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HUD gets $50 million for $164 million Lakeway hospital loan

Housing officials in Washington, seeking to unload a defaulted hospital mortgage of $164 million, accepted a $50 million bid from a Nashville, Tenn., company to buy the government-backed loan.

The U.S. Department of Housing and Urban Development auctioned off the note for Lakeway Regional Medical Center in mid-December and recently closed on the deal with MedEquities Realty Trust Inc., a relatively new health care investment company. MedEquities will own the land, building and equipment and lease it to the investors, said Frank Sossi, interim acting chairman of the Lakeway Regional hospital board.

“It’s a way for us to continue to operate,” he said, adding that the news is good for the hospital and the community.

The founders of Lakeway Regional asked HUD for the guarantee because the community didn’t have a hospital and needed one. They called the community medically “underserved” and described ambitious plans to provide access to residents of Lakeway and surrounding areas, an estimated 243,000 residents by 2016.

But not long after opening in April 2012, Lakeway Regional experienced a cash crunch. It was attracting too few patients for its size, 106 licensed beds. The hospital normally staffs 40 to 50 beds, CEO Susan MacLeod said.

The cash problems led to a default on the loan in August 2013 as the hospital bled money to cover expenses.

The sale is unusual in the history of HUD’s hospital mortgage program. It means that HUD is no longer involved with the hospital but will cover the remaining $114 million on the note from an insurance fund that hospitals finance, HUD spokesman Brian Sullivan said.

The fund has sufficient money to cover the guarantee, and there is “no impact to the taxpayer,” Sullivan wrote in an email. Asked how much money is in the fund, Sullivan said that the fund does not have a balance, per se, and that he couldn’t provide a number.

MedEquities did not return calls Friday or Monday about the sale but put out a news release Tuesday saying that it expects to complete paperwork to own and lease the hospital in early February. The release said the company is excited about the prospect of increasing the number of specialty physicians at the hospital and “improving the experience and outcomes” of patients.

The lease will be for 25 years.

“Our objective in our new strategic plan will be to grow the Hospital service lines and attract additional physician users and patients based on the quality of care and patient attention that we have achieved to date,” Sossi wrote in an email to the hospital board, note holders, investors and employees. “We will have additional information for you as we finish the documentation for the new arrangements.”

HUD declined to offer a reaction to the sale or respond to a question about whether it erred in giving Lakeway Regional its largest loan guarantee ever to a for-profit hospital, $167 million, in 2010. The guarantee was expected to save the hospital $91.2 million in interest and prompted a lawsuit from a smaller hospital vying to be the first to open in Lakeway.

A report on hospital performance that came out this month, Texas Health Market Review, shows that Lakeway Regional had losses of $43.7 million, or 111 percent, in 2013. Those losses were based on total revenue of $39.4 million and $83 million in expenses.

Losses in 2012 were 78 percent of revenue, a previous market report says.

The second-highest income loser in the Austin market was the public-owned, safety-net hospital, University Medical Center Brackenridge, operated by the Seton Healthcare Family. It had losses of 26.4 percent in 2013. Most other Seton facilities were profitable, especially Dell Children’s Medical Center, which earned more than any St. David’s HealthCare facility.

As a group, however, St. David’s hospitals were more profitable than Seton’s.

“We’re really proud of our strong financial position, primarily because it allows us to continue in our mission as the primary safety-net provider,” Seton executive Greg Hartman said.

Lakeway Regional is being run by a management company, QHR Intensive Resources, and MacLeod became CEO in August.

“I certainly think it is progress,” she said of the note sale. “There are a lot of unknowns about what will happen with MedEquities and what we do differently.”

She does not anticipate staff cuts, she said.

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