Facing a $100 Million Loss, Downey Regional Files for Bankruptcy

Cheryl Clark, for HealthLeaders Media , September 21, 2009

Kaufman also says even with the bankruptcy, he doesn't have high hopes the stand-alone hospital can remain viable as long as it is free-standing, and not in a hospital network.

"This (bankruptcy) will stop the hemorrhage, but it won't ensure the viability of the organization over the long term. The question is, if they have to buy new equipment and build new facilities, do they fit the profile of an organization that financial institutions would be wiling to lend to. The answer is no."

Downey Regional is listed as one of the 273 hospitals in the state with buildings that must meet seismic upgrade requirements in coming years, which in some cases may mean replacing entire buildings with new construction, or extremely expensive retrofits.

Meanwhile, hospital officials in the region are worrying about a "domino" effect if the hospital goes out of business or stops accepting emergency room patients, says Jim Lott of the Hospital Council of Southern California. That's because six other hospitals have taken their emergency departments offline in the last decade, including Los Angeles County's Martin Luther King.

Downey serves a high number of Medi-Cal and uninsured patients and serves a region with about .9 beds per 1,000 residents, fewer than the state average of 2.24 beds per 1,000 residents. The national average is 3.4.
"Downey Regional has become a critical part of the emergency medical services system," Lott says.

That EMS system may not be able to withstand the stress of Downey's emergency department goes offline as well, he adds. Some relief after re-enrollment may come from the new Kaiser Permanente hospital, a 352-bed unit that opened last week less than two miles away from Downey Regional.  But that facility is only accessible to Kaiser enrollees.

Hospital officials described in painful detail what went wrong with its five capitated contracts.  Those contracts required Downey to pay hospitalization costs for HMO members assigned to it, as well as pay actual costs for out-of-network charges when members were hospitalized elsewhere, which amounted to $1.8 million monthly.

When debiting the "risk pool," they said, "our prior risk sharing contracts with the physician groups allowed us to charge only an artificially low amount to the risk pool for ourselves for care provided here at the hospital.  In fact, only about $1 million got debited per month, while the Hospital's actual cost of care ran nearly $3 million monthly."

The hospital has negotiated its way out of four contracts, but still has an agreement with Aetna.  In the reorganization proceeding, it plans to "reject all of Aetna's contracts."

"With no cash reserves since March of 2008, and with credit markets in a free fall for the past year, the lack of working capital has caused the Hospital to struggle with liquidity," the documents continued.

"Filing reorganization actually makes lending to the hospital much more attractive for new lenders, who have committed to making necessary cash available as the Hospital manages the capitation exit consequences and finishes the fixes on its financial systems."

"DRMC expects to resume cash flow surpluses in the next quarter and therefore rebuild its investment reserves while repaying its accumulated debts over the next several years. In fact, since the new management team has been in place, the Hospital has seen a dramatic financial turnaround."

Soon after emergence from bankruptcy, the hospital should be able to replenish its depleted endowment.

The hospital will remain "open and operational" and will continue to meet its payroll, said Rose. He says he does not anticipate the patients will notice any difference.  Suppliers will get paid in the hope they will continue to honor their contracts with the hospital, the documents said.

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