Mid-Size Company Turnaround - Coordinated Health
Chris Creger, CohnReznick LLP
Cynthia Romano, CohnReznick LLP
Thomas Marchozzi, Lehigh Valley Health Network
Mark Minuti, Saul Ewing Arnstein & Lehr LLP
Jeffrey Hampton, Saul Ewing Arnstein & Lehr LLP
Victoria Vaskov Sheridan, Epstein, Becker & Green, P.C.
Patricia Wagner, Epstein, Becker & Green, P.C.
Andrew Kaplan, Epstein, Becker & Green, P.C.
About the Turnaround:
Coordinated Health (CH), a for-profit health network headquartered in the Lehigh Valley, Pennsylvania, grew from a small sports medicine practice to a profitable $235 million health network over more than 30 years. CH comprised healthcare operations (OpCo) of 80 legal entities, 105 physicians, and 1,400 employees responsible for 12,000 patient visits per week, operating from 22 owned properties and three leased facilities (PropCo) across Pennsylvania and New Jersey, including medical office buildings, ambulatory surgical centers, physical therapy and imaging clinics, and micro hospitals. CH was founded by Dr. Emil DiIorio, and more than 20 key physicians bought into the enterprise. DiIorio later bought CH back when regulatory policies restricted doctor ownership of hospitals (the last buyout payment wasn’t yet paid, and these physicians became a pivotal creditor class).
CH built a stellar reputation with low rates and high doctor/patient satisfaction scores via a delivery process that prioritized doctor efficiency and patient coordination. By late 2017, CH struggled to compete with not-for-profit networks, so CH sought partnerships with two of these networks to drive expansion for all. CH doubled administrative staff and started construction on two hospitals as the deals were being finalized. In late 2018, the deals fell apart when an ongoing five-year U.S. Department of Justice (DOJ) investigation into CH billing expanded via the False Claims Act, increased a whistleblower action from $300,000 to more than $100 million, and settled for eight figures plus a corporate integrity agreement.
Worsening competitive and creditor pressures made a transaction the best option for all stakeholders, and improved performance made a transaction feasible. Between May and August, 96 institutions were contacted; creditors stood still without court protection; the CRO team took over as lead negotiator; and six term sheets were received. Lehigh Valley Health Network (LVHN), a $2.7 billion, A-rated not-for-profit health network in the same footprint as CH was chosen for the transaction. The HSR notification and report form was filed using the failing firm defense to combat anticompetitive concerns. Cash reserves and creditor patience dwindled to zero while the government spent eight weeks looking for a different option, including forcing a reopening of the bid process. Finally satisfied, the FTC and PAAG closed their investigations, and the sale to LVHN closed five weeks later, on December 19.
The outcome was outstanding. LVHN provides stability and a well-funded future for CH. At close, LVHN committed to retaining all non-owner/non-family staff, and nearly all physicians accepted new contracts. LVHN purchased all OpCo assets and four of 22 PropCo assets. All lenders holding purchased collateral were paid in full or brought current, with LVHN assuming the debt. LVHN leased the remaining 18 properties. All PropCo lenders holding leased collateral were brought current and now have an A-rated tenant as credit enhancement. The DOJ and physicians were paid in full. Unsecured creditors of OpCo were paid in the range