Government records depict money troubles at Lakeway hospital [Austin American-Statesman]

Oct. 15--Within months of opening -- aided by the largest federal loan guarantee ever granted to a for-profit hospital -- Lakeway Regional Medical Center began to struggle financially, emails from the U.S. Department of Housing and Urban Development show.

A team of officials from HUD, which guaranteed the mortgage loan of $167 million, express repeated concerns about the hospital's cash flow in emails from last fall through April 2013. Too few patients had been using the hospital since it opened April 16, 2012, at a cost of $210 million. HUD suggested various strategies, including getting more money from investors.

HUD took five months to provide that information after the Statesman submitted a Freedom of Information Act request in March. Agency officials have declined to discuss the hospital's current financial status.

"HUD is not authorized to release financial information on hospitals in the insured portfolio," HUD spokesman Lemar Wooley wrote in an email last month. "Such information is considered to be proprietary and HUD is not permitted to release it."

In heavily redacted emails through April, HUD officials said the hospital would run out of cash in September in a best-case scenario. Whether the hospital has recovered is unclear. CEO David Kreye said in a brief call with the Statesman that September was the hospital's busiest month.

But Kreye, along with the hospital's investment banker, corporate owners and others, either did not return calls or declined to answer questions about the hospital's current status and ability to repay the loan. Kreye has not responded to a series of questions that he asked to be emailed to him on Oct. 4.

The government loan guarantee has been controversial since HUD announced it in 2010, especially among competitors. It is part of a year-old lawsuit filed by a smaller hospital, Lake Travis Specialty, that was built but never opened in Lakeway. One of the allegations is that Lakeway Regional planned to acquire the smaller hospital until the loan guarantee came, providing a savings of $91.2 million in interest.

HUD said the guarantee would enable Lakeway Regional to be built so it could care for a medically under-served population, another topic of dispute.

If a default occurs on such a loan, made through HUD's Federal Housing Administration, the government would first try to sell the hospital. If that failed, it would tap into insurance funds paid by participating hospitals, said Scott Blount, a vice president at Lancaster Pollard & Co. in Austin, a lender that services such loans but is not involved with Lakeway. Only in the unlikely case that those pools are exhausted would taxpayers be on the hook.

"There is a risk, but the risk is small," Blount said.

Lakeway Regional, which has 100 beds, has had two rounds of staff reductions this year, according to documents.

A HUD official wrote in an email on March 25 that the hospital had cut 16 percent of its staff. Kreye said in an interview around that time that the hospital had about 300 employees.

Six months later, on Sept. 19, Kreye sent an email to staff announcing another round of cuts, without saying how many positions would be eliminated. The email called the cuts minor in comparison with other hospitals. It also said that while the hospital "has experienced growth over the past six months in many areas, we have experienced fluctuations of volume and lack of growth in other areas. With this in mind, we are right sizing our team today through some reductions in staff."

Kreye also noted that the hospital's "patient satisfaction (is) in the Top 10% nationwide," and thanked the doctors, nurses and other staff for their hard work.

The Statesman reported in the spring on problems in the hospital's laboratory after the U. S. Centers for Medicare and Medicaid Services said in inspection reports that some lab staff were ill-trained; policies and procedures were lacking; and lab equipment was not regularly calibrated or maintained, casting doubt on the accuracy of tests. A few patients underwent procedures based on inaccurate results, the reports said.

Hospital officials said that many of the deficiencies reflected problems with documentation, not quality of care. Since then, the problems were corrected except in the most troubled lab, bacteriology. It remains closed and is sending specimens out for testing, a follow-up report says.

In the spring, Kreye said the hospital usually had 25 to 35 inpatients on any given day and was not having any problems paying its bills. Nor did he anticipate difficulty repaying the loan.

Laurie Higginbotham, a lawyer who lives in Lakeway, said she took her 2-year-old daughter to the emergency room early this year with flu-like symptoms and was pleased with the care and how quickly they saw the doctor.

"It was a Saturday or Sunday afternoon, and there was no one waiting," Higginbotham said.

She saw other patients come and go and is glad residents have a community hospital. "It's nice for us that it's not crowded," she said. "I don't know if that's nice for the hospital."

Lakeway resident Rip Miller, CEO of The Hospital at Westlake Medical Center, a competing facility, said Lakeway Regional is "gorgeous" but "way too big for this size community."

In January, Bob Deen, a senior account executive at HUD, wrote in an email that if the hospital ever had to be sold, it would be attractive to the two big hospital systems in Austin, St. David's HealthCare and the Seton Healthcare Family, because of the "significant capital" held by their parent companies.

"Yes, both would love to have the hospital, so, if it ever came to a bidding war, the chances of a high return are good," Deen wrote Jan. 7.

Officials with St. David's and Seton declined to say whether they have been approached, adding that even if they were, it was not something they'd discuss publicly.

Deen wrote in email to others at HUD on March 25 that the hospital had an increase in surgical cases but that cash collection had only increased by 4.7 percent per day since January, and "will not sustain the hospital."

HUD officials emailed about the possibility of putting Lakeway Regional on its Priority Watch List, which would indicate a danger of loan default within a year. But they said they wanted to avoid that to prevent negative publicity.

If the hospital were put on the list, a HUD official wrote in an email April 12, "I'll explore using attorney-to-attorney privilege to limit distribution of the Notice ..."

Miller said that over the past six months, the Westlake hospital hired 10 to 12 employees who were let go from Lakeway Regional.

The hospital was expected to be a magnet for other new projects, but they have materialized more slowly than expected.

Mayor David DeOme, who declined to discuss the hospital, which he supports, said that an assisted living center is under construction but no retail projects have begun.

He added that he wasn't worried because "we've got so much development going on" in Lakeway.

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