Doctors Community Healthcare ; PhyAmerica Physician Group ; Tender Loving Care ; Med Diversified ; LifeCare Solutions ; Lincoln Hospital Medical Cente

Fallout Spreads After Collapse Of a Health Services Lender

MICHAEL ONEAL
Published: November 21, 2002
The collapse of National Century Financial Enterprises toppled another of its clients yesterday when Doctors Community Healthcare -- a company based in Scottsdale, Ariz., that owns five hospitals in low-income neighborhoods in Washington, D.C.; Chicago and Southern California -- filed for Chapter 11 in the Federal Bankruptcy Court for the District of Columbia.

Doctors Community joins several other major customers of National Century that have filed for bankruptcy since the health care finance company, based in Dublin, Ohio, began to come apart in late October. The PhyAmerica Physician Group in Durham, N.C.; Tender Loving Care, a unit of Med Diversified in Andover, Mass.; LifeCare Solutions in San Diego; and Lincoln Hospital Medical Center in Los Angeles have all sought Chapter 11 protection in the last two weeks after they stopped receiving payments from National Century.

Hundreds of other National Century clients are also scrambling to find alternative financing. Those that operate hospitals in depressed communities may be the hardest hit.

''This is a knife in the heart for those institutions,'' said Rick Wade, a spokesman for the American Hospital Association. With rising costs, slow-paying insurers and lots of uninsured patients, many hospitals in low-income neighborhoods ''are on the edge,'' he added.

National Century itself filed for bankruptcy on Monday and has become the target of both an F.B.I. investigation and allegations of gross mismanagement brought by its clients and holders of $3.35 billion worth of its asset-backed securities.

The company's former chairman and chief executive, Lance K. Poulsen, resigned both posts under pressure on Nov. 8.

The Doctors Community filing will provide protection from creditors to all five of its hospitals: Greater Southeast Community Hospital and Hadley Memorial Hospital in Washington; Michael Reese Medical Center in Chicago; Pine Grove Hospital in Canoga Park, Calif.; and Pacifica of the Valley Hospital in Sun Valley, Calif. The company issued a statement promising that wages and benefits would continue to be paid as the privately held company restructures.

But the troubles of Doctors Community have already affected medical services in one of Washington's poorest neighborhoods. Karen Dale, chief executive of Greater Southeast Community Hospital, said that while she was confident the quality of care had not been affected at her hospital, the number of patients it can care for has diminished because of the severe cash squeeze.

Two of the four companies that had been supplying nurses to Greater Southeast have withdrawn their employees because they were not being paid. The other two have reduced the number of nurses they will supply, Ms. Dale said. That means the hospital can accept fewer patients, especially in its intensive and critical care units. When its emergency room got too crowded over the weekend, for instance, Ms. Dale said the hospital was forced to divert ambulances to other hospitals.

Meanwhile, Ms. Dale is spending much of her time trying to persuade her doctors and nurses to stay put. ''The danger would be that the staff panics and decides to leave,'' Ms. Dale said. ''We are located in Ward 8 -- the area with the worst health indices and a lot of poor people. This is devastating.'' Greater Southeast was the lead hospital in a highly publicized effort to privatize the District of Columbia's health care system for indigents in 2001.

The troubles at Doctors Community began in late October when National Century, one of the largest health care finance companies in the country and the primary source of financing for most of its clients, began to fall apart. National Century lent money to cash-short health care companies in return for taking over rights to their receivables -- payments expected from insurers and government programs like Medicare and Medicaid. It then packaged those receivables into collateral for bonds and sold the bonds to investors, who received interest derived from the insurance payments. National Century gets a part of each transaction.

But last spring, after Fitch Ratings downgraded the bonds, investors started to shy away from National Century, depriving it of new capital. In response, the company took money from reserve accounts backing two bond trusts worth $3.35 billion. When investors discovered that almost $350 million was missing from a trust called NPF XII, it was clear National Century was facing a liquidity crisis. The company stopped making payments to hundreds of hospital and home health care clients and the value of its bonds collapsed.

Since then, a bondholder group has charged in the Franklin County Court of Pleas in Columbus, Ohio, that National Century owned large stakes in many of its biggest clients -- companies like Med Diversified and Doctors Community. Other documents in the Ohio court proceedings claim that the company was lending far more money to these clients than they generated in receivables. Instead, court papers say, National Century was taking real estate and even artwork as collateral for the loans, violating the bond indenture.

In effect, bondholders have charged, National Century was using its AAA-rated bonds to prop up distressed companies in which it had a direct ownership interest. Bank One, the trustee for a portion of National Century's bonds, said in a court filing that ''the evidence of systematic financial trickery continues to mount.''

Some of the bondholders are moving on. The Ambac Financial Group announced on Monday that it would write down 70 percent of its $174 million investment in the bonds. Others with big exposure include the Pacific Investment Management Company, which is a unit of Allianz, and Alliance Capital Management, which is a unit of AXA.

Investors in asset-backed securities are still questioning how bonds that had carried a top credit rating could now be worth just a fraction of their face value. Moody's Investors Service rated National Century's bonds AAA until Oct. 25. Credit Suisse First Boston underwrote the bonds, and J. P. Morgan Chase had two bankers on the National Century board, including Hal Pote, head of the audit committee. Deloitte & Touche audited the books. Both Bank One and J. P. Morgan were bond trustees.

Most of these securities are backed by mortgages and other assets with relatively predictable cash flows. ''They're supposed to be bullet proof,'' one specialist said.