Affiliated Medical Files for Chapter 11 : Bankruptcy: The operator of five hospitals, including Pacifica Community, is mired in debt.
Affiliated Medical Enterprises, owner and operator of five hospitals, including Pacifica Community Hospital in Huntington Beach, on Wednesday filed for protection from creditors under Chapter 11 of the U.S. Bankruptcy Code.
Dan S. Young, president and chief executive, said the privately held Orange company has reached an impasse after year-long negotiations with its creditors over restructuring debt resulting from its $100-million acquisition of four hospitals from American Health Group International in 1988.
In a filing in U.S. Bankruptcy Court in Santa Ana, AME listed $110 million in debts, including $88 million owed to banks and other lenders involved in the acquisition, and about $14 million owed to various vendors.
Young said the five hospitals “will remain fully functional” while the company attempts to reorganize its debts under supervision of the bankruptcy court. There will be “no interruption of any services,” he said. “We plan no hospital closures and no employee layoffs.”
Young claimed that the hospitals have failed to generate as much revenue as anticipated at the time of the sale and have “never lived up to” pre-sale financial statements prepared by the sellers and audited by their accounting firm, Arthur Andersen & Co.
AME said it has filed a suit in Los Angeles Superior Court against Arthur Andersen, “alleging misrepresentation and fraud in connection with the acquisition.” It also said it is arbitrating similar complaints with the former owners of American Health.
Mark Leaf, a California spokesman for the accounting firm, said company officials familiar with the case were unavailable for comment Wednesday.
AME was founded in 1986 by five private local and offshore investors with the objective of acquiring a chain of hospitals, said Douglas Webster, the company’s chief financial officer. In 1987, the company bought the 116-bed Ojai Valley Community Hospital in Ojai. The following year, it bought four hospitals from American Health, based in Washington state.
The four hospitals acquired from American Health included three in Southern California--the 109-bed Pacifica Community Hospital, the 123-bed Palmdale Hospital Medical Center in Palmdale, and the 264-bed Pacifica Hospital of the Valley in Sun Valley. It also included the 99-bed Roosevelt General Hospital in Portales, N.M.
Following the acquisition, Webster said, AME was surprised to discover that the hospitals owed “several million dollars” to the federal government for overpayments they received for treating Medicare patients.
He said the government has recovered the money by refusing to pay the bills of Medicare patients at AME’s hospitals for the past two years.
To fund ongoing operations, Webster said, “the company quickly tapped out its available resources,” including a $6 million line of credit.
Company officials say AME is unable to repay to a group of institutional lenders led by the Bank of Boston a short-term loan that becomes due in full in April.
They add that their efforts to refinance this loan have been fruitless because the ailing hospital industry is generally unattractive to investors and lenders.
Webster said AME entered into an agreement last year to sell its hospitals to another company and lease them back under a management contract. But he said the prospective buyer, which he declined to identify, has been unable to finance the deal.
