AG’s LRGHealthcare report reveals ‘errors in judgement’, administrators’ deference

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The NH Department of Justice’s Charitable Trust Unit found that LRGHealthcare administrators “made errors in judgment and were overly deferential to the recommendations and conclusions” of the former CEO and CFO.

An investigation into the governance of LRGHealthcare, which declared bankruptcy in October 2020, found that the organization’s board of directors “made errors in judgment and were overly deferential to the recommendations and conclusions” of two long-time executives. date”, although he specifically stated that the directors did not breach their fiduciary duties.

The NH Department of Justice’s Charitable Trust Unit report noted that the long tenure of the leaders — Thomas Clairmont, who served as CEO for 25 years, and CFO Henry Lipman, who served in the role for 20 years — were “very unusual in the hospital industry.

LRGHealthcare filed for bankruptcy after failing to overcome nearly a decade of sluggish financial performance.

Lake District General Hospital in Laconia, founded in 1893, acquired Franklin Hospital in 2002 to form LRGHealthcare. Three years later, management proposed and administrators adopted a master plan to improve facilities and update computer and mechanical systems at both hospitals by investing $97 million over ten years.

In 2008, shortly after the plan was completed, LRGH was rocked by the headwinds of the Great Recession. Reported patient volume. Private paying patients migrated to Concord Hospital. Changes to the Medicaid reimbursement formula resulted in annual losses of $1.2 million. And adjustments to Medicare’s wage payment system still threatened “a few million” in operating revenue, prompting Lipman to tell the Laconia Daily Sun at the time that “LRGH would be in the red as soon as they entered in force “.

Although the administrators began to question the capital project, they approved the expenditure of $36.3 million to design the capital project, restructure and refinance outstanding debt, purchase medical practices and build an operating room.

Towards the end of 2008, LRGH’s operating margin was shrinking and cash was tight – only 74 days compared to the industry median of 110 days. The board withheld contributions to the employee pension fund and workers’ compensation trust, but spent $913,000 on capital projects.

In January 2009, the council, on the recommendation of Clairmont, suspended the expansion project for six months. At that time, LRGH’s weakened financial situation precluded access to conventional financing. But rather than reordering the company’s priorities, Lipman turned to alternative funding — a mortgage insurance program for hospitals funded by the US Department of Housing and Urban Development.

In June 2009, LRGH borrowed $170 million to build a “patient tower” in Laconia, improve the emergency room in Franklin, expand an outpatient clinic in Meredith, repay some loans, and cover financing costs. Based on a financial forecast prepared by Lipman and his team, an independent auditor concluded that there would be sufficient funds to cover operating expenses, debt service and working capital. In retrospect, the report found the projections to be “overly optimistic”.

Meanwhile, management began to cut costs, an effort hampered by having to draw $3.1 million from its operating revenue and line of credit to maintain the employee pension fund and trust. workers’ compensation.

With the approval of the HUD loan, the board approved the 2010 budget, adding $10 million for capital improvements. Lipman expected LRGH’s operating margin to improve to $5.3 million in 2010, but instead recorded a loss of $12.7 million.

In 2012, LRGH invested $51 million to renovate and expand facilities in Laconia and Franklin, highlighted by the patient tower and the new entrance hall preceded by a large archway at the Region General Hospital. lakes. But the improvements failed to generate enough revenue to keep pace with HUD’s cost of debt.

Clairmont resigned in 2014, and a year later Lipman — who now heads New Hampshire’s Medicaid program — reported that LRGH was operating in the red, with operating expenses running $2.5 million over budget. in the first trimester. Nevertheless, management and the board proceeded with the purchase of an electronic medical records system in partnership with Speare Memorial Hospital in Plymouth. The capital cost of the system was estimated at $15.8 million and the annual operating cost at $15.7 million. LRGH bore 80% of the cost, which was 9% of its annual revenue, two to three times the industry standard.

Shortly thereafter, LRGH refinanced its HUD loan, paying $15.6 million in cash to reduce the interest rate.

By the end of 2015, LRGH’s operating deficit had grown to $30 million and its net assets had decreased by $37 million. The council hired three consulting firms to cut costs. Vascular and surgical services were closed in Franklin as well as obstetrics in Laconia. Benefits have been cut and headcount has been reduced. In 2016, Kevin Donovan was hired as CEO and tasked with finding LRGH a partner to support healthcare in the region. Lipman resigned a year later.

LRGH lost $12.8 million in 2018 and $19.7 million in 2019, while net assets slumped and cash declined in the mid-single digits. It was only by cutting costs and suspending services, along with state and federal pandemic funding, the report notes, “that LRGH was able to limp to its Chapter 11 filing in 2020.

In 2018, Kaufman Hall, the firm chosen to sell the hospital, approached 19 potential buyers, but none offered enough to pay off LRGH’s debts. The trustees concluded that the only option was a sale of assets and a bankruptcy filing. Concord Hospital was the sole bidder, and with the approval of the Bankruptcy Court and the Charitable Trusts Unit, the transaction closed on May 1, 2021.

“Legacy Effort”

The report concludes that a number of factors contributed to LRGH’s demise.

In his statement to the bankruptcy court, Donovan highlighted the decision “to make significant investments in inpatient services and facilities at a time when patient demographics and medical trends indicated a greater reliance on outpatient services. and decreased hospital utilization.Soon after, LRGH found itself caught in a downward spiral of rising costs, declining reimbursements, shrinking service lines, and leaking volume to other other communities.

The report’s authors heard several comments describing the expansion project as “a legacy effort from Mr. Clairmont, to ensure that the facilities at LRGH reflect his many contributions over the years” and “despite warning signs local market and national health care trends, Mr. Clairmont used his influence with the Board of Directors to push his plan forward.

The report found that although the directors acted in good faith and honored their fiduciary duties, they “relyed too much on the recommendations and conclusions of long-term leaders and did not challenge the leaders.” In particular, the report notes that with respect to the HUD loan and the expansion project, “there should have been increasingly loud voices questioning the feasibility of the project.”

The report draws a number of lessons from the demise of LRGH, the first financial failure of a nonprofit hospital in the state since Newport Hospital closed in 1991. It recommends that hospital administrators undergo regular training and education as well as rely on independent expertise. when considering key financial, operational and legal issues related to health care delivery.

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