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Wednesday, 22 February 2012 20:41

County holds up approval of MedWest collateral

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A $10 million line of County credit intended to bridge short-term cash flow problems at MedWest-Haywood hospital has hit a snag.

A loan taken out by the hospital offers up the hospital building as collateral but legally it needs approval from county commissioners to do so.

The MedWest board failed to seek necessary approval from the county before taking out the loan, however. The hospital had already signed on the dotted line and promptly begun spending some of the loan money before the oversight was realized, prompting the hospital to seek the county’s retroactive blessing.

But, county commissioners apparently have not been willing to rubber stamp the loan. The hospital came to the commissioners six weeks ago for their approval on using the hospital building as collateral.

Since then, county commissioners have held three private meetings, which were closed to the public, citing attorney-client privilege, to discuss the loan conundrum.

Formerly known as Haywood Regional Medical Center, the hospital has a clause in its deed that prevents any transfer of the property without county approval. In the unlikely case the hospital defaults on the loan, the lender could not in fact take the building, making the current loan documents partially invalid unless the commissioners give their blessing.

Commissioner Chairman Mark Swanger said commissioners are working with the hospital to come to a suitable arrangement that helps the hospital move forward but still safeguards the building in the event of a default.

“We generally have two goals,” Swanger said. “One is that there be a viable thriving hospital in Haywood County and the second is to protect the county’s interest in the property.”

Meanwhile, the Jackson County medical community has expressed dissatisfaction that their hospital in Sylva, which is part of the MedWest system, ended up on the list of collateral for the loan.

A shorter list, in fact, might be what didn’t get listed as collateral. In all, the loan documents list enough collateral to pay the $10 million many times over. Accounts receivables are at the top of the collateral list — essentially every payment coming into the hospital could be garnished to cover the loan, which in itself would be more than enough to cover the debt. Collateral also includes all the medical equipment in the hospital, as well as the MedWest Health and Fitness Center.

The actual hospital itself, along with the MedWest-Harris and MedWest-Swain hospitals, are far down the list.

So why even list them as collateral? It’s the nature of financing these days, with skittish lenders requiring everything but the kitchen sink, and in some cases even that, to secure a loan, according to Mike Poore, CEO of MedWest-Haywood.

MedWest-Haywood has spent $4 million of its $10 million loan so far. The hospital has no other debt. And that’s why Poore is confident the debate over whether the building is included as collateral is a largely a moot point.

“There are several dominoes,” Poore said, listing all the collateral that would be tapped first in the event of a default before the hospital itself would ever become an issue.

Even then, the loan would merely take the form of a lien against the hospital, as the hospital is worth far more than the $10 million loan.

Indeed, the debate over whether the hospital should have been used as collateral on the loan seems to be playing out more on a matter of principle.

“If we thought there was much chance of default we wouldn’t be doing this. We felt we would be in and out of this moment,” said John Young, vice president for Carolinas HealthCare’s western region.

In an unusual financing arrangement, Carolinas HealthCare System has agreed to act as a bank and put up the money from its own reserves for the loan to MedWest-Haywood. MedWest-Haywood is under a 15-year management contract with Carolinas HealthCare, a network of 32 hospitals under the flagship hospital of Carolinas Medical in Charlotte.

Despite the large number of hospitals under the wing of Carolina’s management, it has never stepped in to provide financial help for an affiliate hospital.

“It has never been done before,” said Young. “I don’t know we will ever do it again, but at the time, it was the right thing to do.”

Young said Carolinas made an exception given the circumstances. For starters, the Haywood hospital desperately needed the money to bridge a short-term cash flow crisis brought on by a perfect storm of financial hits.

MedWest-Haywood had to spend $1 million to replace a broken generator, $1.6 million on a wrongful firing lawsuit by group of emergency doctors and $8 million on a new computer system to handle electronic medical records.

The hospital will actually be paid back for part of the cost of electronic medical records system by the federal government in coming years, Poore said.

“These are what you would consider one-time expenses. We knew we would have to get some kind of financing to help us through,” Poore said.

The hospital also spent an undisclosed sum buying up private doctors’ practices during the past year. It didn’t have the budget to do so, but the practices were being courted by Mission Hospital in Asheville. MedWest-Haywood feared long-term repercussions of a patient drain if it didn’t make a competing offer.

While the hospital was in the black last year, its margin was so slim — around 1 percent — it didn’t have the cash flow to cover the unexpected one-time costs.

“It is not a symptom of the engine being dysfunctional in any way,” Young said. “We realized this liquidity issue would go away, so we decided to lend them the money to get through this moment.”

 

Smoothing out the wrinkles

Meanwhile, the newly formed MedWest allegiance — a merger of sorts of the hospitals in Haywood, Jackson and Swain under an umbrella organization — need help finding its footing.

“Coming together under MedWest was trying to happen in a very difficult time under a very difficult set of circumstances,” Young said, offering further explanation of why Carolinas stepped up to the plate financially.

The recession was taking its toll on hospitals everywhere, particularly smaller, rural hospitals. And here, the hospitals in Haywood and Jackson were facing tougher competition than ever from Mission Hospital in Asheville.

Meanwhile, the relationship with the Jackson County medical community toward MedWest was strained. A large number of doctors in Jackson County had come forward to express concerns about how their hospital was faring under the new MedWest entity.

Carolinas has been asked for help many times by cash-strapped hospitals operating on razor-thin margins. It’s a frequently asked question by smaller hospitals when weighing whether to join Carolinas’ umbrella.

“One of the things that usually comes up is would you be willing to put capital in. Our answer is always ‘no,’” Young said. “That is not our model. Our business model is to help local hospitals find economies of scale and have the expertise to be successful in a very difficult marketplace. It is hard to do it alone.”

Poore said the financial problem faced by MedWest-Haywood is partly inherited. The hospital couldn’t get a traditional loan from a lender.

The once deep-reserves of MedWest-Haywood were spent up during a faltering time four years ago when the hospital failed federal inspection, largely on technicalities, but the resulting decertification by Medicare, Medicaid and several major insurance carriers forced the hospital to essentially shut its doors for five months. Its reserves were depleted as a result.

“I wish it could have happened a different way,” Poore said of the need for the loan from Carolinas. “I wish we had all the credit in the world and everyone was knocking down our doors to give us credit.”

Poore sees the loan more like a line of credit, a very common financial tool used by corporations both large and small.

“The line of credit is helping us pay for a lot of one time expenditures we’ve incurred this year,” Poore said.

Poore said it wasn’t altogether clear initially whether they actually needed county commissioners to sign on the dotted line.

“At one point, we had 11 attorneys on the phone trying to put this deal together,” Young said. “It is unusual for one hospital to loan another hospital money.”

Poore pointed to the proactive steps MedWest-Haywood has taken during the past two years that will start paying off. It has employed doctors practices, has an outpatient surgery center under construction on its campus, has a new urgent care slated to open in Canton in the spring, and has recruited several new doctors, including a new urologist, cardiologist and neurologist just recently.

These days, it is all about fighting for market share against Mission, and that’s what Poore has been positioning Haywood to do.

“There is a demand, and if we can meet that demand, we can keep those patients here,” Poore said.

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