DALLAS - El Paso Children's Hospital filed for Chapter 11 bankruptcy protection on May 19 after negotiations over a debt to county-owned University Medical Center fell apart, officials said.
The bankruptcy is the largest for a public facility in Texas in years. Other county hospital systems around the state, especially in rural areas, have struggled to stay afloat this year amid changes in Medicaid provisions and Texas' refusal to expand federal health insurance to the working poor.
It was built using debt issued by the El Paso County Hospital District, secured by the tax base of the hospital district, which operates University Medical Center.
Attorney Patricia B. Tomasco, who filed the petition on behalf of EPCH, declined comment on how bond holders might be affected. However, there is no indication that debt service on the outstanding bonds would be at risk.
At a news conference, Children's CEO Mark Herbers said it was not in the best interest of Children's to cede its authority to a county hospital whose priority is adults with acute medical issues. Instead, Children's plans to restructure its debt under
"It is not our preferred choice, but it is our only choice," Hebers said.
The bankruptcy filing came a day after University Medical Center, the county's publicly funded hospital, made a final offer on resolution of Children's $49.3 million debt to UMC.
"UMC has made exhaustive efforts to reach an agreement with EPCH that is consistent with the UMC Board's responsibility to ensure access to quality healthcare to all residents of El Paso County and prudently oversee UMC financial interests," UMC Board of Managers Chair Steve DeGroat said in a statement.
The final offer called for completion of a due diligence process with supervision from El Paso County Commissioners.
"We must be prudent and ensure the interests of UMC and El Paso's taxpayers are protected," DeGroat said. "For over a year now, UMC has continued to provide services to EPCH that are necessary to keep EPCH open. UMC cannot continue to provide this subsidy indefinitely."
Fitch Ratings placed El Paso County Hospital District's AA-minus credit rating on watch for a possible downgrade in February, the month the bankruptcy resolution was written.
"Recent public announcements from EPCH regarding a possible bankruptcy filing to avoid a takeover by the University Medical Center highlight a lack of ability to resolve organizational differences," Fitch analysts said then.
The El Paso County Hospital District covers 1,058 square miles, and owns and operates UMC, the only public hospital in the region. The 394-bed acute care facility has the legal responsibility to provide medical and hospital care to all El Paso County residents regardless of their ability to pay.
The El Paso Children's Hospital opened in February 2012; construction was financed with proceeds from the hospital district's $120.1 million series Series 2008A general obligation bonds, according to the district's financial statements.
"The Series 2008A Bonds are direct obligations of the Medical Center and are payable from an ad valorem tax," according to the district's most recent audited financial statement, for the period through September 2014.
It is the first children's hospital in the region and is located within UMC facilities. The district owns the facility and leases it to the separately licensed non-profit EPCH, which has an independent board of governors.
Standard & Poor's downgraded the hospital district to A-plus from AA-minus in December 2014 and maintained a negative outlook.
"The rating action is based on our view of the district's declining cash levels related to operational pressures tied to the operation of El Paso Children's Hospital," said Standard & Poor's credit analyst Brian Marshall.
The bankruptcy filing listed assets of $50 million to $100 million and $11.4 million of unsecured debt, including $9.2 million to the Texas Tech University Medical School, which uses the hospital as a teaching facility. EPCH is disputing $162,000 of unsecured debt.
In March, EPCH entered into mediation with UMC seeking an agreement for a change of control that would align mutual interests and resolve the children's hospital debt and operational structure.
"Since that mediation, UMC unilaterally changed the terms and on May 13th submitted a completely different term sheet to EPCH," according to a statement from the Children's Hospital.
"Unfortunately, the manner in which UMC has navigated the mediation process has been unproductive and not in the best interest of the EPCH," Herbers said. "It is our obligation to the residents of El Paso County to protect the independent operation of EPCH and more importantly, our mission, which is to care for the critically ill children in this region."
EPCH expects to emerge from Chapter 11 by the end of the year.
"This will not be an easy process, but in order to protect EPCH, its scope of services and its patients, and to maintain all that it has achieved in 3-plus years, this is the right thing to do," Herbers said.
Under the protection of the restructuring laws, UMC and its board of directors will have no supervisory, advisory or operational control of EPCH, the hospital said.
"UMC's role will be that of a building landlord and will provide common services to EPCH," according to the EPCH statement.
