Report: LRGH trustees put too much stock in CEO, CFO

LACONIA — The bankruptcy of LRGHealthcare was not due to any specific cause or person, but rather, a series of mis-steps and misjudgments, which led to the first failure of a nonprofit hospital in New Hampshire since 1991.

That was the conclusion of a report, issued Friday afternoon, by the Attorney General, Charitable Trusts Unit. Following the Chapter 11 bankruptcy, which was filed on Oct. 19, 2020, LRGHealthcare’s hospitals in Laconia and Franklin, and other assets, were absorbed by Concord Hospital.

“There may be grave consequences from a collapse of a nonprofit so vital to the community. Therefore, the Charitable Trusts Unit initiated a review to determine whether LRGH’s governing board had breached its fiduciary duties and whether any insights could be gained from LRGH’s experience,” read the report’s introduction.

Lakes Region General Hospital dates back to 1893, was a community acute care hospital, had a licensed capacity of 137 beds, and was Laconia’s largest employer with more than 1,400 employees. The nonprofit LRGHealthcare organization merged with the 25-bed Franklin Regional Hospital in 2002.

The report notes that it was “highly unusual” that LRGHealthcare had the same two top executives for such a long tenure. Thomas Clairmont was chief executive officer from 1989 until he retired in 2014, and Henry Lipman worked for the hospital organization from 1984 until his resignation in 2017. Lipman served as chief financial officer for the last 20 years of his tenure, and since leaving LRGHealthcare he has worked for the state’s Department of Health and Human Services as Medicaid director.

LRGHealthcare was facing challenges in 2007 and 2008 in the form of competition from Concord Hospital, which was luring away patients with commercial insurance, while changes in the Medicaid reimbursement formula would mean that the hospital system should expect an annual loss of $1.2 million, according to minutes of a Feb. 25, 2008, executive committee meeting. Nevertheless, the board of trustees approved a series of spending decisions in the coming months: $1.2 million for lobby and entryway improvements, $3.2 million for other capital projects, $8 million to purchase and renovate the Hillside Medical Park, and $5 million to purchase equipment, among other investments and debt restructuring moves.

Leadership pressed forward with improvement plans even as financial forecasts, and the organization’s cash-on-hand situation, worsened as a result of widespread financial crises of the time.

Things were looking brighter by late 2009. A Housing and Urban Development loan had been secured to pursue capital improvement projects, and Lipman’s projections were that fiscal year 2010 would see a positive margin of $5.3 million. The board of trustees approved a budget that included $10 million for capital equipment purchases. However, when FY 2010 ended, the hospital organization showed a loss of $12.7 million.

Capital projects, about $51 million worth, had been completed by 2012. They included renovations and expansions of both hospitals, as well as a new outpatient clinic in Meredith. “Unfortunately, the new facilities and renovations failed to generate increased revenues sufficient to match the increased financing costs of the HUD-insured bonds,” the report stated.

By 2019, LRGHealthcare’s financial liabilities were so significant that even efforts to find an organization to buy the hospital system were unsuccessful, and it was apparent that bankruptcy, coupled with a sale of the surviving assets, was the only path forward.

A declaration by then-CEO Kevin Donovan, who steered LRGHealthcare through the bankruptcy process, pointed to decisions of his predecessors.

Donovan wrote in his declaration that LRGHealthcare “has experienced a tumultuous five to ten years, all beginning with decisions by prior management to make significant investments in inpatient services and facilities at a time when patient demographics and medical trends indicated more reliance on outpatient services and decreased hospital use.” Donovan also referred to a “downward spiral” of increasing costs and decreasing reimbursements, as well as the purchase of a “massively expensive” electronic records system.

The report referenced interviews with prior board members, who spoke of decisions made with a desire to better serve the community without accounting for the impact to the bottom line, and that they hadn’t considered the possibility that a community hospital could “go under.”

“Because of the lengthy tenure and reputation of prior management, some board members did not question the recommendations made by the long-term CEO and CFO,” the report stated.

The board of trustees performed their duties fully, attended meetings, and records of the meetings reflect good engagement, the report stated.

“That said, in making major decisions, the board, at least until 2014, deferred too much to the recommendations and conclusions of the long-term executives and failed to challenge the executives.” That deference was most apparent when the only way to go forward with the, in retrospect, ill-advised improvement projects was through a HUD loan, as more conventional lenders wouldn’t finance the project.

The report also found that the expansion project had become a “legacy endeavor” for Clairmont who “used his clout with the board of trustees to push through the plan.” Lipman, the report said, was “overly optimistic” with his projections as he convinced the board’s finance committee to pursue the HUD financing.

In its conclusion, the report states that the collapse of LRGHealthcare “was due to a number of factors, and no single person, entity or cause is to blame.” Yet there are lessons to be learned. The report states: hospital boards should undergo continual training and education; trustees should question executives; trustees should act with care for the hospital’s continued existence, and; trustees should seek outside expertise before making significant decisions regarding investments, finance, law or health care.

Access the full report by viewing this article on laconiadailysun.com.