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Will Hahnemann’s bankruptcy pave the way for a stable St. Christopher’s children’s hospital?

The bankruptcy includes St. Christopher's Hospital for Children, but the North Philadelphia institution is expected to continue operating perhaps under a new owner.

Hahnemann University Hospital.
Hahnemann University Hospital.Read moreDAVID SWANSON / Staff Photographer

Hahnemann University Hospital and St. Christopher’s Hospital for Children have filed for bankruptcy, bringing the Center City institution closer to a painful end but potentially leading to a more stable future for the safety net that St. Chris provides in a poor section of Philadelphia.

The late Sunday bankruptcy filing, in Wilmington, "will facilitate a restructuring or sale of St. Christopher’s, which will allow that hospital to remain in full operation,” Allen Wilen, chief restructuring officer for Philadelphia Academic Health System LLC, the parent of the two hospitals, said in a news release.

In a document filed Monday morning, Wilen described Hahnemann as hobbled by greater-than-expected losses and financial disputes from the moment Joel Freedman, the California investment banker, bought the two hospitals from Tenet Healthcare Corp. for $170 million in partnership with a Chicago real estate investment firm, Harrison Street Real Estate Capital LLC.

Hahnemann’s pre-tax losses last year totaled $69 million, said Wilen, who is a financial restructuring consultant in the Iselin, N.J., office of EisnerAmper LLP. Total losses, including the profitable St. Christopher’s and money-losing physician practices, were more than $85 million. The document did not disclose revenue.

An attempt to sell St. Christopher’s and Hahnemann to Drexel University, which uses Hahnemann as the primary teaching hospital for its medical school, went nowhere. In late May, Drexel informed Hahnemann officials that it was not interested in acquiring the facility, stating “we do not believe that HUH has any financial value,” according to Wilen.

Drexel, which has said previously that it tried for a year to help Hahnemann survive but was unable to access enough information from Hahnemann management, did not respond to a request for comment Monday.

The real estate used by the two hospitals and affiliated companies was not included in the bankruptcy. It is owned by separate entities.

Health-care industry observers have long speculated that the backup plan for Freedman and his real estate partners was the redevelopment of the Hahnemann properties, which are at Broad and Vine Streets, just north of the expanded Pennsylvania Convention Center.

The closure of Hahnemann was announced Wednesday. Despite efforts by city and state officials to force the hospital to maintain its operations through the city’s July Fourth celebration — a time that typically brings higher volume to emergency rooms — Hahnemann on Saturday officially closed its emergency room to critically ill patients, after curtailing services Friday.

On a separate legal front, Hahnemann’s parent companies squared off Monday against Drexel University and the City of Philadelphia in the Court of Common Pleas over the closing of Hahnemann.

Lawyers for Hahnemann and its parent companies tried to convince Judge Nina W. Padilla that the bankruptcy had blocked any further action on a lawsuit filed by Drexel on June 21 that sought, at the least, an orderly shutdown overseen by the court. The judge granted the city’s petition to participate in that litigation.

The city wants to enforce a 1969 regulation that requires the Philadelphia health commissioner to sign off on the closure of an emergency room and claims that the bankruptcy filing doesn’t supersede that “police power,” City solicitor Marcel Pratt told the judge, who did not immediate rule on the matter.

Padilla, for her part, said the fight over Hahnemann was not a regular case for her. “Hahnemann Hospital has been the centerpiece of saving lives in Philadelphia,” she said. When she was a criminal court judge she saw cases go from murder to attempted murder because Hahnemann saved a victim from dying, she told the courtroom Monday.

But how much authority she has depends on where the line is drawn between her jurisdiction and U.S. Bankruptcy Judge Kevin Gross, who is scheduled to preside over the first hearing in the case Tuesday morning.

The bankruptcy petition said the company owed $88.7 million to its 30 largest unsecured creditors. The biggest are Tenet Business Services Corp., owed $20.1 million, and a Tenet subsidiary called Conifer, owed $19.1 million. Both those amounts, however, are disputed by Hahnemann.

Also notable is $14.2 million owed to Drexel. The university’s faculty also supervise the more than 500 residents Hahnemann employs, all of whom have to scramble to find a new place to continue their training.

Bankruptcy documents showed $58.6 million in secured debt, owed to MidCap Financial. A list of additional creditors was filed under seal.

Hope for St. Chris

By filing for a Chapter 11 bankruptcy reorganization rather than a Chapter 7 liquidation, Philadelphia Academic gives St. Chris, which has 188 beds and employs 1,500, a chance to emerge in stronger financial shape, perhaps under a new owner.

As a children’s hospital, even one that serves a predominantly poor population, St. Chris benefits from the availability of government health insurance for virtually all children. St. Chris’s pre-tax profit last year was $58 million.

Joshua Nemzoff, a health-care mergers and acquisitions expert, cautioned that it is too soon to assume that St. Chris will emerge unscathed. “The fact that it is rolled in with Hahnemann is an issue,” Nemzoff said. Cash could run short for all the entities in bankruptcy, putting St. Chris at risk.

Hahnemann, which traces its roots to a homeopathic medical college that opened in 1848, has been through a tumultuous era dating to at least 1993, when Allegheny Health, Education, and Research Foundation acquired it as part of rapid expansion that ended in a 1998 bankruptcy.

Tenet bought Hahnemann and eight other Allegheny hospitals in the Philadelphia region but quickly scaled back, hanging on to just Hahnemann and St. Christopher’s, which were the subject of on-again-off-again sales negotiations that failed until Freedman decided to leap across the country from his Southern California base.

In an April interview, Freedman said the financial problems of Hahnemann, which employs 2,440 and has 496 beds, were much worse than he expected. About 1,000 more work at the site, but are employed by other companies.

For example, Freedman believed that Hahnemann was breaking even on a cash-flow basis as of November 2017, just before he bought it, but in the first full month of his ownership, February 2018, the hospital lost $6 million.

After talks with Drexel failed, Philadelphia Academic Health system hired SSG Advisors LLC, an investment bank that specialized in the sale of distressed companies. SSG, led by J. Scott Victor, invited 33 potential buyers to look at the business. Only five of them expressed any interest; two have looked at the hospital’s books.

“To date, no party has expressed interest in acquiring HUH’s assets as a going concern,” the filing said.