Calais Regional Hospital. Credit: Linda Coan O'Kresik / BDN

One of Maine’s top-performing rural hospitals would take over one of its worst-performing ones in a Washington County merger that may leave millions of dollars in debt unpaid to retain medical care in Calais.

Many of the 1,900 banks, government agencies, businesses and others to which Calais Regional Hospital owes about $25 million are unlikely to recoup much after the hospital’s proposed acquisition by its Machias counterpart. But if it goes through, the city of Calais would retain a hospital run by an organization that has operated in the black in recent years and with substantially less overhead.

Down East Community Hospital on Friday said it planned to acquire Calais Regional Hospital. The proposal marks the potential exit from bankruptcy for the Calais hospital after nearly a year and a half in court proceedings, millions of dollars in continued losses, hundreds of thousands of dollars in fees related to the filing and labor disputes.

Some of those owed money and a federal bankruptcy judge have to approve the plan, which was developed by the Machias hospital and a committee representing Calais hospital creditors and filed in U.S. Bankruptcy Court on Friday. A court hearing is set for Wednesday at 1 p.m.

The Machias hospital and creditors want to complete the deal before March 31 in part so the new entity in charge of Calais’ hospital can apply for a federal Paycheck Protection Program loan, which the hospital has been unable to do because it’s been in bankruptcy.

The entity owed the largest amount of money, the U.S. Department of Agriculture, would provide money needed to make the transaction happen, according to court documents filed Friday. It would provide Down East Community Hospital with $1.5 million for startup costs.

In exchange, payments to the Calais hospital for services would all flow through the federal agency, and Down East would assume up to $5.7 million in debt to be paid off over 30 years. That amount is just more than half of the nearly $11 million the Calais hospital owes the agency.

About $650,000 would be available to pay a range of vendors to which Calais Regional Hospital owes money, including medical staffing firms, a national laboratory services company, and accounting and law firms, according to court documents. Calais Regional says that it owes some of those companies hundreds of thousands of dollars.

It’s common for non-profit hospitals in bankruptcy to change hands without one entity writing a check for the other, said John Morrow, managing director of Franklin Trust Ratings, which specializes in compiling and analyzing health care financial data. The goal is to keep a hospital running in a community where a bankruptcy judge thinks one is necessary, he said.

Both hospitals serve rural Washington County, which is Maine’s third least populous county, and both have 25 beds. Their “critical access” label means that the hospitals serve areas with no other hospitals nearby and qualify for higher Medicare payments to offset high operating costs.

“It’s very hard to run a small hospital. There are no economies of scale,” Morrow said. “It’s like trying to run a library or a church in a town. You basically have to get the town to underwrite it or support it.”

Still, Down East Community Hospital managed to post a 5.74 percent profit margin in 2019, compared to Calais’ 6.59 percent negative profit margin, according to data from Medicare cost reports. The Machias hospital took in about two times the patient services revenue that Calais did in 2019, while its operating expenses were dramatically lower.

Calais Regional Hospital paid nearly $2,300 in administrative expenses per adjusted patient discharge in 2019, compared with $1,026 in Machias, according to the Medicare reports. And Calais incurred $14,100 in expenses for every patient discharge, compared with about $8,800 in Machias. Calais must cut costs to stem the tide, Morrow said.

The embattled hospital does appear to take in larger payments from private insurers than the Machias hospital, according to Medicare cost data. But the Calais market, on the Canadian border, is inherently challenging, Morrow said.

“Border towns are difficult because everyone north of the border gets free health care,” he said. “So the marketplace might look like it’s round [geographically], but it’s actually half a moon.”

A spokesperson for Down East Community Hospital declined to comment on how the Machias hospital might improve the financial outlook for its Calais counterpart. A Calais Regional Hospital spokesperson, Dee Dee Travis, said the hospital considered “various routes to maintain the hospital,” including seeking out potential buyers and developing plans to improve the hospital’s financial condition so it could remain independent.

Lawyers for the committee representing creditors didn’t respond to requests for comment.

The prospect of Down East taking over Calais Regional appealed to the union that represents nurses, laboratory scientists, and laboratory and radiology technologists in Calais, said Todd Ricker, lead labor representative for the Maine State Nurses Association.

Eighty-four percent of the hospital’s unionized employees last fall signed a petition of no confidence in Calais Regional’s CEO, Rod Boula, demanding that he be fired. That call came amid the prolonged bankruptcy case, labor contract negotiations that hadn’t been resolved in more than two years and the hospital’s scaling back of services.

The Maine State Nurses Association also represents staff at Down East Community Hospital.

“We’re hopeful that this transition is going to mean good things,” Ricker said. “For the staff, both union and non-union, we’re looking forward to having a positive and constructive relationship with whoever the new administration will be.”