LOS ANGELES — Downey Regional Medical Center, a not-for-profit hospital located in greater Los Angeles, will emerge from bankruptcy in mid-November, allowing it to close on a planned bond refunding if a bankruptcy judge approves its exit plan.

Under the exit strategy, $36.85 million of bonds would be sold privately to RCB Equities #1 LLC, according to a disclosure filing. Downey would also receive a loan from MidCap Financial LLC in the amount of $20 million, the filing states.

The bankruptcy exit plan would pay in full the hospital’s $20.6 million of outstanding tax-exempt debt, issued in 1993 through the California Health Facilities Financing Authority.

The exit funding will be used to refinance the bonds and certain other liabilities. The hospital will continue to operate its facility as an independent, not-for-profit general acute care hospital.

The hospital filed for Chapter 11 relief in the Bankruptcy Court for the Central District of California on Sept. 14, 2009.

The hospital was undergoing a restructuring and had lined up financing when the economy tanked in 2008, said Rob Fuller, executive vice president and chief operating officer. When the planned financing fell through, the hospital decided it needed to seek relief from the bankruptcy court to complete its restructuring plan, Fuller said.

“Our business model relied heavily on capitation,” Fuller said. “Hospitals are paid in several ways. One is the standard per-person fee up front every month that is called capitation.”

That system works well when the hospital can manage all the care that is required, but the Downey hospital did not have the infrastructure to do that, Fuller said. Since the hospital serves patients over a broad regional area, it was accruing many out-of-network costs that were not being analyzed, he said.

“We were losing $15 to $20 million a year in that program,” Fuller said.

Hospital officials decided it could not make a capitation program work for the hospital, so a decision was made to switch to a more traditional fee-for-service structure. The hospital expected to have a break in cash flow as it transitioned from one system to the other and had arranged for financing to smooth the transition.

“We thought the financing we had set up in the summer of 2008 would get us through the program, but with the situation in the finance markets in 2008, we were not able to get financing,” Fuller said.

The hospital also discovered that as a stand-alone hospital, it did not have the bargaining power to restructure its HMO agreements outside of bankruptcy, Fuller said.

“We could use the power of rejection in bankruptcy as a bargaining chip to attain mid-market rates for the area,” Fuller said. “Previously, the rates we received were low. We finally got that accomplished in the spring.”

The Downey hospital filed court documents on Aug. 23 outlining its proposed exit strategy. The general creditors committee has already voted to approve the hospital’s plan to exit from bankruptcy, but the ballots, still out from smaller creditors, are expected to come in over the next few weeks, Fuller said.

The bankruptcy judge will hear arguments regarding the exit strategy on Oct. 27. The judge has 14 days after the hearing to rule on the proposal. If the judge approves the plan, the closing on the financing could occur as soon as Nov. 12, Fuller said.

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