May/June 2012

Anatomy of a Turnaround — Downey Regional Medical Center Exits Bankruptcy Healthier Than Ever

In March of this year, Downey Regional Medical Center in Los Angeles County successfully emerged from bankruptcy as a healthier and stronger healthcare provider. Key to the success was the assembling of a team of professionals who could see beyond the problems of the past and focus on finding the solutions.

Successful healthcare turnarounds are significant success stories in today’s environment. Compound the situation with a California location, and the ability to turnaround a hospital in bankruptcy becomes even more amazing. Yet, overcoming significant odds is exactly what Downey Regional Medical Center (DRMC) and its management team and advisors were able to do between DRMC’s bankruptcy filing in September 2009 and its exit from bankruptcy in March 2012.

DRMC achieved several significant milestones upon its exit from bankruptcy including being the first hospital in California to exit using municipal bond financing and one of only a handful of California hospitals that exited bankruptcy as a continuing stand-alone operation.

The Bankruptcy Odyssey

DRMC filed for bankruptcy protection in September 2009 as a direct result of weak revenue cycle management, contracts with insurance companies that did not provide the required return to DRMC, and poor systems integration.

Prior to the decision to complete a restructuring through a Chapter 11 bankruptcy, the DRMC board replaced key members of the management team including the CEO and CFO. A critical component in making this decision was Chapter 11’s ability to successfully deal with the issues identified by this new management team.

While in bankruptcy, DRMC continued to undergo substantive changes. Several important advisors were replaced with new parties. It was this transformation of the team, led by new CEO Kenneth Strople and COO Robert Fuller, that created the environment, which, in turn, led to a successful restructure.

During the period of time DRMC was in bankruptcy, its investment banker, revenue cycle management company, financial advisor and lenders were all replaced. Key to this transition was assembling a team of people who could see past the problems and focus on solutions — some changes were large, while many were incremental. Through it all, the focus was on an improved operating performance and an ability to exit bankruptcy as a successful small regional healthcare provider.

The Redesigned Team

The Investment Banker: HNB Capital joined the DRMC team in early 2010. HNB is a regional southern California-based investment banking firm with strong ties to the local community. This personal investment in the success of DRMC, coupled with an ability to locate nontraditional investors, assisted DRMC in finding advantageous working capital and term debt financing.

The Revenue Cycle Management Company: In December 2010, DRMC changed its revenue cycle management company to MedAssets Inc. Undertaking a transition to a new revenue cycle management company is difficult under normal circumstances — and even more difficult in a bankruptcy environment when it is absolutely critical to maintain the regular cash inflows of the enterprise.

MedAssets stepped into the revenue cycle management role first as a hot backup, and then immediately transitioned to the full-service provider. MedAssets served as an integral part of the cash management team, which was able to keep the cash inflows steadily improving.

The Financial Advisor: Beginning in early 2010, Focus Management Group was retained as financial advisor to the debtor. In this role, the key emphasis was on accelerating revenue cycle improvements, improving financial reporting and performance tracking.

This emphasis led to development of a revitalized accounting department, and a better integration of the IT functions. Cash-flow budgeting, financial statement reporting, revenue cycle management, and IT all improved with the guidance and support of Focus.

The Lender: During the bankruptcy proceeding, DRMC switched lenders to MidCap Financial. MidCap brought extensive healthcare industry lending experience to the DRMC turnaround project. As a lender, the company was both pragmatic and creative, and maintained flexibility, which is critical when navigating the bankruptcy process.

Performance Improvement

During the bankruptcy process, Downey’s management, directed by Strople and Fuller, maintained their commitment to high-quality care, while controlling expenses and investing in needed capital projects. With this backdrop focused on high-quality care, the redesigned team focused on improving many aspects of the financial performance.

Accounts Receivable Collections: The combination of team members, MedAssets and Focus, coupled with improving internal systems and procedures, all combined to create improved accounts receivable collections. The DSO (Days Sales Outstanding) reduced from over 100 days to below 60 days from 2010 to 2012.

MedAssets has recognized DRMC with two performance-based awards from January 2011 to April 2012. The first award related to speed of transition to a new revenue cycle management firm and maintaining cash flow during the transition. The second award related to improving cash collections during the calendar year 2011.

To highlight this improvement, total cash collected per inpatient census day increased from $2,944 in 2010 to $3,222 during 2011 — an overall 9.5% increase.

DRMC is committed to maintaining this strong performance and has hired a director of Revenue Cycle Management, who will be responsible for continuing the improvements.

Cash Budget & Planning: Focus developed a cash forecasting tool that DRMC was able to use to support the transition to a new lender and to support the exit plan in bankruptcy. The combination of team members, Focus, HNB Capital, MidCap and internal management, working together, created a cash management environment, which provided the information necessary to manage and understand cash flows of DRMC both in bankruptcy and after exit. This improvement was key to HNB Capital’s successful sourcing of replacement working capital and term debt financing.

Financial Reporting: The CEO and COO asked Focus to improve the financial statement reporting and the management information systems necessary for decision making. The combination of the improved reporting processes and tracking mechanisms within the organization set a tone for iterative improvements and developed the systems to track cash and financial performance going forward.

Systems Integration: A combination of all the team members, both internal and external, joined together to work to improve the information technology at DRMC. DRMC, with the help of Focus, began improving its use of existing systems and began exploring new systems. HNB Capital assisted in locating the financing required to fund new systems. MedAssets successfully developed methods of using available information from existing, older systems.

Contract Renegotiation: Various contracts entered into by DRMC prior to the filing caused negative impacts to cash flow and operating performance. During the bankruptcy proceeding, Strople and Fuller worked diligently with payers and insurance providers, renegotiating contracts to bring payment for services provided to industry accepted standards.

The Exit

On March 6, 2012 DRMC exited bankruptcy as a healthier, stronger healthcare provider. The key factors in creating this success story were: 1.) Management and advisors acting as a team focused on improving financial and operating performance, 2.) new, and improved, relationships with lenders and service providers with an emphasis on operations and survival and 3.) an environment fostering continuous improvement and evolution.

The success DRMC has experienced during this process is a result of the strong team, internal and external, that was assembled and focused on working together. After spending two and a half years in bankruptcy, DRMC beat the odds and has exited as a strong local healthcare provider for the Downey area.

James Hopwood, managing director at Focus Management Group, has more than 25 years of experience in financial management positions. His industry experience includes a broad base of healthcare specialties such as acute care hospitals, assisted living and skilled nursing facilities, billing/business office and collection operations, pharmaceutical and medical supply distribution, physician practices and surgery centers. His functional experience includes accounting, cash-flow analysis and forecasting, debt and equity restructuring, financial analysis, operational restructuring and real estate management. Prior to joining Focus, he was CFO at one of the nation’s largest publicly traded distribution companies. Over the course of his career, Hopwood has been involved in turnaround assignments both as a consultant and as a company executive in industries such as food processing, distribution and logistics, manufacturing, real estate and retail. The University of Chicago awarded Hopwood an M.B.A. with honors in Finance. He also earned his Bachelor of Business with honors in Finance from Western Illinois University.

Juanita Schwartzkopf, managing director of Focus Management Group, has over 25 years of experience in commercial banking, financial management and operations and systems management. Throughout her career, she has handled diverse crisis management and asset recovery situations involving bankruptcy, dissolution and liquidation. Schwartzkopf has an extensive background in credit risk assessment and loan portfo­lio appraisal, and has reviewed asset-based lending and commercial lending loan portfolios of various financial institutions. She has worked with nearly all major financial institutions in the evaluation of credit risk surrounding various borrowers and has held key management positions that include CFO and senior vice president in a variety of industries, such as manufacturing, agriculture, lumber, flooring, consumer finance, sporting goods, apparel and electronics. She was awarded an M.B.A. from the University of Wisconsin in 1987 and a Bachelor’s degree in Accounting from Carthage College in 1981. She holds a CPA certification and is also a Certified Fraud Examiner.. For more information, visit