Crittenden Regional Hospital’s True Financial Status Surprised Directors

(Clarification: A clarification has been made to this article. See the editor’s note at the end of this article for details.)

Directors of Crittenden Regional Hospital learned on Aug. 19 that its monthly revenue was only $2 million — about half what they had previously been led to believe — while expenses were about $5 million, the CEO of the shuttered hospital revealed in a bankruptcy court filing.

The affidavit by Eugene Cashman also revealed that Crittenden Hospital Association, the nonprofit that operated the county-owned facility at West Memphis, was quietly looking for a buyer even as it successfully lobbied voters to approve a countywide sales tax specifically to shore up the hospital’s finances.

A potential buyer had made a tentative offer of $12 million, but when the board asked the unidentified bidder to cover the $3 million monthly deficit, the deal fell apart.

The hospital could not have made payroll in September, Cashman revealed in the affidavit, which seemed to blame the former chief financial officer for reports that overstated revenue.

“We were not aware of it; the public was not aware of it,” Crittenden County Judge Woody Wheeless told Arkansas Business last week about the tentative deal to sell the hospital. “We became aware of it after they closed.”

On Aug. 25, less than a week after learning the true size of the operating deficit, Cashman shocked Crittenden County’s 50,000 residents by announcing that the 61-year-old hospital had stopped admitting patients and would close its doors on Sept. 7.

“I don’t know one person … that said they saw this coming,” Wheeless said.

In June, 86 percent of voters had approved a 1 percent sales tax to fund the hospital. And Cashman had touted big plans for the hospital, such as recruiting more doctors and renovations to the emergency department and inpatient rooms.

“I think there is a huge sense of gratefulness to the community for their support of this hospital,” Cashman told the Memphis Business Journal for an article published July 2. “I also think there’s a real sense of accountability to spend those tax dollars wisely and to be a good steward of those resources.”

The tax was supposed to take effect on Oct. 1, but the Arkansas Department of Finance & Administration said last week that the tax wouldn’t be collected because of a circuit court challenge. Voters will decide on Dec. 9 on whether to repeal the tax.

“The community did their part, and I think the hospital let them down,” Wheeless said.

Wheeless said he was talking to a potential buyer for the hospital and hoped to have a proposal by the end of the month.

State Sen. Keith Ingram, D-West Memphis, a member of the hospital board, said that “everything is on the table,” including having a smaller, maybe a 12- to 30-bed, hospital. 

“You’ve got to look at everything and the needs that have got to be met in the community,” Ingram said.

‘Financial Difficulties’

On Sept. 12, the Crittenden Hospital Association filed for Chapter 7 liquidation, making it the first Arkansas hospital in recent memory to seek bankruptcy protection.

Cashman’s 14-page affidavit, filed in the case on Sept. 26, offers a peek inside the collapse of the hospital and the attempts to save it.

For months Cashman thought the additional revenue from a 1 percent sales tax that was approved by voters in June would put Crittenden Regional on a path toward speedy recovery. But the hospital wouldn’t see that money until near the end of the year and couldn’t find a bridge loan to keep the hospital afloat until then, according to Cashman’s affidavit.

The Crittenden Hospital Association listed $33.3 million in debts and $27.75 million in assets in its filing.

Financial problems were nothing new. In the fall of 2012, Crittenden Hospital had hired Methodist Le Bonheur Healthcare in Memphis to provide consulting and administrative support services for $6,250 a month.

In addition, Methodist would lease one of its employees, Cashman, to the hospital as its CEO, according a 2012 audit attached to the Form 990 that Crittenden Hospital Association was required to file with the Internal Revenue Service.

A spokesman for Methodist Le Bonheur declined to make Cashman available for an interview because of pending litigation. (See Former Crittenden Regional Employees Sue Over Unpaid Medical Bills.)

“What can be said is that Crittenden Regional Hospital was in a fragile financial state for many years for a variety of reasons which eroded its ability to navigate these challenging times in the health care industry,” Jeff Moder, a spokesman for Methodist Le Bonheur, said in an email to Arkansas Business. “Our sole motivation was to enable CRH to serve the community’s health care needs. We regret that they are no longer able to do so.”

When Cashman took over as CEO in October 2012, Crittenden Hospital Association was on its way to another operating loss. It had an operating loss of $1.3 million in 2011 and an operating loss of $2.95 million in 2012, according to the audit.

“It was apparent to me and the Board that a number of factors were causing the financial difficulties,” Cashman said in the affidavit.

For starters, patients were staying away. While it was built to handle about 140 patients a day, the average number the hospital treated had been tumbling. In 2008, it averaged 59 patients a day; by 2010, the average was 49. In 2013, it was 42.

Of those patients, nearly two-thirds were insured by Medicare and another 10 percent were uninsured, according to a report called “The State of Crittenden Regional Hospital” that Cashman presented to the Quorum Court in March.

In 2013, he said in the March report, the hospital’s uninsured patients paid only about 5 percent of their bills, leaving the hospital with $17.8 million in uncompensated care that year.

The hospital also had trouble keeping and finding doctors. Between 2012 and January 2014, 14 doctors had left the area or retired.

“Many of those departed physicians were key surgeons, medical consultants, and medical internists vital to the financial stability of the Hospital and its patient census,” Cashman said.

Paul Cunningham, executive vice president of the Arkansas Hospital Association, said doctors are critical to the survival of a community hospital. “You can’t have a community hospital unless you have doctors,” he said. “Hospitals don’t admit patients or treat patients. It’s doctors that do.”

Cost-Cutting

Cashman said in the affidavit that he took a knife to expenses.

He imposed a hiring freeze and all capital projects were put on the shelf. In November 2013, Cashman eliminated 23 positions. But it still wasn’t enough.

Other problems surfaced. In 2013, the hospital was named as a defendant in four separate medical malpractice lawsuits. The hospital has denied any wrongdoing, and the cases have been put on hold because of the bankruptcy proceeding.

Even after slashing expenses, an audit showed a deficit of $4.9 million in 2012 and the hospital expected that to continue, Cashman said in the affidavit.

Cashman and the board proposed a countywide sales tax that would generate revenue for the hospital. It seemed like the perfect solution: The tax was expected to raise $6 million annually, which Cashman believed would cover the hospital’s operating deficit with enough left over for existing debts.

Cashman told the quorum court on March 31 that the hospital would close if the sales tax proposal wasn’t put to a vote, according to a recording of the meeting that was reviewed by Arkansas Business.

“Where we’ll be [in five years] if we don’t have this support, is that you won’t have a hospital,” Cashman said in the March meeting.

The quorum court called a special election for June, and the hospital sales tax received overwhelming support. But Crittenden Regional Hospital couldn’t expect its first tax revenue receipts until Dec. 23.

For Sale

While seeking help from taxpayers, Cashman was quietly looking for a partner or a buyer.

In February, the hospital hired the investment firm Raymond James to market the hospital nationwide. Cashman said 15 to 20 buyers showed interest and six even signed confidentiality agreements.

But the finances were still looking dire. At the end of May, the board authorized the hospital’s law firm, Waller Lansden Dorch & Davis LLP of Nashville, Tennessee, to expand its role to include “considering potential partners, potential sales, or initiating a bankruptcy proceeding.”

There was some good news, though. In July, two of the potential buyers of the hospital had started their due diligence.

The highest bidder, whose identity Cashman didn’t reveal in the affidavit because of the confidentiality agreement, made a preliminary offer of $12 million, a figure that could be adjusted after more investigation.

Damage and Decisions

In the early morning hours of June 6, a fire broke out in the hospital. The cause was undetermined, and it was under control after 25 minutes, according to a West Memphis Fire Department report.

Smoke and water damaged the hospital’s emergency room and radiology and surgical areas, and the hospital was closed for repairs for 42 days.

A second fire occurred on July 2. This time an electrical fire that started in the mammography and MRI building “caused us to lose those service and potential revenues,” Cashman wrote.

To cover ongoing costs while the hospital was being repaired, Cashman searched for loans from five to 10 institutions.

“Unfortunately, no lender was willing to lend to the Hospital,” Cashman said in the affidavit.

While the hospital was being repaired, the board began having second thoughts about reopening, Cashman said.

Directors in favor of reopening thought “there would likely be a backlog of procedures to be performed when the Hospital reopened which would give it a boost financially, and that reopening would better position the Hospital for a sale,” Cashman wrote.

But during the weeks the hospital was closed, the true financial picture emerged — and it wasn’t good, Cashman said.

On July 23, the accounting firm Dixon Hughes Goodman LLP of Charlotte, North Carolina, “reported to the Board that the Hospital’s collections were significantly less than the CFO had reported to the Board before the fire,” Cashman wrote. “Dixon Hughes’ report raised questions about the Hospital’s short-term financial condition.”

The CFO was Brad McCormick, who announced that he was leaving Crittenden Regional in May and left in July. He had reported to the board that net revenue was averaging more than $4 million per month for March, April and May, according to Cashman’s affidavit.

McCormick, who is now the chief financial officer at Natchitoches Regional Medical Center in Louisiana, didn’t return several calls seeking comment.

“Dixon Hughes subsequently reported that by the end of September the hospital would not be able to meet its payroll obligations,” Cashman said.

Dixon Hughes told the board on Aug. 19 that the hospital was generating revenue of about $2 million a month but had $5 million in monthly expenses.

The hospital was still in talks with its potential buyer. The board then informed the bidder that the hospital would need to close its doors unless the bidder would cover the $3 million monthly deficit. The bidder declined.

So on Aug. 24, “rather than incur further deficiencies, the Board voted to close the Hospital,” Cashman said. “In addition, the Board also authorized me to prepare the Hospital for filing a bankruptcy proceeding.”

(Editor’s Note: The original version of this article gave the incorrect impression that state Sen. Keith Ingram meant that “everything was on the table,” including not having a hospital. The paragraph containing his comments has been clarified to reflect what he meant to say.)