IN VERY CRITICAL CONDITION FACING $10 MILLION DEBT, HOSPITAL STRUGGLES TO AVOID BANKRUPTCY.

Byline: Naush Boghossian Staff Writer

SANTA CLARITA - Hoping to avoid bankruptcy, the financially beleaguered Henry Mayo Newhall Memorial Hospital is scrambling to cut deals with creditors to pay off its $10 million debt.

The Valencia's hospital's chief executive officer and chief financial officer have been personally placing calls to each creditor to persuade them to accept 22.5 cents on the dollar for past-due bills.

Hospital President and CEO Roger E. Seaver said 95 percent of the creditors must agree to the discounted payment if the hospital is to avoid a bankruptcy court-supervised business reorganization.

``At a meeting in a couple of weeks, the major creditors will decide if they'll agree to the terms or force us into Chapter 11 (bankruptcy),'' Seaver said. ``Getting 95 percent agreement in anything is a problem, even though it appears to be the best option for them. In the end, it's their choice.''

Seaver said if the hospital is forced to file for Chapter 11 reorganization, court and other fees will reduce the rate it can pay to creditors.

``That would create a bigger number of issues to deal with and creditors will receive substantially less than the 22.5 cents,'' Seaver said. ``Most will opt for avoiding Chapter 11, and there could be a high acceptance of our proposal, but it may not make 95 percent.''

As of Friday, Newhall Memorial had agreements from creditors owed 15 percent of the total debt.

The hospital has been trying to manage debt with high operating costs not fully covered by revenues - a predicament not uncommon in California. About two-thirds of the hospitals in the state are operating in the red, said Jim Lott, executive vice president of the Healthcare Association of Southern California.

``We're having more and more hospitals reach this point, but many don't even go through the trouble of trying what Henry Mayo is suggesting to do,'' Lott said, adding that hospitals in similar situations normally shut down. ``What's uncommon is the valiant effort by Henry Mayo to keep things going and working with vendors in the community.''

Lott said it is rare for creditors not to accept the reduced rate offered, but in any business, there are creditors who would prefer to force a business into bankruptcy and have access to other valuable assets.

It will be a challenge to reach the 95 percent threshold, Lott said, but in California, it is unusual for creditors to reject such an offer and force a hospital into bankruptcy.

Newhall Memorial was financially stable until the 1994 Northridge Earthquake forced extensive repairs and a head start on state-mandated retrofitting, work many hospitals in California have not yet done. The hospital's debt mounted in excess of $10 million.

The depletion of cash reserves and industrywide reductions in payments from Medicare and managed care health plans compounded the financial woes.

Staff reductions were ordered and some outpatient programs were eliminated, freeing up about $2 million this year.

Four major health care provider networks considered buying the hospital between 1997 and 1999, but they withdrew after evaluating the hospital's high debt and capital needs for expansion. Seaver said that if the hospital reaches financial stability at some point in the future, the community will not want to give it up to an outside interest.

``There is a huge desire here to stay self-sufficient, to meet community needs and not depend on somebody else coming in on a bailout interest,'' Seaver said.

In January, the hospital secured a $55 million bond to help pay long-term debt, but Seaver believes Newhall Memorial will reach an operational break-even point - at which revenues match the cost to run the hospital - in one year.

But the hospital continues to face unavoidable expenses as it looks to expand. Newhall Memorial, operating the only trauma center in northern Los Angeles County, needs to grow because of a population boom in the valley, and has initiated plans for a $6 million expansion of the emergency room.

The hospital's foundation has raised $1.2 million for the expansion, which will pay for the design of the facility, holding the project over until 2003. The foundation is already working on tapping into different sources to pay for the balance of the project's cost, including organizing capital campaigns.

If everything goes according to plan, the hospital could be completed by 2004.

Overall, Seaver believes that the hospital should be performing in the upper 25 percent of all hospitals in the state if it is adequately funded through government and insurance proceeds.

``We'll be profitable and able to meet community needs,'' Seaver said. ``And in this community, that's more likely because of their outstanding support.''