Part 2: The Basically Bogus Bankruptcy of Hoboken University Medical Center

In 1992, New Jersey’s population was 7.8 million.  Two decades later it topped 8.7 million.  Despite the increase in population, dozens of hospitals closed, filed bankruptcy, were dismantled, or switched from nonprofit to for-profit status.

When entities’ tax status changes from nonprofit (charitable) to for-profit, the impact on services is enormous because nonprofits pay no sales, income, or property taxes and are able to provide those otherwise dedicated costs toward the advancement of their mission statements.  Further, these nonprofits are able to raise money by issuing bonds (for capital improvement, equipment, etc.) at favorable tax considerations to purchasers of their bonds.  But the most critical change in moving from nonprofit to for-profit status is the elimination of the nonprofit’s social purpose mission which must directly be correlated to serving the needs of the public and communities (especially those most at risk) in which they are located.  A for-profit entity has no such constraint and is instead focused on the bottom line, return on investment, and reporting to shareholders.

A nonprofit entity is also more transparent with regard to its operations due to strict IRS regulations which mandate the filing of detailed annual information returns (known as Form 990) and are public information.  Privately-owned organizations (those not publicly traded on stock exchanges), which may be owned by anyone from hedge fund managers to Wall Street executives, are less transparent in the operation of their entities because they have no such requirement.

In NJ, one of the most recent hospitals to file bankruptcy is Hoboken University Medical Center.  In September of 2011, NJ Governor Chris Christie (a Republican elected in 2009 to his first term on the promise of fiscal responsibility, taking office in January 2010) announced he’d:

“Pledged $5 million in state funds to jump start bankruptcy negotiations key to the sale of [nonprofit] Hoboken University Medical Center to the [private equity] ownership group of Bayonne Medical Center.” NJ.com 9/22/11

(The year before, Christie slashed money to municipalities and school boards by almost a billion dollars, directly impacting their ability to fund schools/teachers/police/fire/safety/etc.)

The for-profit entity looking to purchase Hoboken University Medical Center had also acquired Bayonne Medical Center which (coincidentally) filed for bankruptcy in 2007.  Several of the ownership members:

“made numerous bi-partisan political contributions, including $100,100 to Democratic lawmakers and the party’s state committee.  The group contributed $25,000 to Reform Jersey Now, a political action committee with close ties to Christie….[and relatives] also made maximum contributions to Assemblyman Ruben Ramos (D-Hudson) weeks before the lawmaker sponsored a budget resolution for the $11 million [to cover interest on the original purchase bonds] earmarked for the hospital sale.”  NJ.com 9/22/11

On its face, it seemed NJ Governor Chris Christie – in an apparent bi-partisan deal – was working to “grease the wheels” of the sale of nonprofit Hoboken University Medical Center to a specific group of capitalists/investors.

Hoboken University Medical Center – Background

Founded during the Civil War to treat wounded soldiers, St. Mary’s Hospital was opened by the Poor Sisters of St. Francis.  As the oldest community hospital in the State of NJ, located in Hudson County in the one-square mile of the City of Hoboken, it’s a stone throw from New York City.  After the attacks of 9/11/2001, St. Mary’s emergency room treated more than 8,000 patients.   In 2000, the hospital was purchased by Bon Secours New Jersey Health System Inc., a nonprofit Catholic health system, but by 2007 Bon Secours wanted to close the facility claiming financial distress.  The City of Hoboken – under the façade of saving jobs – looked to purchase the hospital and so created The Hoboken Hospital Municipal Authority (The Authority), a city-backed entity which purchased the hospital’s charter from Bon Secours through the sale of city-guaranteed bonds of $52 million, renaming it Hoboken University Medical Center.  The Authority, as required by state law, entered into an agreement with Hudson Healthcare, Inc. – a nonprofit 501(c)(3) entity to manage the hospital.

Hudson Healthcare, Inc.

Hudson Healthcare’s sole purpose was to manage the day-to-day operations of Hoboken University Medical Center for which it was paid tidy annual management fees ranging from $123 million to $142 million.  It’s mission statement:

“The organization was formed for the promotion of the health of the community and delivery of health care.”

According to Hudson Healthcare’s Form 990, for its first year of operation (2007), they received $123,136,074 in management fees.  The cost to run Hoboken University Medical Center – that is for program services related to operations of the hospital (i.e. actual medical care) was only $93,861,181, resulting in a net surplus of almost $30 million.

But that surplus was spent on other costs such as “management and general” expenses, resulting in a net income for the year 2007 of zero.

After the purchase of the hospital by The Authority and formation of the management entity, Hudson Healthcare, the public relations machine began churning:

(1)    “The Road to Remarkable Recovery”

In February of 2007, at an initiation ceremony, the hospital’s former owner, Bon Secours, handed over the keys to the newly created Hoboken Hospital Municipal Authority [The Authority] transferring ownership and changing the name of the 144-year old institution to nonprofit Hoboken University Medical Center.  The well publicized 2/7/2007 announcement stated CEO Harvey Holzberg (who received reported total compensation in excess of $2 million for the first 3 years of Hudson Healthcare’s operation):

“…took the reins of the hospital last summer.  Holzberg has a track record engineering successful hospital turnarounds that are second to none.  Most notably, he led the transformation of the financially struggling Middlesex General Hospital into the nationally-renowned Robert Wood Johnson University Hospital.”

Further:

“As a public hospital, Hoboken UMC will also be eligible for increased state and federal reimbursements.  But, even before receiving any of these additional funds, Hoboken UMC appears to be well on the road to a remarkable recovery [emphasis added].  Overall, the average daily census rose by more than 23% in 2006 (154 vs 125 in 2005).  Over the three month period ending Nov 30, 2006, revenues increased an impressive $6 million, compared to the same period in 2005.  Admissions in December were up 35% leading to a profit of $400,000 compared to a $1.8 million loss the previous December [emphasis added].”

(2)    “Remarkable Financial Recovery”

“The oldest continuously running hospital in New Jersey, Hoboken UMC was acquired by the City of Hoboken in 2007, and has since engineered a remarkable financial recovery [emphasis added] culminating with the selection of OpenVista as the key to federal financial assistance…..’We anticipate tremendous benefit from our ability to exchange data with other hospitals that participate in the Healthcare Open Source Ecosystem’ said Lior Bilk, President and CEO of NIT Health. ”  Reuters 10/15/2009

Mr. Bilk’s company was the highest paid independent contractor at Hudson Healthcare where he was also the CIO earning, in 2008, not only a salary of $289,975 as a “key employee”  but also as CEO of NIT Health, his company was paid the sum of $2,591,977 or over $7,000 per day.  (Between 2007 and 2009, NIT received in excess of $6 million).

This is particularly interesting because Section B “Independent Contractors” of Form 990 requires entities to disclose payment to the five highest independent contractors.  Usually, these contractors comprise physician services, medical supplies, anesthesiologists, or nursing.  For comparison purposes, Mount Sinai Hospital is located in New York City less than 10 miles from Hoboken University Medical Center.  According to Mount Sinai’s 2009 Form 990, which reflected income of $1.5 billion (10 times the income of Hudson Healthcare), payment for medical records management totaled only $734,224 or less than 30% what Hudson Healthcare paid (Mount Sinai’s highest paid independent consultant was Marathon Medical who provided physician services at a cost of $1.3 million – still over a million dollars less than NIT received).

In fact, in 2008, the top 12 employees at Hudson Healthcare pulled in $3,912,698 for an average salary of $326,058 – seven times the average salary of its 1,500 employees ($44,681).

This typical hands-in-the-cookie jar syndrome, which is rampant at almost any nonprofit hospital (even more so at for-profit hospitals), was even more egregious at Hudson Healthcare which paid out over $14 million to a dozen top employees ($8 million between 2007 and 2009) and one consultant ($6 million).

Mounting Evidence of Financial Finagling

Hospital accounting is ripe for financial improprieties because the source of revenue is blatantly discriminating, confusing, contradictory, and complicated.  Ask any hospital billing department employee or CEO or collections agent to explain exactly how they calculated your hospital bill and you’ll receive a dozen explanations and excuses.

Basically, this is hospital accounting in the USA.  Management, along with their team of public relations personnel, work very hard to:  Spout lies, plant false impressions, point fingers, and reinforce everything through the corporate-controlled media.

How do I know?  Well, whenever I ask people why they think our nonprofit hospitals are closing/losing money, the responses are usually two-fold:  it’s either (1) the illegals using our emergency rooms, or (2) the high cost of health care (which you can’t do anything about anyway).

The profiteers’ propaganda machine knows no bounds.

So it’s no surprise that despite the stated “remarkable recovery” of Hoboken University Medical Center in the years following its acquisition, the rumors of a looming bankruptcy began to circulate in 2010.

Lo and behold, on 8/1/2011, the nonprofit organized for the sole purpose of managing Hoboken University Medical Center – Hudson Healthcare, Inc. – filed a voluntary Petition under Chapter 11 of the bankruptcy code listing total assets of $37,751,015 and liabilities of $38,180,570 for a net deficit of (only) $429,554 (they handed out more than that each year to one top employee).

The petition included a plan to dole out over five times the deficit amount in bankruptcy fees including but not limited to:

(1)    Sills, Cummis, & Gross:  $1,275,837.75 (Order granting first interim application of Sills, Cummis, & Gross PC for allowance of fees and expenses as attorneys for the official committee of unsecured creditors for the period 8/14/2011 thru November 30, 2011 – filed 2/17/12);

(2)   J.H. Cohn:  $361,944.10 (Order granting first interim application of J.H. Cohn LLP for allowance of fees and expenses as financial advisers for the official committee of unsecured creditors for the period August 15, 2011 through November 30, 2011 – filed 2/17/12).  It is interesting to note J.H. Cohn’s hourly billing rates range from $710 for senior partner (who billed the most time) to $260 for administrative staff.  (Question:  Do they pay their administrative assistants $300,000 a year!?)

(3)   Trenk, DiPasquale, Webster, Della, Fera, & Sodono:  $448,563.21 as counsel for debtors who also received a retainer (Monthly Fee Statement for the period September 1, 2011 through September 30, 2011).

In Hudson Healthcare’s bankruptcy petition, listed among the largest unsecured creditors was $1.5 million owed to District 1199J NJ Benefit/Pension Fund which represents hospital and health care employees.

Hudson Healthcare filed for bankruptcy (voluntary, not forced by creditors) stating they owed less than $500,000 but were willing to pay out millions in fees, leaving their unsecured liabilities (like unions) screwed.  Interesting, in a review of the Petition, I didn’t see their IT consultant, NIT Healthcare, listed as a creditor.

But There’s More

Two weeks before Hudson Healthcare filed for bankruptcy, the attorney for Hoboken University Medical Center resigned because he feared the City was committing fraud:

“In court papers, Donald Scarinci [general counsel for the Hospital] says the city-backed authority created to oversee the hospital withheld millions in contractual payments to help make it appear the facility was in duress and push it into bankruptcy. The Authority wants to sell the hospital to [yawn] private investors who own the for-profit Bayonne Medical:

 ‘I was the first hand witness to a pattern of conduct by the Hoboken Municipal Hospital Authority board members to intimidate, threaten, control, abuse and attempt to force the CEO of the hospital and members of the board to take actions adverse to its charter and otherwise violate the laws of the state of New Jersey,’ Scarinci said in [court] documents filed.”  NJ.com 9/14/11

The hospital’s CEO resigned two weeks before the bankruptcy filing, receiving a $600,000 severance package; hospital board members who also resigned were replaced by members hand-picked by The Authority to halt the legal challenge to the withheld payments.

“The goal,” Scarinci says, “was to ensure the hospital was sold to the investors who are waiting for the state to approve a transfer of its license and a bankruptcy judge to rule on key motions considered pivotal to the $65 million sale.”  NJ.com 9/14/11

Where Was the Oversight?

Numerous letters I’ve written to NJ authorities requesting an investigation into the bankruptcy and sale of Hoboken University Medical Center (HUMC), including but not limited to State Senator Loretta Weinberg (D-District 37), Assemblyman Rubin Ramos (D-Hudson), Hoboken Mayor Dawn Zimmer, City of Hoboken Councilpersons, NJ Attorney General Paula Dow (appointed by Governor Christie in 2010 but subsequently nominated for a Superior Court Judgeship), and United States Attorney, went unresolved.  Despite my repeated requests, I have not received notice of any action on my inquiries.  Specifically, I questioned:

(1)   When was the insolvency of Hoboken University Medical Center first discovered?

(2)   What was the cause of the hospital’s insolvency?

(3)   How soon after the discovery of this insolvency, was it brought to the public’s attention?

(4)   What steps were taken to mitigate losses and implement a plan to recover the financial operations of the hospital?

(5)   Under the NJ Community Health Care Asset Protection Act (CHAPA) – enacted in 2000 under then Governor Christine Whitman to ensure Attorney General oversight in the specific event of a sale of a nonprofit hospital – why did Paula Dow’s office specifically exempt Hoboken University Medical Center from CHAPA regulations?   CHAPA’s purpose is to provide transparency, ensure arms-length transactions, and protect the assets of nonprofit hospitals for the health, well-being, and protection of the citizens of NJ.

(6)   With regard to Hudson Healthcare:   Who was authorizing its management of HUMC, especially given the outrageous compensation and independent consultant packages?

(7)   Prior to the bankruptcy of HUMC, were audited financial statements obtained, and did those statements disclose going concern issues especially since an alternate public statement highlighted “turnarounds” and “remarkable recoveries”?   (Continuation of an entity as a going concern is assumed into perpetuity in financial reporting unless there is evidence to the contrary, and then auditors are bound to separately state this in the notes to the financial statements.)

Epilogue

On Friday, October 21, 2011, the State of NJ Commissioner of Health and Senior Services, Mary O’Dowd, approved the certificate of need for the sale of Hoboken University Medical Center to HUMC Holdco, a profit-first entity – coincidentally,  the same ownership organization which owns Bayonne Medical Center.  HUMC Holdco promised to pay off the bond debt (the taxpayers will bail out the bondholders by paying $11 million interest accrued and due):

“HUMC Holdco was named the winning bidder after opposing bids from Community Healthcare Associates/Jersey City Medical Center and Connecticut-based consulting firm Paradigm Physicians Partners, was rejected for not having reliable financial backing or plans to maintain the hospital’s current services.”  NJ.com 10/22/11

The creditors (including nurses and other health care providers’ unions), who were owed about $34 million, received a $10.2 million settlement (30 cents on the dollar).

Further, now that the hospital is for-profit, the bonds which the City issued to pay for the adjacent parking garage supporting of the former nonprofit HUMC, transformed the garage to a taxable entity and created a budget gap for the City of Hoboken who must find $4.5 million to pay down the existing bonds.

The City is reported to close this budget gap by city-wide personnel layoffs.

Lynn Petrovich

Copyright 2012