Hospital Acquistion LLC – Acute Care Hospital Operator Files Chapter 11, Cites Medicare-Driven Decline in Reimbursement Rates Resulting in Untenable Debt Service and Liquidity Issues

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May 6, 2019 − Privately-held Hospital Acquisition LLC and 25 affiliated Debtors (trading as Lifecare Health Partners, "LifeCare" or the "Debtors") filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 19-10998. The Company, leading operator of long-term acute care (“LTAC”) hospitals in the United States , is represented by M. Blake Cleary of Young Conaway Stargatt & Taylor, LLP. Further board-authorized engagements include (i) Akin Gump Strauss Hauer & Feld as bankruptcy counsel, (ii) Houlihan Lokey as financial advisor, (iii) BRG Capital Advisors, LLC as investment banker and (iv) Prime Clerk as claims agent. Documents filed with the Court list the Company's three largest unsecured creditors as (i) Cantu Construction (indeterminate, unliquidated litigation claim), (ii) Welltower Inc ($1.9mn trade claim) and (iii) DOC-Lifecare ($753k trade claim).

Predecessor Chapter 11

In December 2012, the Debtors' predecessor LCI Holdings filed for Chapter 11 protection in the District of Delaware, lead Case No. 12-13319. Following a prepetition marketing and sales process prepetition, and having determied that no bid provided consideration equal to or in excess of their obligations under their prepetition credit agreement, LCI Holdings effectuated a sale of substantially all of its assets to the current Debtors.  

Events Leading to the Current Chapter 11 Filing

In a declaration in support of the Chapter 11 filing (the “Murray Declaration”), James Murray, the Debtors’ chief executive officer, detailed the events leading to Debtors’s Chapter 11 filing.

The Murray Declaration states, "While the Debtors have established a market leadership position in post-acute care, internal and external factors have lead the Debtors to an unmanageable level of debt service obligations and an untenable liquidity position. 

In 2015, Medicare’s establishment of patient criteria to qualify as an LTAC-compliant patient facility led to significant reimbursement rate declines over the course of 2015 and 2016 as changes were implemented. Average reimbursement rates for site neutral patients, representing approximately 57% of 2016 cases, is estimated to drop from $23,000 to $9,000 across the portfolio. When rates declined sharply, the Debtors were unable to adjust. 

Further, the number of patients that now qualify by Medicare to have services provided in an LTAC setting has declined substantially, resulting in a significant oversupply of LTAC beds in the market.

In an effort to address decreasing Medicare rates and declining eligible patient volumes, the Company focused on four primary areas. 

  • First, the Company sought to improve their core business by building profitable referral sources and offering world-class care. 
  • Second, the Company sought to improve the value proposition of its strongest hospitals by adding complimentary businesses and/or developing centers of excellences for disease specific programs. 
  • Third, the Company closed four (4) marginally performing hospitals. 
  • Finally, the Company sought to implement a multi-faceted growth strategy designed to diversify its business’s through home health agency acquisitions and developing offerings designed to utilize its post-acute care platform to compete in the evolving value-based health care environment. 

In addition to developing these areas of focus, in August 2018, the Company raised additional liquidity and completed an amend and extend transaction described in paragraphs 14-21 to provide runway to execute on their business plan, including the continued acquisition and expansion of home health businesses (the 'August 2018 Transaction'). During the course of pursuing the August 2018 refinancing, the Company’s combined operations were generally performing in line with their business plan, although certain of the Company’s home health agency acquisitions were experiencing unfavorable results. Through September 2018, these unfavorable home health agency results were generally offset by favorable hospital results. In the fourth quarter of 2018, the Debtors’ hospitals also began to experience unfavorable operating results against plan. These unfavorable results coupled with the unfavorable home health operations against plan resulted in the Company being unable to perform in line with their 2018 business plan. Due to the anticipated 2018 business plan shortfall, the Debtors concluded that they would be unable to meet the debt level covenant levels required by the August 2018 Transaction during 2019."

Equity Ownership of Lead Debtor

Name

Common Share Percentage

Monarch Master Funding Ltd

34.45%

Twin Haven Special Opportunities Fund IV, L.P.

16.23%

Blue Mountain Credit Alternatives Master Fund LP

11.69%

Merrill Lynch, Pierce, Fenner & Smith Incorporated

9.92%

BlueMountain Montenvers Master Fund SCA SICAV-SIV

6.19%

BlueMountain Summit Trading, L.P.

5.57%

BlueMountain Timberline Ltd.

5.16%

BlueMountain Guadalupe Peak Fund L.P.

3.16%

BlueMountain Foinaven Master Fund L.P.

2.25%

BlueMountain Kicking Horse Fund L.P.

1.46%

BlueMountain Distressed Master Fund L.P.

1.44%

BlueMountain Logan Opportunities Master Fund L.P.

1.27%

Oakstone Ventures, Inc.

1.20%

Total

100.00%

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