No closures planned, normal operations to continue

The Kennewick Public Hospital District has filed for bankruptcy protection as it works to reorganize $221 million in debt.

Trios Health, which operates two hospitals and multiple outpatient care centers throughout Kennewick, will continue to operate as normal as it works to regain financial footing. The district has reported losses over the past three years and its cash is depleted.

“We have arrived to a point that we must restructure our debt so that we can sustain our operations and services to the Tri-Cities,” said Marv Kinney, president of the hospital district board, in a statement. “We have endeavored to avoid this process by working with our creditors. Unfortunately, a few are not amenable to negotiation so we needed to file so patient care can continue unhindered.”

The public hospital district board voted unanimously June 29 to file for Chapter 9 bankruptcy with the U.S. Bankruptcy Court for the Eastern Division of Washington. Documents were filed with the court June 30.

The process provides for the reorganization of municipalities, providing time to propose a plan for the adjustment of the hospital district’s debts to third parties.

The next step in the process is to file a plan of adjustment and disclosure statement with the court outlining Trios Health’s plan for repayments. The court will then assign a date for presentation of this plan. Depending on the judge’s decision, the next steps in the process can vary.

Trios Health expects to emerge from bankruptcy within one to three years.

Trios Health CEO Craig Cudworth said the details of the debt reorganization plan are not finalized but Trios will continue to take deliberate steps to return to financial health as soon as possible.

The administrative team and leadership are following the recommendations presented by Quorum Health Resources, a management consultant firm hired by the hospital board last year.

The $395,000 contract with Quorum is for one year with an option to renew another one to two years.

Quorum delivered a 401-page report in December describing a perfect storm following the construction of a new hospital and outpatient facility when industry-wide realities and local competition collided.

Trios began a series of layoffs in April affecting about 25 employees. The layoffs eliminated about 95 full-time equivalent jobs.

The reductions were realized through attrition, or not rehiring positions when possible, changes to shift scheduling and hours worked, voluntary layoffs and layoffs.

The Quorum report recommends the elimination of 115 FTE jobs.

Documents filed with the court show the “gap between Trios’ actual and forecast revenue growth rates is largely attributable to two unforeseen actions undertaken by Kadlec.”

The first is Kadlec successfully negotiating for the exclusion of Trios from coverage under the HMO and PPO plans offered by Group Health in 2011, court documents said. Prior to this development, payments from Group Health represented about four percent of Trios’ total revenue. After losing the contract, Trios experienced an annual reduction in net patient revenue of about $5.3 million and it wasn’t able to replace that lost revenue.

Kadlec’s free-standing emergency room built close to the new Trios Southridge Hospital also negatively affected Trios.

Following Kadlec’s opening of its Southridge emergency room, “Trios experienced an immediate decline in patient visits to its own emergency room, along with a corresponding decline in hospital admissions that are normally associated with such visits,” court documents said.

In 2010, Trios had 34,211 emergency room visits. By 2014, that number decreased to 27,265 patient visits, a decline of more than 20 percent. Also, Trios could historically expect that about nine percent of emergency room visits would result in admissions, implying a potential loss of more than 600 admissions annually by 2014, according to court documents.

Court documents list 20 of Trios Health creditors with the largest claims. Two local businesses are on the list: Tri-Cities Laboratory ($359,961) and Tri-Cities Chaplaincy ($91,180).

Cudworth acknowledged there will be concerns among creditors.

“It’s important that our vendors and partners understand that we sought to avoid this,” he said in a statement. “We have tried to work out payment plans that would give us some room, but that was not agreeable to all. In the interest of continuing patient services, this is what we must do.”

The hospital district has more than 3,000 creditors holding about $221 million in claims, according to court documents. These creditors include bondholders, real and personal property lessors and lenders, current or former employees and retirees, political subdivisions or state or federal agencies, and others who may be unknown, each with varying interests.

Here’s how Trios breaks down its outstanding debt:

• $110 million for Trios Southridge Hospital lease financing agreements.
• $48.8 million for the six-story medical office building lease financing agreements.
• $24 million for certain equipment capital lease financing agreements.
• $4 million in outstanding principal for hospital system revenue improvement and refunding bonds.
• $4 million in outstanding principal for limited tax general obligation bond.
• $6.9 million in outstanding principal and past-due interest under certain notes.
• $22.1 million in outstanding amounts payable to vendors of which at least $19.8 million is past due.

Creditors and interested parties may follow the proceedings and review information on a website set up by Trios Health’s legal counsel, Foster Pepper of Seattle, at http://cases.gardencitygroup.com/kphd/.

“What is important right now is that our team remains focused on moving forward and staying our course,” Cudworth said in a statement. “Over the last few months, we have significantly reduced our expenses throughout the organization and adjusted our workforce to match our patient volumes, which continue to exceed years past. It’s not too late for us to fix the financial challenges and we have every reason to be successful in doing so.”

Other strategies to improve the district’s financial health include pursuing a $150 million loan from the federal Department of Housing and Urban Development to restructure its debt and negotiating acquisition/merger offers.

Trios documents posted online say filing for bankruptcy makes the district “more attractive due to an improved market valuation position” for a merger or acquisition and “may improve our chances of successful refinancing through HUD.”