Physiatry Practice Management Resources

A clinic's demise

Lewis-Gale Clinic's reversal of fortune is a cautionary tale in an era when many health care providers are struggling to survive.

By |
Source: Roanoke.com

The medical icon Lewis-Gale Clinic seemed to have it all.

Boasting more than 100,000 patients and its own operating rooms, the clinic had a brand deemed worthy to adorn garbage cans at the front door and a chief executive named Jonathon Arrington with a $490,000-a-year salary.

It was, even as recently as 2004, the largest and oldest multispecialty medical clinic in the state and doctor-owned and operated.

With doctors in almost all disciplines under one roof, "It was like a shopping center. Momma could come and take the children to see the pediatrician. She could get a Pap smear and, at the same time, the husband could get his blood pressure checked," said George Wall, a retired gastroenterologist, who worked there from 1965 to 1996.

But behind the scenes, the clinic's financial health was fading as surely as a patient whose illness is not yet physically apparent. While specialists ranging from allergists to urologists treated patients by the thousands a week, the clinic couldn't save its own skin. Ill-fated expansions and other missteps drove the clinic into bankruptcy on Feb. 22.

So severe was the reversal of fortune that at a bankruptcy hearing, Arrington had to endure a creditor's questioning the size of his severance check. Given the humbling duty of explaining publicly the clinic's futile measures to stave off insolvency, Arrington said at one point: "We were like the little squirrels running around trying to gather all the nuts."

Even now, many bills remain. The former ownership of Lewis-Gale Clinic LLC, with about $15,000 in the bank, owes about $18 million to more than 500 businesses and individuals, including a copier service, drugmakers and health insurers, according to documents filed in U.S. Bankruptcy Court for the Western District of Virginia. Some of its doctors haven't received their final paychecks.

But administrators saved a large part of the operation thanks to some help from the hospital next door. In a common business practice to salvage a dying corporation, HCA Inc., the parent company of adjacent Lewis-Gale Medical Center, bought the clinic's assets (but was under no obligation to take on debts), hired the workers including the physicians, and continued operating the clinic with minimal disruption to patients. The clinic's many doors are open under the banner Lewis-Gale Physicians.

Sixty-four of the 110 doctors on staff last fall still work there, as do 350 of its 600 employees, according to data released July 13. Still others perform their old clinic jobs but are on the payroll of HCA or other employers.

Many long-standing vendors that supplied the clinic with goods and services were shortchanged. The clinic buckled under the weight of massive debt accumulated during the previous decade. Financial statements for those years aren't available, but Arrington's testimony and insight from the hospital reveal that real estate costs and retirement-account management were the chief sources of woe. There was no shortage of patients.

In the end, the best that can be made of it all by Arrington is that while the clinic died, its patients didn't suffer. "We made sure that not one single patient missed an appointment, not one single patient was denied care because we didn't have equipment and supplies," he said.

If the clinic had simply closed, it could have delayed care to thousands, sent doctors looking for work in other communities and raised the prospect of empty beds at Lewis-Gale Medical Center.

"It would have been an incredible disaster," said Louis Joseph, an HCA official and vice president of the company's Physician Services unit. "For all the drama and for all the phone calls and all the stress and all the strain, the goal was achieved, and that was no disruption in patient care." And patients have stuck around, all 117,000 of them, HCA said.

Yet the demise of Lewis-Gale Clinic is a cautionary tale in an era when many health care providers are struggling to survive. If Lewis-Gale couldn't make it as one of the largest collections of medical specialists around, how can any large practice survive?

The answer could be particularly important to Carilion Health System, which last month unveiled plans to restructure into a multispecialty clinic -- a business model similar to the one at the defunct Lewis-Gale Clinic.

Carilion executives pointed out key differences, however. Lewis-Gale Clinic was a private, for-profit group medical practice. Carilion Clinic will be a not-for-profit, multispecialty team of doctors and a chain of hospitals that treats patients, conducts research and trains recent medical school graduates. By coordinating the efforts of doctors and hospital staff members in a climate focused on research and education, Carilion Clinic expects to operate more efficiently, get better results and draw more business than a straight multispecialty clinic could, Carilion executives said.

Rooted in early Roanoke

Lewis and Gale were among Roanoke's industrious first doctors. Supported by the railroad, they built Lewis-Gale Hospital (now Lewis-Gale Medical Center) in 1909 and established a physician practice within it that came to be known as Lewis-Gale Clinic. In the 1960s, the two organizations separated but remained close. In 1973, they moved to new, side-by-side facilities in Salem that are still their homes today.

The clinic appeared to flourish in the 1970s and 1980s. The number of doctors tripled from 30 in 1973 to 90 by 1986. The doctors ran an emergency room for the hospital, added mental health services, conducted research and added new facilities, including satellite offices valleywide and in small towns nearby.

The direction of the clinic's business affairs was determined by a board of directors made up of clinic physicians and hired management. Darrell Whitt, the administrator who led the clinic from 1975 to 1995, said growing numbers of patients justified each expansion and each doctor hired. With 125 doctors by the mid-1990s, it was "the Mid-Atlantic Region's largest and oldest multispecialty physician services group," a press release said. It was larger than 99 percent of group physician practices in the country, according the American Medical Association. In 2003, it took in $79.1 million.

The failure of the clinic is "mind-boggling to me," Whitt said. "I'm very confused as to why this all happened."

Whitt said some doctors now at Lewis-Gale have told him they don't understand why the clinic faltered and "I believe them." (Doctors wouldn't comment for this story.)

Rather than contracting one major illness that was clearly terminal, Lewis-Gale gradually came down with a series of maladies that weakened it to the point of financial death. Management reeled off a series of transactions that were, in effect, treatments of specific ills that didn't cure the overall malaise.

For example, in 1994 the U.S. Department of Labor took issue with the fact that clinic doctors had invested retirement nest eggs in a separate company that owned the clinic's buildings. To avoid fines, federal authorities said, the pension plan needed to move the doctors' money into a different investment, which Arrington said required the clinic to come up with a "tremendous amount of cash."

In November 1996, the clinic sold its property to a real estate investment trust, Healthcare Realty Trust Inc., and signed a lease to remain in the facilities. In addition, the clinic sold itself -- the business, that is -- to an outside physician-practice management firm, PhyCor Inc.

Tens of millions of dollars flowed into the clinic. But both of the transactions brought serious side effects.

In return for handing the clinic cash, the investment trust, whose objective was profit for its shareholders, persuaded the clinic to rent back all of its real estate, even though that was more than it needed. The trust later reduced the square footage in the lease to bring it closer in line with doctors' needs. However, because of rental rate increases, the clinic's payment remained high. Arrington said that the clinic paid about $7 million a year when it was renting 470,000 square feet in 1996 and about the same when it was renting 275,000 square feet in 2005.

While the overdose of rental space didn't, by itself, kill Lewis-Gale Clinic, it weakened the organization's resistance, financially speaking.

Lyndell Brooks, the clinic's top administrator at the time the real estate was sold and leased back, did not return repeated phone calls seeking comments for this story.

Meanwhile, PhyCor failed to live up to expectations for improved finances and operational efficiency. Thirty-three doctors showed their discontent by resigning.

Allegations of improper billing only added to the distractions, as surely as bedsores might divert attention from early heart disease. Medicare had for more than two years paid physician rates for the services of lesser-trained physician assistants/nurse practitioners, the U.S. Department of Health and Human Services found. To resolve the matter, the clinic paid $344,765, about half as restitution and half as penalty.

Cutting short what was supposed to be a 40-year arrangement with PhyCor, the doctors borrowed money and bought the clinic back in 2000.

The doctors were back in charge. But the biblical admonition of "Physician, heal thyself" would prove an impossible dream.

In 2003, the year Arrington joined the clinic as chief financial officer, administrators dropped an ax. Doctor pay, jobs and services were cut. A few satellite clinics were closed.

"We were having to aggressively cut costs just to try to basically stay even," he said.

But despite somewhat improved performance, Arrington saw little hope of prosperity as long as the clinic was paying inflated rents and, at some addresses, paying for space it couldn't use. Further, it had accumulated more than $5 million in overdue back rent.

Arrington turned to the hospital next door for deep-pocketed assistance.

On Aug. 30, 2005 he and Jim Thweatt, chief executive officer of Lewis-Gale Medical Center, announced that the hospital's parent company, HCA Inc., would acquire the clinic.

Officials said nothing about the clinic's poor financial health and, publicly, Arrington maintained an air of optimism.

But a far-from-sunny diagnosis leaked out in November 2005 when, to fulfill a state disclosure requirement, the clinic filed a consolidated balance sheet showing a deficit of $17.4 million at the end of 2004. The Roanoke Times reported the deficit figure, which Arrington said was incorrect and had been sent by mistake. He declined to give other numbers.

Privately, Arrington was hoping the HCA deal would cover all of the clinic's debt. But time was running out. In September 2005, the clinic was within about a month of running out of cash. Without cash, it couldn't operate. Arrington's office prepared a letter to be mailed to patients Oct. 1 announcing the clinic would close effective Nov. 1.

"We felt we were at the precipice," Arrington said.

An ultimatum

In late September, Arrington gave HCA an ultimatum: If it didn't take the physicians under its wing on Oct. 1, the clinic would file for bankruptcy.

HCA, now worried about the clinic's survival, agreed to employ the clinic's entire 600-person work force and contract with its doctors, effective Oct. 1. Arrington set aside the closure notice and pressed HCA about finishing the rest of the deal: the purchase by HCA of the clinic's same-day surgery business and also various fixtures, furnishings, supplies and assets.

But HCA dragged its feet, Arrington said. "I began to get very worried and very suspicious that their intent was to wait us out, let us file bankruptcy and then pick up the surgery center assets at, you know, pennies on the dollar," he said.

Not true, said Joseph, the HCA vice president. Some 100 HCA personnel were using time provided in the preliminary takeover agreement to look closely at what HCA had agreed to buy before actually signing on the dotted line. The more HCA learned, the less it became willing to pay, Joseph said.

"Our due diligence continued to uncover other things that affected the valuation," Joseph said. "I make no apologies for that."

Arrington realized that contrary to what he had told some clinic creditors, it now seemed unlikely he would be able to pay them in full. He was right.

HCA paid $7.3 million for the surgery center and $1.8 million for other valuables. Healthcare Realty Trust, whose business-is-business attitude had proved a challenge for years, stepped up by paying $1.9 million for the right to collect patients' unpaid bills.

That's why patients are still on the hook for bills incurred before Oct. 1, the transition date after which HCA took over, even though the clinic isn't paying its bills.

The $11 million in proceeds went fast. The old clinic operating company used $10 million to pay off a secured SunTrust bank loan that many of its doctors, as the clinic's owners, were personally on the hook for in the event the clinic couldn't pay. Other big payouts included $1.4 million for bankruptcy related legal advice. Arrington got a severance check for $105,000. In one of his last tasks before stepping down, Arrington notified everyone to whom the clinic owed money that the clinic would be unable to pay them. He wrote the missive on blank white paper mailed in a plain white envelope with no return address.

Six weeks later, the former ownership filed bankruptcy under Chapter 7 as a precursor to going out of business. Attorneys see little chance of the clinic ever being able to pay its bills.

The proud brand had come to symbolize an anonymous shame. New managers of the old clinic facilities changed the signs and eliminated floor mats with the old clinic name and logo. They spun the round, metal garbage cans so the carved-out name LEWIS-GALE CLINIC faced the shrubs and not the sidewalk leading to the front door.

Lewis-Gale Clinic had died, not amid the crimson-stained sheets of an operating table, but in the throes of red ink gushing from ledgers and computer screens in offices that most patients never saw.