By Wayne Schutsky GSN Managing Editor
The once-prosperous Gilbert Hospital shut down for good on June 15, falling victim to longstanding financial problems stemming from a 2014 bankruptcy and a changing market for healthcare services.
Court-appointed receiver Jeremiah Foster of Resolute Commercial Services made the decision to close the hospital – along with its affiliated hospital in Florence – only eight days after Maricopa County Superior Court Judge Roger Brodman gave him power over the hospital’s parent entity, New Vision Health.
The decision resulted in the immediate closure of the emergency rooms at both hospitals. All patients receiving care were discharged or transferred to other facilities.
“I’d like to stress that patient care was never in jeopardy, but the ability to sustain the minimum level of operations was simply too great of a financial burden moving forward,” Foster said in a prepared statement.
After taking over, Foster attempted to secure sustainable financing to keep Gilbert Hospital open.
The most viable option involved the hospital’s landlord, national investment firm Medical Properties Trust, taking over control of the hospital.
It handed over operations to Steward Health Care System, a Boston-based private hospital operator that has made inroads in the Phoenix market in recent years, said attorney Gerald Shelley of Fennemore Craig, who represented Gilbert Hospital in recent legal proceedings
However, Medical Properties Trust was unable to agree to a deal with the hospitals’ primary creditor Indigo-DLI Holdings I, and “it became clear that all potential sources of financing had been exhausted and that the receiver had no realistic hope of obtaining necessary capital to continue operating the hospitals as going concerns,” according to court documents.
In his status report for the court, Foster noted that the hospitals were quickly running out of cash and would require a significant cash infusion just to meet the next payroll.
The hospital’s most recent bout of economic distress dates back to at least fall of 2017, when New Vision Health began to look for potential buyers for the operation and its assets but found no viable offers.
But the real problems started much earlier when the hospital filed for Chapter 11 bankruptcy in 2014.
The bankruptcy filing indicated the hospital had liabilities of over $7.6 million and under $50,000 in assets.
The primary debt holder at that time was Stillwater National Bank. Indigo Holdings acquired all of the bank’s interests in New Vision Health in 2016.
Despite the dire financial state of both hospitals at the time, fortunes appeared to be improving for the hospital as recently as last year after reorganization efforts stemming from the 2014 bankruptcy received a Turnaround Award in the Healthcare/Life Sciences Deal of the Year category from the M&A Advisor, a mergers and acquisitions industry organization.
The organization commended the reorganization plan adopted by Gilbert Hospital and Florence Hospital at Anthem – previously separate entities founded by Dr. Timothy Johns – in which the hospitals joined together under the umbrella of New Vision Health.
The new entity committed to paying back Stillwater Nation Bank in full to the tune of roughly $14 million.
That optimism appeared to be misplaced as the new entity ultimately failed to meet those obligations.
By last February, Medical Properties Trust had terminated the leases for Gilbert Hospital and Florence Hospital at Anthem for non-payment of rent, and multiple creditors began pursuing legal action in Maricopa County Superior Court around the same time.
In April, several creditors filed an involuntary Chapter 11 bankruptcy against New Vision Health in U.S. Bankruptcy Court for roughly $1.9 million to recoup back wages and other debt.
Ultimately, the U.S. Bankruptcy Court sent the case back to Maricopa County Superior Court, so Medical Properties Trust, New Vision Health and Indigo-DLI Holdings I could continue working toward a global settlement that would have kept the hospital’s doors open.
That settlement never materialized.
The Gilbert Hospital closure marks the end of a complicated financial saga that saw a web of creditors, former employees and landlords vying to recoup their interests in Gilbert Hospital, which had opened to immediate success in 2006.
The hospital expected to see 22,000 patients in its first year, but ultimately doubled that expectation and treated 41,161, according to a 2007 East Valley Tribune story.
“We exceeded everybody’s expectations,” Founder and then-Medical Director Timothy Johns said in the 2007 story.
Johns was later ousted from operational and financial management positions but maintained a board seat and medical position.
He also was one of the plaintiffs who filed the involuntary Chapter 11 against Gilbert Hospital earlier this year, claiming he was owed nearly $1.7 million in deferred compensation.
Gilbert Hospital’s early successes resulted in profitability, which allowed the hospital to build up cash reserves of over $20 million, according to court documents filed by investors.
However, by 2014, the hospital had filed for Chapter 11 bankruptcy protection.
How did the hospital’s fortunes go down hill so fast? It depends on whom you ask.
In 2012, a group of Gilbert Hospital investors sued Johns claiming that his financial mismanagement squandered the hospital’s reserves.
Specifically, the investors claimed that Johns used those cash reserves to issue lines of credit to new hospital projects he started in Florence and Peoria.
“The shareholders of Gilbert Hospital sued the founder of the hospital for taking money out of Gilbert and loaning it to and investing in another hospital project,” Dan Garrison of Andante Law, who represented Gilbert Hospital at the time, told Gilbert Sun News in 2017.
The Florence project (later, Florence Hospital at Anthem) filed bankruptcy in 2013 after a year in operation. The Peoria Hospital never completed construction.
The suit was settled before Gilbert Hospital entered its own voluntary bankruptcy proceedings the next year.
However, those risky bets on Florence and Peoria were not the only factors that hurt Gilbert Hospital’s profitability.
“Since (the bankruptcy reorganization) they have struggled to figure out who they are and what their role is,” Shelley, the attorney for Gilbert Hospital, said. “The hospitals were conceived back in the day when it wasn’t uncommon to sit in an ER for five hours.”
When it first opened, Gilbert Hospital was the only hospital in Gilbert and thrived due to its 30-minute door-to-doctor business model, which saw ER patients receive care in an average of 10 minutes.
Its market share lessened because of the emergence of nearby hospitals, including Mercy Gilbert Medical Center, and the proliferation of urgent cares.
“That has cut into the service that these hospitals (in Gilbert and Florence) were giving, though not fair to say that is the only reason they struggled,” Shelley said.
“They never really got out of a couple of bad years after bankruptcy.”