https://www.healthcaredive.com/news/californias-verity-system-files-bankruptcy-faces-175m-in-annual-losses/531524/

Dive Brief:

California-based Verity Health System filed for Chapter 11 bankruptcy late last week. The nonprofit operator blamed ongoing losses and debt, along with aging infrastructure and an inability to renegotiate contracts, for its tenuous operating position. The system secured debtor financing of up to $185 million, and plans to keep its six hospitals open during the bankruptcy proceedings.

The Friday filing follows a statement in July noting that Verity was exploring different avenues to pull the system out of its slump, including the potential sale of some or all of its hospitals and other facilities.

Last year, billionaire investor and entrepreneur Patrick Soon-Shiong purchased Integrity Healthcare, the company that manages Verity, with the intent to revitalize the system and upgrade its technology while continuing to serve lower-income populations. Yet, “after years of investment to assist in improving cash flow and operations, Verity’s losses continue to amount to approximately $175 million annually on a cash flow basis,” and more than $1 billion overall, Verity CEO Richard Adcock said in the company’s bankruptcy announcement.

Dive Insight:

The company has been struggling for a while and can “no longer swim against the tide” of its operating reality, which includes a legacy burden of more than a billion dollars of bond debt and unfunded pension liabilities, an inability to renegotiate burdensome contracts, the continuing need for significant capital expenditures for seismic obligations and aging infrastructure,” Adcock said.

Verity’s problems come in an caustic environment for U.S. hospitals, many of which are suffering from costs that are rising faster than revenues. Credit rating agency Moody’s warned just last week that the nonprofit provider industry was on an “unsustainable path.”

A recent MorganStanley analysis found that about 18% of American hospitals were at risk of closure or performing weakly, a high figure in historical context. Only 2.5% of hospitals closed over the past five years, yet Moody’s estimated 8% of the 6,000 hospitals studied were apt to close their doors. Additionally, more nonprofit hospitals suffered credit downgrades in 2017, and Moody’s revised its outlook for the hospital sector from stable to negative.

But it’s not only industry pressure that’s causing Verity to fold. Another burden is the management of Soon-Shiong, who’s been hit with backlash for the way he runs his businesses and methods.

The South Africa-born surgeon and investor purchased the hospitals in July 2017, following a 2015 acquisition by New York hedge fund BlueMountain Capital Management. The system had struggled financially for years and needed the influx of cash both buys gave it.

“There’s going to be a huge capital need,” Soon-Shiong said at the time. “There’s been little investment because these hospitals could not afford it.” He said he planned to bring in new equipment and technology, along with expanded oncology, transplant, cardiology and orthopaedic services. Through his company NantWorks, Soon-Shiong funneled more than $300 million into the system within the year, but Verity’s losses continued to mount.

At the time of the acquisition, Soon-Shiong, who has founded and sold multiple biotech companies and now owns a stake in the Los Angeles Times and L.A. Lakers, heralded the charity work done by the hospital, but said the restructuring was “inevitable” due to years of underinvestment.
Touted plans to revitalize the flagging hospital system didn’t pan out, and some of Soon-Shiong’s critics say it was intentional.

“It has become crystal clear by the bankruptcy announcement that he virtually had no intention of keeping these hospitals open and to continue to serve the poor,” San Mateo County Supervisor David Canepa told news outlets following the announcement.

Labor unions are similarly displeased. SEIU-UHW representative David Miller reportedly said “there were other paths out of this” and that it’s a “very destructive approach,” as the bankruptcy filing could put employee pensions at risk.

But in the press release, Adcock said the bankruptcy filing was the best thing for all involved, and told Reuters that the 1,650-bed, 6,000-employee company has already received interest from more than 100 parties. Potential suitors include large national operators. Any sales will now be supervised by the bankruptcy court and approved by regulators