Suit claims St. Francis hid ongoing federal audit from prospective buyer
A Tennessee health-care company once in negotiations to purchase financially strapped St. Francis Hospital claims in a federal lawsuit that the Columbus nonprofit provider repeatedly refused to disclose and attempted to hide its “legal and regulatory problems.”
CHSPSC LLC, a subsidiary of Brentwood, Tenn.-based Community Health Services, filed the suit under seal — meaning it was not made public — Friday in U.S. District Court, Middle District of Georgia. Late Tuesday, Judge Clay Land ruled the suit should not be under seal and made the 31-page complaint public.
CHSPSC is alleging fraud and breach of contract after its attempt to purchase St. Francis was aborted last month.
“St. Francis’ deception included repeated misrepresentations and intentional omissions intended to induce CHSPSC into a deal and specifically into fronting St. Francis $5 million,” the suit claims.
Richard Y. “Bo” Bradley, chairman of the St. Francis Board of Trustees, strongly denies the allegations,
“We have not misrepresented anything and have tried to be transparent and open with everyone we have dealt with as a prospective partner,” Bradley said. “We didn’t misrepresent anything to them.”
The suit comes as St. Francis has been dealing for almost a year with serious financial problems.
Since January, St. Francis has had purchase discussions with Atlanta-based Piedmont Healthcare and CHSPSC, and it currently has a letter of intent to purchase from LifePoint Health System of Franklin, Tenn.
Unlike CHSPSC, Piedmont did not pay St. Francis during its exclusive negotiations, Bradley said. The board chairman would not disclose how much, if any, LifePoint has paid, citing a confidentiality agreement.
Last November, then-St. Francis President and CEO Robert Granger said the issue was caused by a nearly $30 million accounting error.
The CHSPSC suit claims the issues run far deeper.
In the lawsuit, CHSPSC claims St. Francis was under audit by the U.S. Department of Housing and Urban Development and the Office of Inspector General (a government agency that investigates fraud), and that the audit “implied the strong possibility that St. Francis engaged in fraudulent or otherwise illegal conduct, not simply an erroneous ‘accounting error.’”
St. Francis has a HUD-backed construction and debt-consolidation loan of more than $220 million that is serviced by Prudential, and the bonds are held by an unnamed third party, Bradley said. The hospital has not missed a debt payment on the HUD-secured loan, he said.
In addition to the HUD-backed loan, St. Francis has an unsecured loan of about $12 million to $13 million from Columbus-based Synovus, said Board of Trustees Vice Chairman Phillip Thayer.
In the lawsuit, CHSPSC also claimed that the HUD audit “potentially posed a serious threat to the status of the hospital’s Medicare provider number and/or to any future Medicare payments to the hospital,” and that it would not have paid a $5 million deposit if it had known about the audit.
CHSPSC claims that Bradley misrepresented the reason that Piedmont Healthcare cut off negotiations with the hospital. The lawsuit states that the St. Francis board chairman told CHSPSC that Piedmont was unwilling to assume St. Francis’ debt because of the effect it could have on Piedmont’s credit rating.
“In fact…” the lawsuit states, “Piedmont ended negotiations because its due diligence had uncovered St. Francis’ many legal problems, including the HUD audit, and Bradley intentionally misrepresented Piedmont’s reasons for withdrawing in order to induce CHSPSC to re-enter negotiations.”
Bradley said the due diligence done by the prospective buyers did discover regulatory and compliance issues the board had been previously unaware existed.
“The board was not aware of all of the compliance activities or the lack of compliance activities,” Bradley said. “As due diligence preceded with Community, we became aware of technical deficiencies in the hospital’s compliance program.”
The deficiencies were “technical in respect to the Medicare rules,” Bradley said.
The lawsuit claims the following: “Although St. Francis attempted to hide and obfuscate its legal problems, by June, 2015, CHSPSC realized that St. Francis had been potentially violating Medicare and HUD regulations in at least four significant respects for a number of years. In CHSPSC’s judgment, these violations were substantial enough to expose St. Francis to tens of millions of dollars in liability in the event of an enforcement action by the government or a private lawsuit by a whistleblower.”
The specific issues were not outlined in the lawsuit.
Thayer said St. Francis is working through a “corrective action plan.”
“We really are not in a position to talk about those,” Thayer said. “We will be happy to sit down and go through them once they are made public.”
The potential deal with LifePoint Health is still in the works. Asked if the CHSPSC suit was an attempt to derail the potential LifePoint acquisition, Bradley said, “We are not going to speculate on what their motives are.”
LifePoint had three teams in Columbus earlier this week examining human resources, the pharmacy and the hospital’s physical plant, Bradley said.
LifePoint has access to a due diligence database established during the previous agreements with Piedmont and Community Health Services, Thayer said.
Due diligence by Lifepoint is ongoing despite the suit, Bradley said.
“It is not going to interfere with our focus on concluding the transaction with LifePoint, and we hope it won’t interfere with their focus,” Bradley said.
Thayer called the lawsuit “a sideshow to the closing with LifePoint.”
“We are focused on LifePoint and giving them everything they need,” he said.
LifePoint has committed to keeping St. Francis’ 2,800 employees, according to a statement the Columbus hospital issued last month.
Thayer said St. Francis hopes to close the deal with LifePoint by the end of the year.
This story was originally published August 11, 2015 at 10:37 PM with the headline "Suit claims St. Francis hid ongoing federal audit from prospective buyer."