Bankrupt Hawaii hospitals eye non-profit status in reorganization plan

HONOLULU – The owners of two bankrupt hospitals in Hawaii have announced plans to convert both to non-profits – a reorganization plan that would save as much as $6 million a year and, in the words of one official, bring them closer to the communities they serve.

The Hawaii Medical Center filed plans Thursday with U.S. Bankruptcy Court to turn its hospitals in Liliha and Ewa Beach into non-profits. The company filed for Chapter 11 bankruptcy protection in August 2008 after suffering operating losses of roughly $21.8 million and laying off almost 200 employees of its 900-member workforce.

The Liliha hospital, known as Hawaii Medical Center East, had started operating as a non-profit last year, leaving Hawaii Medical Center West in Ewa Beach as the only for-profit hospital in the state. The new plan would make both hospitals non-profits.

The latest plan gives U.S. Bankruptcy Judge Robert Faris two different options from which to choose. HMC’s former owner, the St. Francis Healthcare System of Hawaii – which retained a 1 percent stake in the company after its sale to CHA Hawaii and Hawaii Physician Group LLC in 2007 – is seeking to regain ownership and take control of the two hospitals’ management.

HMC bought the St. Francis Medical Centers from the Sisters of St. Francis in January 2007 for $68 million. Combined with a $40.2 million term loan and an $8.9 million working capital loan, HMC’s debt to St. Francis amounted to payments of $342,000 a month. Some members of HMC’s board have recently said the group – which includes more than 130 Hawaii-based physicians who lost millions of dollars after investing in the hospitals – paid too much for the properties.

St. Francis is now owed $46.3 million. HMC’s reorganization plan calls for that loan to be paid off in seven years, with interest, with another $21 million owed to unsecured creditors being paid off over 14 years.

In an interview with the Honolulu Star Bulletin, Salim Hasham, HMC’s chief operating and restructuring officer, said the HMC plan would not only relieve the hospitals of as much as $6 million in annual taxes, including general excise and property taxes, but would also improve community relations. “When you are for-profit, you’re not as fully integrated into the community,” he said.

Hasham said the hospitals have become profitable since operating as for-profit entities. He said both HMC and St. Francis officials have the same goals in mind, including turning both hospitals into non-profits, so he expects HMC’s reorganization plan to gain favor over that of St. Francis.

“The only issue is that St. Francis wants to take over the governance and management,” he said. “Our contention is that we’ve already demonstrated success with management and governance anyway. So why would we want to change that and shift it?”

St. Francis officials have not responded to HMC’s plan. The reorganization plan favored by St. Francis calls for claim holders to receive promissory notes equal to what they’re owed, to mature in 10 years. St Francis would regain ownership of the two hospitals and seek a management company to operate them at a later date.

A hearing is scheduled for May 24. If the HMC plan is approved, Hasham said, HMC could be out of bankruptcy reorganization by July.