Editor: Please tell us about your practice.
Rogoff: Kramer Levin is an AmLaw 100 law firm with more than 375 attorneys in 20-plus practice areas, and with offices in New York, Silicon Valley and Paris. As a partner in the Corporate Restructuring & Bankruptcy Department, I specialize in representing a diversity of parties both in and outside of a bankruptcy restructuring, including debtor companies, creditors’ committees, lenders and distressed asset buyers. For the past five years I have had significant experience with representing insolvent healthcare providers, such as acute-care hospitals, nursing homes, hospices and home-healthcare agencies. As I indicated in the interview with this newspaper in 2011, I continue to represent St. Vincent’s Catholic Medical Centers in its Chapter 11 case.
Editor: Are you seeing a lot of activity on the part of financial buyers of distressed companies?
Rogoff: Yes. In general, financial buyers have become prominent players in distressed restructuring, whether through “loan to own” lending or funding the acquisition of assets or new equity of an insolvent company. Strategic buyers are also partnering with financial buyers to provide for future liquidity. For many years, Chapter 11 has been, and continues to be, an excellent forum for distressed M&A acquisitions. In addition to the outright purchase of assets in bankruptcy, investors are purchasing distressed loans with the goal of converting the debt (often bought at a discount) into new equity ownership of a reorganized company by credit bidding or converting that debt in the bankruptcy process. The Chapter 11 process can also be used to reduce legacy liabilities. For healthcare, the opportunity for financial buyers can be different because the ability of an investor to own and operate hospitals or other healthcare facilities is defined by whether the state allows for-profit owners of healthcare providers. In a not for-profit state, financial buyers cannot acquire the equity of an insolvent hospital.
Editor: What is the current environment for distressed healthcare organizations, and what are the critical risk factors for these organizations?
Rogoff: Healthcare continues to suffer declining revenues from lower insurance reimbursement and deferral of elective procedures. While revenues decline from constraints on Medicaid and Medicare reimbursement, fewer funds are available from government grants and subsidies. Compounding problems, overall lower revenues are spread over a fixed-cost basis that is not declining -- for example, labor and pension costs, maintaining outdated physical plants. Add to this the cost of replacing aging equipment with more modern technology that patients seek out in treatment. Another negative for traditional hospitals is that physicians who have privileges with hospitals are competing with their own physician practice groups in newer outpatient facilities with modern equipment. These centers allow for more procedures on an outpatient or ambulatory care basis, directly competing with acute-care hospitals. Doctors have the discretion to direct where patients go for treatments, and driving these treatments to outpatient facilities exacerbates the liquidity constraints hospitals face. At the same time, some hospitals face looming debt maturities, including municipal debt, that cannot be readily refinanced.
Editor: When you get involved in reorganizing insolvent hospitals and healthcare providers through bankruptcy, what are the most common outcomes?
Rogoff: There is no common outcome. The outcome depends upon how much support there is within the community and the recognition by the department of health or state regulators that the hospital provides a necessary service to be maintained – a “safety net” hospital. As a necessary service provider, there is the potential for government support to restructure or facilitate a sale of the hospital. For example, New Jersey is an interesting dynamic compared to New York. New Jersey, unlike New York, allows a not-for-profit hospital to sell its assets to a for-profit operator, offering greater opportunities. In the last several years, a private investor group acquired Bayonne Medical Center and Hoboken Hospital, and it is now hoping to purchase Christ Hospital in Jersey City, which recently filed for bankruptcy to sell its assets. With state support, for-profit operators can create opportunity to sustain ongoing operations. In New Jersey, we are also seeing consolidation, which increases leverage and allows the new owners to negotiate better rates and hopefully become more cost efficient. In contrast, Brooklyn has several distressed hospitals, so much so that New York State appointed a task force to evaluate options, concluding there was the need for potential consolidations among these not-for-profits. Because of the regulatory environment in New York, however, the options for these Brooklyn hospitals can be fewer than they would be in a state that allows for private capital investment.
Editor: What are the critical regulatory considerations, both with managing the bankruptcy itself and with helping an organization re-emerge?
Rogoff: Accountability to the regulatory organizations for quality of care exists both in and out of a Chapter 11 context. In Chapter 11, the state and the bankruptcy court are very focused on the ability of a distressed provider to continue providing quality care. Further, we have the role of a patient care ombudsman who is appointed in Chapter 11, who is charged with overseeing the health services being provided, working with the debtor’s management, and reporting to the bankruptcy court as to the impact of any operational or financial restructuring on patient care. In the event that the debtor hospital is unable to continue providing the appropriate quality of patient care, the ombudsman will alert the court and immediate steps would have to be taken to address ongoing care. While Chapter 11 offers an automatic stay against collection and enforcement actions, debtors must still maintain current licenses and permits to operate and obtain regulatory approvals, including for the transfer of services. Regulatory oversight can take a substantial period of time. In the case of St. Vincent’s, it took the better part of a year between the bankruptcy court sale approval and the regulatory approval for certain service transfers. Typically, in bankruptcy sales, there is a very short period between court approval and the sale closing – perhaps measured in days. In healthcare, it can be a process that takes many months after the bankruptcy court’s approval.
Editor: What are the key criteria for debtor in possession (DIP) lenders in determining whether to lend to distressed healthcare organizations?
Rogoff: As with any loan, a key criterion is collateral. The second is liquidity to operate during the bankruptcy. Third is the type of loan being made – is it a new loan or a defensive loan to protect an existing commitment? Unlike in other industries, in healthcare, the lender weighs the “social costs” of any decision to discontinue supporting the operation in the event a hospital needs to be closed. Hospital closure may result in significant community pressure on a lender to continue funding. There are also delays in being able to implement a closure or sale, requiring additional interim funding. DIP loans require a greater focus on the exit process than does a loan made to non-healthcare entities, where collateral values govern to a greater degree.
Editor: To what extent do public health issues and the responsibilities they create factor into your negotiations on behalf of your clients?
Rogoff: The impact of the public health issues and the responsibility that the directors of a not-for-profit hospital have in looking at their alternatives is very significant. The “mission” that existed before financial distress has not gone away; rather, the issue is how to balance the needs of patients in the community with needs of creditors for repayment. The typical for-profit commercial bankruptcy focuses on capital structure and operational changes. If the entity cannot be restructured, asset sales for highest or best value are commonplace. That purer economic analysis isn’t appropriate for public health interests and healthcare. We look to ways to meet both objectives – creditor recovery and patient care. In the case of St. Vincent’s, we undertook a remarkable transaction for the former Manhattan hospital campus, which maximized value for creditors with a $260 million sale price to a private developer of the real estate while also establishing, on one of the sold parcels, a new comprehensive care center operated by North Shore-LIJ, including the first freestanding emergency department in New York City. This sale balanced creditor recovery with community interest.
Editor: Please discuss the impact of preserving patient medical data and providing access to these records for a distressed provider.
Rogoff: An important part of any transfer or closure of operations is how to protect patient medical data and provide future access to it. State law may require retaining records for up to 21 years. Records can be in many forms, including physical files, x-ray films and electronic data. Insolvent providers need to manage a process for centralizing access and providing patients with notice of the storage location of records if operations are not preserved. Assuming the provider has not been able to invest in modernized IT, then a challenge exists in identifying the information, its location, and provision for long-term management. In the case of St. Vincent’s, we spent many months developing a protocol for what was required to be preserved, what could be disposed of, and how to centralize hundreds of thousands of records, including very disparate electronic data from multiple systems used over the years. Insolvent providers need to assess how to pay for this without unduly burdening creditor recoveries, especially if state subsidies are not available.
Editor: Healthcare organizations often have a special relationship with their communities. How do these relationships play out in bankruptcy proceedings?
Rogoff: You can have different community impacts. Bayonne Medical Center obtained a $6 million loan from the City of Bayonne to enable the hospital to continue operating until it was able to implement a transaction with a new sponsor. In the case of St. Vincent’s, emergency loans were made by the state while there was a tremendous amount of community support for the hospital to continue operations pre-bankruptcy, but when no new viable sponsor was located, the closure process started. When working with a distressed healthcare provider, one is mindful of the impact on the community. In the end, the business of healthcare is still a business, and there needs to be financial support for any ongoing or reconfigured operations.