El Paso Children’s Hospital enters Chapter 11 bankruptcy, cites overcharging allegations

By Caroline Salls

Pittsburgh, May 19 – El Paso Children’s Hospital Corp. filed Chapter 11 bankruptcy Tuesday in the U.S. Bankruptcy Court for the Western District of Texas.

Chief executive officer and chief restructuring officer Mark Herbers said in a statement filed with the court that many of the terms of agreements reached with the University Medical Center of El Paso (UMC), the campus of which houses the children’s hospital, varied from the structure set in a 2007 feasibility study.

Herbers said these variations include assumptions that working capital loans would be repaid over a five-year period, instead of 18 months, “resulting in severe undercapitalization in the startup phase of operations of the debtor; a portion of the property tax appropriations attributable to pediatrics, which were estimated at $3.9 million in 2007, would be paid annually to the debtor by UMC for relieving UMC of its obligation to provide care for the pediatric indigent population of El Paso County; and the debtor would benefit from the efficiencies created by its location on the campus of UMC and sharing services, which was not reflected in the agreements.

“With respect to the efficiencies that were supposed to be created by the location of the debtor on the UMC campus (at the behest of UMC), the opposite occurred,” Herbers said.

“UMC instead charged the debtor multiples of its actual costs for myriad services, rent and ancillary items. These charges were not only above UMC’s cost but far more than what the debtor would pay third-party vendors for equivalent services.”

Also, Herbers said UMC obligated the children’s hospital to use its wholly owned subsidiary managed care company, El Paso First Health Plans, Inc., for management of managed care programs.

Under those programs, El Paso First is required to pay the debtor in exchange for services it provides to El Paso First enrollees. However, Herbers said he believes that El Paso First “has significantly underpaid the debtor for services provided by the debtor through systematically paying under-market and below-cost rates.”

Payments stopped

Herbers said the children’s hospital’s board decided in May 2014 to stop payments to UMC under the “onerous agreements.”

On May 28, 2014, UMC filed a UCC-1 Financing Statement with the Texas Secretary of State.

Herbers said the parties reached the terms of agreements in mediation, but those agreements “fell apart,” and the disputes remained unresolved as of May 19.

The children’s hospital filed a motion May 19 asking the bankruptcy court to order UMC to participate in further mediation related to the amount allegedly owed to UMC by the children’s hospital.

Lawsuit filed

In a lawsuit filed Tuesday against UMC, the children’s hospital alleges that its “liquidity issues stem directly from UMC’s systemic and calculated practice of overcharging the plaintiff in connection with the agreements.”

In connection with the filing, the company is seeking court approval to use cash collateral to fund its operations while in bankruptcy.

“Obviously, UMC has had knowledge that plaintiff’s financial distress is a direct consequence of the amounts that UMC asserts is owed by the plaintiff related to the agreements,” the lawsuit said.

Through the lawsuit, the children’s hospital is seeking a judgment against UMC and a ruling that its lien is avoided; an injunction prohibiting UMC from taking any action to terminate the agreements pending resolution of the adversary proceeding; a declaration that UMC has no right to collect rental payments in connection with the children’s hospital’s use of the facility because of the hospital’s bonds; and a ruling that the children’s hospital is owed a refund of all rental payment made to UMC.

Debt details

According to court documents, El Paso Children’s has $23 million in assets and $99 million in debt.

The company’s largest unsecured creditor is Texas Tech University of El Paso, with a $9.19 million trade claim. No other unsecured creditors were listed with claims of $1 million or more.

The children’s hospital is represented by Jackson Walker LLP.

Its Chapter 11 case number is 15-30784.

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