After default, Lakeway hospital in survival mode

Oct. 17--

Lakeway Regional Medical Center, which has struggled financially, is now trying to survive.

The U.S. Department of Housing and Urban Development has assumed control of the hospital's mortgage and is monitoring its efforts to stay in business, officials said.

Lakeway Regional is operating on "a day-to-day basis," but "the goal is to keep the hospital open" in the long term, said Frank Sossi, general counsel and interim acting chairman of the hospital's board.

The hospital is in default on its federally guaranteed mortgage loan -- which HUD officials called "an exceedingly rare" event. HUD is paying back the previous lender with money from an insurance fund that is financed by hospitals in its mortgage program, not with taxpayer dollars, officials said.

The hospital's board is examining various options to restructure. Those could include seeking more investors or a buyer for the hospital, Sossi said.

In 2010, Lakeway Regional received the largest mortgage loan guarantee that HUD had ever granted to a for-profit hospital, $167 million. The guarantee, expected to save the hospital $91.2 million in interest, prompted a lawsuit by a smaller specialty hospital in Lakeway that plans to open this fall.

Investors who filled out the HUD application said that because Lakeway lacked a hospital, it was medically "underserved." They described ambitious plans, including a study showing the hospital would provide access to a primary service area with an estimated 243,000 residents by 2016. The 100-bed hospital, which cost $210 million, also would be an economic engine to spur retail and other development, they said, but that promise has been slow in materializing.

So have the patients.

"It's a big question whether there was a need for a hospital the size of LRMC," said Abe Kuczaj III, the Austin lawyer representing the original developers of the smaller hospital.

Nor did Lakeway Regional investors mention the smaller hospital and larger competitors in the area in the application, he said. "The evidence shows they appeared very selective in what they told HUD in trying to get their guarantee," Kuczaj said.

Months after opening in April 2012, Lakeway Regional experienced a cash crunch. In August 2013, the hospital missed its first mortgage payment and landed in default, HUD officials said. After that, the loan changed hands to Greystone Servicing Corp. Inc.

In September, Greystone wanted out, and HUD stepped in.

HUD officials say they step into the shoes of the lender, and the agency's responsibility is to ensure that the hospital has sufficient resources to operate until the note can be sold or its finances stabilize. They haven't set a deadline for the hospital to solve its financial problems.

On Sept. 17, HUD paid Greystone$154.6 million, which is 90 percent of the amount owed, according to HUD. The other 10 percent will be paid when HUD receives all of the ownership documents, officials said.

Hospitals pay mortgage insurance premiums to cover lenders in the program in case of a default.

HUD officials emphasized that taxpayer money isn't involved, and that some losses incurred by the fund can be recovered if the note is sold.

Also, if the note gets sold, the hospital is no longer in HUD's program.

Asked why another lender would come in, HUD officials said it could be attractive to another lender, given that the hospital has value and insurance claims have been paid.On April 30, the hospital board announced that it had hired a management company to run the hospital, QHR Intensive Resources. Susan MacLeod became hospital CEO in August.

"We are moving in the right direction; we're just not moving fast enough," MacLeod said.

Sossi said the board is recruiting more doctors, which should also bring in more patients. Asked about complaints the American-Statesman has received about high charges on patient bills, Sossi said that issue has been corrected so that pricing now reflects the Austin-area market.

"We are working with the community in trying to improve the reputation of the facility and make it a place people want to go," Sossi said. "It's a hospital in a good place doing good things."

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Watchdog coverage

This story reflects the American-Statesman's emphasis on government accountability issues in health care in Central Texas. In previous stories, health reporter Mary Ann Roser documented concerns with inaccurate lab results and money troubles at Lakeway Regional Medical Center.

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