With Bankruptcy Filing, Saint Michael’s Opens Up New Front in Battle Over Sale

Andrew Kitchenman | August 11, 2015 | Health Care
Hospital CEO points to lengthy state review while state argues it must act in best interests of community

St. Michael's Medical Center in Newark
The decision by Saint Michael’s Medical Center officials to file for Chapter 11 bankruptcy yesterday opens a new opportunity for the hospital to argue for its proposed sale to the California-based for-profit chain Prime Healthcare Services.

The Newark facility voluntarily filed for reorganization under federal law, which hospital officials said would enable it to maintain viability. They point to the state’s extended consideration of the sale to Prime — which has been ongoing since it was announced in December 2012 — as the chief reason for the filing. While the hospital hopes to wrap up the sale by year’s end, state officials will ultimately decide if the deal is to go through.

Saint Michael’s is the subsidiary of an organization with deep pockets; state officials noted that Trinity Health has $21.6 billion in assets and a mission to serve public health. But at the local level, Saint Michael’s is drowning in red ink and on pace to take a $24 million operating loss this year.

It’s not clear if a federal bankruptcy judge would apply pressure on the state to wrap up the Certificate of Need process that has been going on for two-and-a-half years. (During the CN process Department of Health officials determine how proposed changes in healthcare services would affect residents.)

And while the hospital is seeking a quick sale through an open-bidding auction, it’s not clear if any potential bidders other than Prime will emerge.

The filing concludes an intense five months of sparring over the future of the hospital and, more broadly, healthcare in Newark. A report by consulting firm Navigant recommended that Saint Michael’s, East Orange General Hospital, and Newark Beth Israel Medical Center be converted from full-service inpatient hospitals to outpatient facilities. But Saint Michael’s and its supporters have questioned the accuracy of the Navigant report.

Hospital executives yesterday reassured patients that they will see no disruption in services during the reorganization. They said they would file motions with the court to continue normal operations, including meeting payroll.

The hospital sent notices to all 1,400 of its workers telling them that they could lose their jobs after 60 days, a requirement under the federal Worker Adjustment and Retraining Notification (WARN) Act. But hospital officials said the warnings were “purely hypothetical,” and it was neither their intention nor their plan to lay anyone off.

Before St. Michael’s filed for bankruptcy, the hospital and Prime made changes to their purchase agreement to make it easier for a sale to occur in Chapter 11.

Prime President of Operations Luis Leon said in a statement that the company recognizes that the filing was necessary to complete the sale.

“We are hopeful that after hearing from the community and the employees at Saint Michael’s, and in light of this most recent development, the state will act quickly to approve the sale and preserve this vital Newark institution,” Leon said.

While Trinity is Saint Michael’s parent, hospital representatives noted that it operates under Maxis, a local Trinity subsidiary, giving it the authority to file for bankruptcy separately from Trinity.

Saint Michael’s President and CEO David A. Ricci said the hospital answered the state’s sixth round of questions regarding the sale in June and at this point have answered more than 400 questions, but have received no indications from the state as to when its application under the CN process would be considered complete.

“It’s very difficult to keep the organization’s morale and commitment to community” and maintain quality of care with the “shroud” of the state review continuing to hang over the hospital, Ricci said.

Michael D. Sirota, the lawyer who’s advising the hospital on the restructuring, said St. Michael’s will ask a judge to approve the procedures for companies to bid within 10 days, with a goal of completing the sale within 120 days. The hospital has enough money to operate through that period, he said.

“The bankruptcy process is designed to accomplish expedited sales,” Sirota said, noting that in recent Bayonne and Christ hospitals both sold faster because they had declared bankruptcy.

For their part, state officials said they remain committed to the health and well-being of Newark residents, adding that the hospital is “making a business decision.”

“The department has been engaged in a deliberative process and has been going through a round of questions and answers just like we do with any CN process,” acting Health Commissioner Cathleen Bennett said.

She noted that Trinity has “a significant amount of assets and investments.

One concern is St. Michael’s $233 million in state-backed bonds. Under the terms of the proposed sale, $43 million of those bonds would be paid off by Prime, while the state would have to take a loss on the remaining $190 million. But Saint Michael’s officials said the alternative is worse, with the state having to pay off the entire amount.

Seton Hall health law professor John V. Jacobi noted that in addition to the CN process, the hospital still faces a review under the Community Health Care Assets Protection Act (CHAPA). In the latter, the attorney general determines if converting a nonprofit hospital to for-profit status serves the public interest.

Doug Placa, executive director for JNESO, the union representing Saint Michael’s nurses and other workers, said the hospital “took the necessary steps to, in effect, get the state to make a decision.”

Placa also expressed frustration that the Department of Health has already approved Prime’s purchases of St. Mary’s Hospital in Passaic and the Saint Clare’s Health System in northwestern New Jersey.

“What more needs to be asked and answered at this point?” Placa said. “I mean, two-and-a-half years is what it takes to complete the application. I guess I have to scratch my head, to be honest with you.”

And one of the biggest local backers of the sale, Newark Central Ward Councilwoman Gayle Chaneyfield Jenkins released a statement saying, “This filing today needs to serve as a wakeup call to the Christie administration that they need to move expeditiously to approve the sale to Prime.”

India Hayes Larrier, an organizer with New Jersey Citizen, described the filing as “a last-ditch effort to force the issue.” She’s coordinated a coalition that wants any Saint Michael’s purchaser to commit to operate the hospital for 10 years, guarantee that it will contract with the majority of insurance plans, retain its services, and maintain safe staffing levels.

While she said that everyone agrees that it would be a “calamity” for the hospital to close, Saint Michael’s executives appeared to want to force the state to approve the sale before officials have completed “their regulatory due diligence to protect the patients, taxpayers, and working families of the Greater Newark area.”

A spokeswoman for major regional hospital chain Barnabas Health declined to comment on the filing. Barnabas owns Newark Beth Israel and has a management consulting agreement with state-owned University Hospital. Navigant recommended that University Hospital be expanded and become the city’s only inpatient hospital.