Behavioral Health Center Case Study

Behavioral Health Center Case Study

During a flight from Los Angeles to Chicago, Charles Brown became involved in a conversation with Cates Lewis who happened to be sitting next to him. After five or ten minutes of the usual topics concerning the weather, promptness of the airline, and so forth, Cates asked Charles what he did for a living. With that, Charles and Cates entered into a conversation that would ultimately result in a long-term relationship.

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Charles Brown was the CEO of a consulting firm called TM, Inc. His firm specialized in turning around failing companies and in some instances he bought out failed companies and resurrected them. Over the years TM was quite successful and Charles was in the envi- able position of being able to choose his clients. TM was a virtual organization with a small core staff but with a network of associates that spanned numerous industries and disciplines. As a result, the company had been involved with organizations ranging from high- tech computer companies to low-tech manufacturing firms to health care organizations. Charles’s background was health administration and he still gravitated toward projects that involved health care.

Cates Lewis was a successful publisher who owned a small firm that was very successful in a strong market niche. Several years ago

This case was written by Phil Rutsohn and Bob Forget, Marshall University. It is intended as a basis for classroom discussion rather than to illustrate either effec- tive or ineffective handling of an administrative situation. Used with permission from Phil Rutsohn.

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Cates became the financial backer for a buyout of a behavioral health care center, The Rosemont. Cates’s brother, Lloyd Lewis, spent over 20 years as a counselor for drug and alcohol abuse programs and in fact had worked for The Rosemont. When he heard that The Rosemont was on the market, he contacted his brother and asked if he would be interested in considering an acquisition. The arrangement would be that Cates would put up the seed money and Lloyd would be the CEO and man- age The Rosemont.

The price was right and Lloyd was excited about the opportunity, so Cates put up $250,000 in cash and signed for a $750,000 note. At the time the $1 million commitment seemed to be a bargain. The buildings and equipment at Rosemont– Jackson and Rosemont–Bay Saint Louis were assessed at about $2.5 million with a small mortgage remaining on each. Admittedly the furniture and equipment at both locations were old and needed to be replaced but that could be phased in utilizing current earnings. The building in Jackson, which was configured with 50 two-bed rooms, was located in a rapidly deteriorating part of town but as Lloyd noted, “Wasn’t that the plight of all urban health care facilities?” The buildings in Bay Saint Louis were located on a lovely piece of suburban property with older, nicely kept homes in the neighborhood. Although the outsides of the buildings were minimally presentable, the interiors would require a lot of work. Everything from new flooring to plumbing to electrical modifications would have to be undertaken if the institution was going to be able to establish itself as a premier health care delivery entity. Twenty-five rooms were available to handle 50 patients. However, if demand dictated and funds were available, the buildings could be modified to double patient load.

There were two satellite systems providing outpatient services (primarily to college students) in other parts of the state and there were corporate offices separate from both facilities. Because these functions were located in rental properties with no multi-year contracts, they were not seen as enhancing or inhibiting the value of the company. The only other asset that had any real value was accounts receivable. The A/R account was a mess and it was difficult to put a handle on how many accounts were actually collectable. However, Cates still felt pretty confident. If things didn’t work out he could at least sell the fixed assets to a real estate developer and get his money back.

As was agreed, Lloyd assumed responsibility for managing the organization and Cates continued his concentration on publishing. Although Cates was a member of The Rosemont’s board he readily admitted that he was “slack” concerning his board responsibilities. As long as Lloyd told him things were fine, Cates paid little attention to the details of running the center. Rather, he did not pay much attention until one of the board members, who was the CEO of the accounting firm handling The Rosemont financial statements, called him and told him The Rosemont was out of money. The accountant said to Cates, “Cash is so tight that payroll is not going to be met and suppliers are not going to be paid.”

“Needless to say, I was a little upset,” Cates reported. “I knew things were tight. The Rosemont didn’t do very well under its past ownership but I thought things were turning around.”

An emergency board meeting was called to see what could be done to improve the organization’s financial position. Cates commented, “The problem was obvious.

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There just wasn’t sufficient patient volume to generate the revenues necessary to cover expenses.”

Lloyd insisted, “It’s a temporary problem that will be rectified when the two new contracts are signed. One is with a local school system and one with the state.”

As a result of Lloyd’s confidence, Cates arranged for a $3 million line of credit with the local bank. He stated, “I wanted the line of credit to provide the organi- zation with enough financial flexibility to get out of the woods!”

By the time Cates met Charles on the airplane things were bleak. Not only had patient volume continued to be insufficient to break even, The Rosemont had gone through most of the $3 million line of credit. The Rosemont was facing bankruptcy and needed help immediately. Cates asked Charles if he would be interested in consulting with The Rosemont and helping it get back on its feet. With the limited information provided by Cates, Charles was uncertain whether he could help but he agreed to make a two-day site consultation and report his findings to the board. Behavioral Health Center Case Study