Drexel sues to block threatened closure of Hahnemann University Hospital

» UPDATE: Drexel lawsuit seeking preliminary injunction turned down by judge; Hahnemann University Hospital to close

Drexel University has filed a lawsuit to block the owner of Hahnemann University Hospital from closing the Center City institution, arguing that the closure would violate Drexel’s academic agreement with Hahnemann to train medical students and residents there, and “greatly disrupt the health and medical community in Philadelphia.”

The suit, filed Friday in Common Pleas Court, also seeks $13 million that Drexel said it is owed for services by its physicians at Hahnemann, and excoriated the management style of Joel Freedman, who controls Hahnemann and its parent, American Academic Health System LLC (AAHS), through a trust he established for his family.

“What has remained constant at AAHS is instability and a lack of any reasonable or consistent direction or plans, due in large measure to Freedman’s failure to provide the stable and informed leadership necessary for AAHS to work through the main operational and other problems that it has acknowledged exist,” the lawsuit says.

Drexel said in a statement that it had been working for more than a year on ways to assist AAHS, but "AAHS’ lack of responsiveness and failure to engage constructively with these efforts has forced Drexel to file this complaint in order to protect these vital interests.”

AAHS officials said in a statement Monday that the company and "Joel Freedman have at all times acted with the best interests of the hospitals and our patients at heart. We believe the allegations are without merit, and we intend to vigorously defend against them.”

Freedman bought Hahnemann, St. Christopher’s Hospital for Children, and related office buildings from Tenet Healthcare Corp. early last year for $170 million in partnership with Chicago-based Harrison Street Real Estate Capital LLC, whose involvement led to widespread speculation that real estate development was the backup plan for Hahnemann.

Hahnemann, which traces its roots to a homeopathic medical college opened in 1848, employed 2,700 people before Freedman laid off 175 in April. St. Christopher’s, where 45 jobs in the doctors’ practices were cut last August, employs 1,300. The two hospitals have from $600 million to $700 million in annual revenue, AAHS officials said in April, down from $790 million when Freedman’s company bought them.

Under Tenet, Hahnemann lost money for 14 straight years, in part because the facility has a high percentage of patients on Medicaid, which does not pay well. When AAHS took over, it found Hahnemann in a far deeper financial hole than expected and saddled with computer systems that make it hard to generate accurate financial information.

Drexel’s lawsuit seeks a preliminary injunction preventing Freedman “from taking a drastic action — either closing Hahnemann or eliminating the residency programs — until the parties can negotiate a solution with the help of the court to provide for an orderly closure of the hospital.” Drexel said it prefers that the 496-bed hospital remain open.

If Freedman closes Hahnemann abruptly or without authority, the lawsuit says, “there would be potentially catastrophic consequences for patients, Drexel, the hospital’s residents, Drexel University College of Medicine students and faculty, and the community at large.”

Pennsylvania regulations require a 90-day notice of closure to the state Department of Health. No such notice has been received, Health Department spokesperson Nate Wardle said Monday.

In an April interview, Freedman said that if he closed Hahnemann, he would not do it suddenly.

The lawsuit marks a departure from Drexel president John Fry’s initial reaction to Freedman’s warning in early April that he might close Hahnemann because it was running out of cash.

Fry said in an April 5 interview that the loss of Hahnemann would not disrupt medical education for Drexel students. “We have 20 other affiliated training sites” and contingency plans in place, he said.

In late May, Fry told Drexel faculty that “the College of Medicine leadership team and our external advisers have continued to meet regularly with government officials, insurers, local health-care leaders, and key contacts at AAHS to pursue all options to keep the hospitals open and financially viable for the future.”

AAHS, for its part, has been working with EisnerAmper restructuring consultant Allen Wilen and attorney Lawrence G. McMichael of Dilworth Paxson LLP, who specializes in financial restructurings and bankruptcy.

It is hard to speculate about what might happen if AAHS goes the bankruptcy route because there is little public information about what kind of debt it has beyond a variable credit facility with MidCap Financial that is secured by amounts owed to the company by Medicare, Medicaid, commercial insurers, and others.

Among the pressure points between Drexel and AAHS is the residency program at Hahnemann that is managed by Drexel, though Hahnemann employs the residents. Freedman has wanted to shrink that program because the number of patients at that hospital has declined. But he can’t do that without the university’s approval, Drexel says.

A new class of residents is scheduled to start at Hahnemann next Monday, if tradition holds.