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HMC files for second bankruptcy

St. Francis Healthcare is retaking ownership of its former hospitals

By Kristen Consillio

LAST UPDATED: 7:00 a.m. HST, Jun 22, 2011

Hawaii Medical Center — the former St. Francis hospitals in Liliha and Ewa — filed for Chapter 11 bankruptcy Tuesday, having just emerged from two years of court protection in August.

The owner of the two hospitals was unable to reverse money-losing operations since buying them in 2007.

The company had been hoping to increase referrals for higher-priced procedures and increase the number of patients with commercial health insurance to offset the large population covered by Medicare and Medicaid, whose reimbursement rates are significantly lower. But the plan failed to generate the revenue needed.

Ownership of the hospitals will now revert to St. Francis Healthcare System of Hawaii, which sold them to HMC LLC, which started as a joint venture between Kansas-based Cardiovascular Hospitals of America and Hawaii Physician Group LLC.


» Hawaii Medical Center-East, opened in 1927 in Liliha

» Hawaii Medical Center-West, opened in 1990 in Ewa Beach

» Last sold: January 2007

» First bankruptcy: August 2008

» Emerged from bankruptcy: August 2010

» Entered bankruptcy again: June 2011

» Interim CEO Maria Kostylo

» Specialties: Renal services, organ transplants, skilled nursing

» Hawaii Medical Center has about 700 employees and 342 beds.

St. Francis Healthcare Systems hopes to return the hospitals to sound footing and continue to provide services for a largely indigent and elderly population that relies on them for essential care.

Hawaii Medical Center East in Liliha and Hawaii Medical Center West in Ewa have a combined total of about 700 employees and 342 beds.

"Filing for bankruptcy protection was a strategic financial decision to ensure the sustainability of the hospitals and enable the continuing provision of health care services to the community," said Collin Dang, chairman of HMC's board of directors, in a statement.

As part of the bankruptcy filing, St. Francis Healthcare System has agreed to write off $40 million debt that HMC owed it.

"St. Francis is prepared to step forward to resume ownership of the hospitals," said Jerry Correa, St. Francis' chief operating officer, in a statement. "St. Francis fully supports HMC's reorganization plan and is focused on making this transition as seamless as possible for the community."

St. Francis did not disclose specific plans for turning around the troubled hospitals, which were a financial burden on the organization and the reason it exited the acute-care business in 2007.

"Nobody's got a crystal ball any time there's a bankruptcy, but clearly they filed to reorganize their affairs so they can be successful with a new business model," said Honolulu bankruptcy trustee David Farmer. "Otherwise, how many times do they have to repeat the same mistakes? They'd have to be coming out with another business model to have any chance of making it."

Despite efforts to become financially viable, HMC said it was unable to overcome obstacles that affected financial performance such as static patient census, federal regulatory requirements and reductions in reimbursements.

"Ultimately it came down to simply not having sufficient capital for HMC to turn the corner," Dang said. "In order to increase patient census and keep pace with new government requirements, we needed to make infrastructure improvements. Not being part of a larger health care system makes it difficult for us to continue as a stand-alone operation."

The reorganization plan has the support of secured creditors — St. Francis Healthcare System and MidCap Financial LLC — which will help expedite the reorganization process, Dang said.

HMC said it entered into a restructuring agreement with MidCap Financial and St. Francis on Monday. MidCap Financial has agreed to provide new financing for operations during the bankruptcy process and upon emergence, according to a press release. The new reorganization plan also calls for relief of an additional $19 million owed to unsecured creditors that remained from HMC's previous plan of reorganization, the release said.

HMC's latest plan must be approved by the U.S. Bankruptcy Court. The transfer of ownership also might require approvals by the state Health Planning and Development Agency, as well as the Centers for Medicare and Medicaid Services.

Shortly after acquiring the hospitals, HMC cut its 1,250-member work force by 150 employees. It later laid off at least 80 additional workers and outsourced back-office operations, resulting in another 89 layoffs.

"I spent my whole two years firing people," said Danelo Canete, HMC's president and CEO from 2007 to 2009. "We did the dirty work for them (St. Francis Healthcare System). It's a smaller hospital and they've learned from our mistakes. I think they'll be successful."

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