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Case Study: HCA acquires Forest Park facilities in 363 sale

Jul 6, 2020

Formed in 2008 by a group of physicians, Forest Park Medical Center was a small hospital system in Texas that quickly grew to six hospitals. The state-of-the-art facilities were generally located in areas of Austin, Dallas, Fort Worth, Frisco, San Antonio and Southlake in which high-income individuals who also had good private pay health insurance resided. The hospitals generally did not accept Medicare or Medicaid and catered to patients seeking elective surgeries which resulted in high profit margins for the hospitals. By 2013, however, Forest Park began to experience significant problems.

First, Forest Park settled allegations of illegal kickbacks with the Department of Justice. Then Sabra Health Care REIT purchased the Frisco hospital and made loans to the Dallas and Fort Worth facilities. Griffin American Healthcare REIT acquired the Southlake facility for $128 million the following year. The expenses related to these settlements and transactions cut into the dividends and distributions that had been paid by Forest Park to its physician owners.

Forest Park had succeeded in its early days by not accepting Medicare reimbursement and operating as an “out-of-network” provider, which meant it was able to charge more than the negotiated “in-network” reimbursement rates. The payors reacted by steering their insured patients to alternate hospitals that were “in-network” before Forest Park ultimately shifted to in-network status with its resulting lower reimbursement rates. This dramatically and negatively affected Forest Park’s revenue.

SOLUTION

When the six physician-owned hospitals filed separate bankruptcy cases, HCA Inc. called on Waller to guide it through the process of acquiring some of the Forest Park facilities. Waller drew upon its collective wealth of experience in handling mergers and acquisitions in bankruptcy settings — referred to as “363” sales — to assist our client in achieving its goals. Waller lawyers conducted an initial assessment of the most viable acquisition targets and ultimately advised HCA in connection with the purchase of three of the hospitals. One of the three hospitals (Frisco) remained open throughout the sale process, and Waller attorneys were able to assist HCA in a seamless transaction, addressing everything from real estate, financing, litigation, tax, regulatory and licensure and bankruptcy issues.

In light of the fact that the Frisco hospital, consistent with Forest Park’s initial business plan, did not participate in Medicare/Medicaid, Waller assisted HCA in securing the Frisco location as a “remote location” of a legacy HCA hospital and thus, facilitate its ability to service Medicare/Medicaid patients as well as its participation in existing HCA payor agreements. In addition, Waller assisted HCA in negotiating and consummating a purchase of Frisco’s buildings and related real estate from Sabra.

HCA North Texas acquired Forest Park Medical Center in Dallas and Forest Park Medical Center in Frisco. Sabra Health Care REIT, the leading creditor of the bankrupt Dallas hospital, received $125.4 million and was repaid in full in the sale to HCA. The transaction included two hospital towers with 84 beds, 22 operating rooms and 14 intensive-care rooms. Since the hospitals were not operational, HCA North Texas essentially paid Sabra Health Care REIT $96.25 million for the land, buildings, and certain equipment (some of which were subject to capital leases that were paid off at Closing based on amounts that were subject to extensive negotiations) in connection with the 54-bed Forest Park Medical Center in Frisco.

In 2015, the hospitals’ management team and boards were faced with the decision of whether or not to pass management responsibilities for the system over to a third party, Foundation HealthCare. Some were convinced that Foundation would better manage the supply chain, generating economies of scale and building relationships to negotiate improved managed care contracts. Each hospital had a unique tax identification number, meaning the Forest Park hospitals could not negotiate reimbursements as a group. This gave the system little leverage to negotiate with higher rates with insurers once Forest Park was pushed to use in-network rates.

After much deliberation, the board chose not to give up managing the hospitals in favor of securing a bridge loan from a Toronto-based firm, Callidus Capital, which promotes a strategy of “enabling our clients to weather the turmoil of growth and recovery.” The terms of the financing, however, were risky. Ultimately, the Callidus loan included loan conditions/covenants that weren’t able to be satisfied. The money remained out of reach — and the ramifications were tremendous.

That same year, the hospital at Frisco began deferring rent payments to Sabra. Forest Park’s largest secured creditor, Texas Capital Bank, froze the Frisco hospital’s bank accounts, which required the management teams to ask permission before making any withdrawals. Texas Capital Bank also posted the San Antonio hospital for foreclosure. The Frisco hospital filed for Chapter 11 bankruptcy protection. The other hospitals soon followed.

Forest Park, which had grown so rapidly, was now very publicly fighting for its life.

Due to Forest Park’s financial struggles, the Forest Park Medical Center in Austin was never operational. As such, St. David’s HealthCare, which is majority-owned by HCA Healthcare, Inc., acquired the land, buildings and related equipment (some of which were subject to capital leases that were paid off at closing based on amounts that were subject to extensive negotiations) of Forest Park Medical Center in Austin. This hospital filed for Chapter 11 bankruptcy protection, and St. David’s paid $135 million for the 146,381-square-foot hospital, an adjacent 80,000 square foot medical office building and a 500-space parking garage. The hospital has 40 patient rooms, including 12 VIP rooms, 10 operating rooms, a six-bed ICU and an emergency department.

OUTCOME

The three state-of-the-art hospitals in a fast-growing part of Texas created additional depth for HCA’s healthcare offerings in the Lone Star State. The hospitals are able to tap into the resources of a larger network with skilled expertise in fast-growing parts of the state. HCA was able to add to its considerable presence in Texas for prices that were determined by the Bankruptcy Court to be fair market value. By acquiring the hospitals pursuant to Section 363 of the Bankruptcy Code, HCA received protections against claims and liens in favor of Forest Park’s creditors that HCA would not have received in the event that acquisitions occurred outside of a bankruptcy proceeding.

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