Donovan says ‘outlandish’ debt, lack of reserves, doomed LRGH finances

LACONIA — In a Zoom meeting on Tuesday, LRGHealthcare President and Chief Executive Officer Kevin Donovan initially said he didn’t want to rehash how his company got into major financial difficulty, but a question later in the session prompted him to address the elephant in the room.

The hearing was held by the state Justice Department’s Charitable Trust Unit, which has regulatory oversight over a proposal by Concord Hospital to acquire the assets of LRGH for $30 million through bankruptcy proceedings.

Donovan said that for an organization of its size, LRGH is in the bottom fifth percentile in terms of debt to capitalization.

“We have outsized debt for an organization our size,” he said.

“We didn’t make hay when the sun was shining. For years, we had low margins or no margins and we didn’t put money in the bank, so we essentially have no capital reserves to fund rainy days, if you will, like a pandemic, COVID-19.

“We entered into an agreement with a medical record vendor that we could not afford. We entered into a number of contractual agreements which were not sustainable for the long-term future.

“So, in order to address the incredible expense of the IT, to address the outstanding outlandish amounts of debt that we have, to address the unsustainable contracts that we cannot afford and to address the fact that we are not capitalized, bankruptcy was the only way to address that issue and move forward in a way that will allow us to continue to provide health care to our community.”

In an October bankruptcy filing, Donovan pointed to a Dec. 9, 2009, action that sailed the not-for-profit company directly into troubled financial waters.

Already owing more than $71 million, LRGH increased its debt to $143.5 million, in part to finance a nearly 100,000-square-foot hospital addition, including a main entrance featuring massive steel arches originating in Germany. The architectural feature is intended to look like a giant sail, befitting the hospital’s location in the Lakes Region, where boating is popular.

The health care system still owes $111 million of that debt. The bankruptcy process will allow debt to be discharged.

In 2009, then-LRGH President and CEO Tom Clairmont said major capital improvements were needed to prepare for the demands of an aging population.

“Putting our heads in the sand would not be fulfilling our fiduciary duty,” he said at a groundbreaking for the project. “People don’t lend that amount of money if they don’t believe you can pay it back.”

Donovan said prior management’s decision to make significant investments in inpatient services and facilities came at a time when trends were pointing to more reliance on outpatient services and decreased hospital use.

“Soon thereafter, LRGHealthcare found itself caught in a downward spiral of increasing costs, decreasing reimbursement, shrinking service lines and volume ‘leakage’ to other communities,” he said in the filing.

In addition to the debt, LRGH also faced the same financial pressures that have forced 131 rural hospitals in the country to close over the last 10 years. Many hospitals have merged as a way to survive, and LRGH sought a merger, but its large debt load made it an unattractive partner.

Clairmont and State Medicaid Director and Laconia City Councilor Henry Lipman, who was LRGH’s chief financial officer under Clairmont, have declined to comment.

Chip Broadhurst, who served on the LRGH Board of Directors from 2012 to 2015, said it would have been better to fund major capital improvements through philanthropy instead of debt.

Another problem, he said, was that LRGH was slow to transition to electronic medical records at a time when early adopters benefited from government incentives. Eventually, the government imposed penalties for those who didn’t begin electronic medical record keeping.

When LRGH got its first system, it was less expensive than others but was so inadequate as to be potentially dangerous, Broadhurst said. It had to be abandoned and its costs written off before a second system was purchased at a higher cost and a greater implementation expense.