First of a series.
The turn of the year Tuesday from 2012 to 2013 will record a year past in Hope and Hempstead County marked by events of widespread impact, distinct drama and the tide of change with the misfortunes and fortunes of the local hospital at the lede of the story.
Medical Park Hospital, now Wadley Regional Medical Center at Hope, had operated for four years under the ownership of companies owned and operated by James Cheek and Herschel Breig, of Springfield and Nixa, Mo., when the two men pleaded guilty in February to federal tax fraud charges in connection with their operation of Highland Medical Center in Lubbock, Texas.
Cheek and Breig had been indicted by a federal grand jury in Lubbock in August, 2011, on seven counts of failing to render payroll taxes to the federal government for Highland, and on one count each of embezzlement of funds from the hospital employee insurance plan. Both men pleaded guilty to one count of the indictment in federal court, alleging that they had deducted from employee pay and collected $337,470 which was to be used for payment of employee federal income taxes, but failed to account for or remit the money to the Internal Revenue Service.
In all, Cheek and Breig had failed to pay some $1.8 million in payroll taxes involved in the period covered in the indictment.
A brief announcement by the hospital's management company, Carraway Medical Systems, indicated that Cheek and Breig were no longer connected with the company, but they were, in reality, among its primary owners; and, that the hospital would likely be sold by the company.
Wadley enters the story
In April, Wadley Regional Medical Center in Texarkana announced that a financial affiliate of its parent company, IASIS Finance, Inc., had acquired the $5 million promissory note which was the basis for the purchase of MPH by Cheek and Breig through their company Shiloh Health Services, Inc., of Nevada, from Signature Hospitals, of Houston, Texas.
IASIS/Wadley made the purchase with the understanding that “...Medical Park Hospital has had multiple owners/operators,” and “That turnover coupled with the current owners' ongoing legal issues has led to great instability and uncertainty at the local hospital,” according to a statement by the Texas-based company.
Under the terms of the purchase, Wadley said that it intended to foreclose the promissory note by Cheek, and seek payment from him of some $400,000 in delinquent state property taxes to satisfy his ownership of the hospital or the company would take title to the hospital. Wadley said that, should it retain title to the hospital, it intended to clear the title and/or provide for a third-party purchase, or operate the hospital itself.
In the meantime, a group of doctors and business leaders appealed to Arkansas Governor Mike Beebe, Arkansas Attorney General Dustin McDaniel and federal authorities in Arkansas and Texas to investigate the business practices of Cheek and Breig.
Page 2 of 4 - Subsequent events showed that the business practices through which they operated MPH under contract to Carraway Medical Systems were similar to those used at Highland Medical Center in Lubbock, and River West Medical Center in Plaquemine, La., both of which had been bankrupted under Cheek and Breig's ownership.
In mid-April, IASIS/Wadley filed a lawsuit in Hempstead County Circuit Court to foreclose the MPH promissory note, and began proceedings to enforce its claim against Cheek as the promissory party.
However, unknown to IASIS/Wadley, Cheek was negotiating with an Ohio-based asset management group, Nexus Healthcare Holdings, of Columbus, Ohio, for the sale of his stock holding in Hope Medical Park Hospital, LLC, the entity which held the hospital's licensing authorities.
Five days later, IASIS/Wadley obtained an order from Eighth Judicial District-North Circuit Judge Randy Wright appointing a receiver for MPH to protect IASIS' interests. Wright appointed Jack Spencer, of Spectrum Health Partners, LLC, a Franklin, Tenn., based healthcare consulting company, as receiver for MPH.
The following Monday, the Nexus investors, some of whom already had business dealings with Cheek through an entity known as NS Investment Funds, walked away from their negotiations with Cheek to buy his stock. Jim Pack, president of Nexus, blamed a purported seizure of MPH assets by the Internal Revenue Service in connection with some $3 million in federal liens which had accumulated against the hospital since 2010.
In late May, IASIS took MPH into Chapter 11 bankruptcy with Spencer at the helm as receiver for the hospital. In connection with the filing, IASIS argued that Cheek, his brother, Teddy, Breig, and Dudley Bell, all with connections to Carraway, and all as owners of a company known as Healthstaff, Inc., had filed liens against the accounts receivable of MPH in August and December, 2011, and were demanding payment of some $7 million. Cheek and Breig were indicted by a federal grand jury in Lubbock, Texas, in connection with their operation of Highland Medical Center there some 10 days prior to the filing of the first Carraway liens against the receivables of MPH.
At the same time, U. S. Bankruptcy Judge James Mixon approved a $1.2 million operating loan from IASIS/Wadley to MPH.
May also brought an announcement by the Arkansas Commissioner of State Lands that the MPH campus would not be sold to satisfy some $417,000 in delinquent real estate taxes. The property had been listed in the state's sale catalogue and had received 11 “interested party” inquiries, including those from Shiloh Health Services of Arkansas, owned by Cheek and Breig, and from Triad Hospitals, Inc., which owned the hospital prior to its sale to Cheek's group, and from attorneys representing IASIS/Wadley.
Later that month, IASIS filed a motion in federal court to pursue a “letter of intent” to buy MPH at a bankruptcy auction contingent upon the purchase being free and clear of all liens, tax liabilities and Medicare/Medicaid liabilities. IASIS said it did not intend to operate MPH under its current Medicare/Medicaid authorities, and proposed a June/July timetable for the auction.
Page 3 of 4 - IASIS' interest in the hospital brought the Internal Revenue Service into the mix of bankruptcy proceedings in June to protect its position in connection with an accumulated $9 million in delinquent tax liens for periods in which Shiloh of Arkansas and Carraway operated the hospital. The U. S. Department of Justice argued that IASIS was acting with an interest in conflict to the overall bankruptcy estate in its proposal concerning an auction sale; but, the DOJ, IASIS and Spencer's attorneys hammered out an agreement to let the auction go forward, subject to Judge Mixon's approval.
Cheek and Breig were both sentenced to five years each in federal prison, with three years each of supervised release thereafter, fined $10,000 each and ordered to pay more than $5 million in restitution costs involving the payroll taxes of 130 employees of Highland Medical Center in Lubbock, Texas, in June.
In response to a plea agreement by both men under which they each pleaded guilty to one count from seven counts of a federal indictment for failing to render federal payroll taxes, with one count each of embezzlement from an employee insurance plan not prosecuted, U. S. District Judge Sam Cummings ordered both men into federal custody immediately.
“I want to send a message to other hospital administrators that you cannot take charge of a small hospital and run it into bankruptcy, and walk away with money in your back pocket,” Cummings said, based on an account in the Lubbock Avalanche-Journal.
Cummings ordered the $5 million in restitution to be completely paid at the end of the three year supervised release period, or pay $1,000 per month each thereafter until the debt was resolved. He also imposed nine special conditions of the supervised release for each of them that essentially prohibited both men from re-entering the healthcare administration business.
Pursuant to the bankruptcy auction conducted in Little Rock in July, Wadley assumed operation of the former Medical Park Hospital in July after purchasing it for $2.35 million. Mixon found in IASIS/Wadley's favor in the bankruptcy sale disposition and absolved the company of any claims against the hospital's former owners, including the tax liens against the hospital. He also absolved IASIS/Wadley of any claims under Medicare/Medicaid originated under the authorities held by the previous owners of the hospital.
The transition developed quickly, with a reorganization of the hospital staff by Wadley, under which most employees were retained, a review of hospital services, acquisition of new Medicare/Medicaid authorities, and a renewed accreditation process.
In an open letter to the community that same month, Spencer praised the concerted effort of community leaders in supporting the hospital while opposing the practices of its previous owners. In particular, he praised the Hempstead County Economic Development Corp. for its loan of $150,000 to the hospital to allow it to meet its payroll in May, and the hospital staff for remaining engaged and helping him as he took over operations in receivership.
Page 4 of 4 - Spencer urged Hempstead County residents to continue to support the hospital and to encourage local physicians to do the same, as it made its transition to Wadley's management. Medical Park Hospital formally became Wadley Regional Medical Center at Hope on August 1.