Iowa agrees to treat $4 million owed to taxpayers as a ‘lower priority’

Iowa’s efforts to collect almost $4 million owed to taxpayers by a bankrupt nursing home chain have suffered a major setback.

Court records indicate the QHC Facilities nursing home chain, which filed for bankruptcy late last year, owes the state more than $3.9 million in unpaid “quality assurance fees.”

The state had been negotiating with QHC to have that debt treated as a higher priority so that once the chain is sold and the company’s assets are liquidated, Iowa taxpayers would be among the creditors first in line when the company’s debts are settled.

In recent months, however, the planned sale price for the chain has plummeted, from $12 million to $4.5 million. In addition, the attorney general’s office recently abandoned efforts to have the $3.9 million owed to the state treated as a high-priority debt that would be paid off ahead of other obligations.

Lynn Hicks, spokesman for the Iowa attorney general’s office, said that while the state continues to assert its claim for the unpaid fees, it has “agreed to have its claim treated as a lower priority to preserve the case, as we felt it was in the best interest of the health and safety of residents that they not be subjected to a sudden closing.”

Treating the $3.9 million debt as a lower priority means other creditors, some of whom are also owed millions, can move ahead of Iowa in the list of creditors hoping to recover a portion of what they’re owed.

Hicks said the attorney general’s office doesn’t know what impact its decision will have in terms of the state’s ability to recover some or all of the $3.9 million that’s owed. The amount that is ultimately recovered, he said, will depend on the sale closing and various contingent assets.

“Any estimate would be highly unreliable, and we would not have an idea until the bankruptcy plan is filed,” he said. “The extended length of the negotiations between the buyer and debtors, the continued accrual of civil monetary penalties and other debts, and the changing posture of the case have made an estimated recovery difficult to determine.”

Hicks said that last week the bankruptcy court determined the planned $4.5 million sale of QHC Facilities to Blue Diamond Equities meets all requirements for a good-faith sale and represents the highest and best price that can be obtained for the assets being sold under these circumstances.

QHC Facilities has been cited for at least 184 regulatory violations in the past 22 months and owes at least $5 million to state and federal taxpayers though unpaid fines, unpaid fees and advance payments for resident care.

Chain filed for bankruptcy owing the state $3.9 million 

The $3.9 million that QHC owes to the state is tied to quality assurance fees that all Iowa nursing homes pay to the state’s Department of Health and Human Services. The quarterly fees have the effect of artificially inflating a facility’s cost of doing business.

That increased expense enables the facilities to draw down more in Medicaid reimbursement from the federal government for resident care, offsetting the cost of the fees they’ve paid to the state.

By law, the care facilities are supposed to use any additional revenue collected through that process to increase the pay of direct care workers and other staffers — which is why the fees are labeled “quality assurance assessment fees.”

It’s a circular, but legal, method of increasing the revenue collected by nursing homes and has been approved by the federal government in Iowa and other states.

QHC’s path to bankruptcy dates back to last year when company owner Jerry Voyna died. His widow, Nancy Voyna, took over the company, which filed for bankruptcy.

In court filings, Nancy Voyna said that after her husband’s death it was discovered the company had not been paying the quarterly quality assurance fees, leaving an accumulated debt of almost $4 million.

She died weeks later, leaving the QHC chain to her son, who continued his mother’s efforts to pursue a sale of the company and all of its assets. In late February, Blue Diamond Equities, also known as Blue Care Homes, submitted a letter to QHC agreeing to purchase QHC for $11.6 million.

Up to $1.4 million owed federal taxpayers will be forgiven

At the time of its offer, the principal owner of Blue Diamond was Shmuel Haikins. Howard Weiss, who has a financial stake in a group of California nursing homes, was acting as Blue Diamond’s financial backer. The two men allegedly provided QHC with documents showing they had the money in hand to complete such a sale.

Their offer triggered an auction, at which Cedar Health Group, an East Coast development company, bid $12.1 million — $100,000 more than Blue Diamond. That left Blue Diamond as the backup bidder in case the planned sale to Cedar Health went south, which it quickly did, leaving Blue Diamond as the winning bidder.

Blue Diamond, however, immediately reached the same conclusion as Cedar Health — that $12 million was more than it wanted to pay, and it sought the court’s approval to enter into a new agreement that would enable it to buy QHC for just $4.5 million, with the chain’s three most troubled care facilities shut down and excluded from the deal.

Last week, the court approved a settlement agreement involving the $2.2 million that, at last count, represents the growing amount of money still owed to federal taxpayers by QHC for unpaid fines and advance payments for resident care.

That agreement calls for up to $1,458,408 of that debt to be forgiven.

The specific terms of the settlement call for Blue Diamond to pay the federal government at least $692,263 to resolve almost $1.7 million in claims owed by the QHC facilities included in the sale, while QHC will pay the federal government at least $82,639 to settle $551,000 in claims tied to the three closed facilities excluded from the sale.

The skilled-nursing facilities owned by QHC when it first filed for bankruptcy are the Crestridge Care Center in Maquoketa; Crestview Acres in Marion; Sunnycrest Nursing Center in Dysart; QHC Fort Dodge Villa; QHC Humboldt North; QHC Humboldt South; QHC Mitchellville; and QHC Winterset North. QHC’s two assisted living centers are QHC Madison Square in Winterset and QHC Villa Cottages of Fort Dodge.

The three closed facilities that Blue Diamond has excluded from the sale are QHC Humboldt South, QHC Mitchellville and Sunnycrest.

Iowa Capital Dispatch is part of States Newsroom, a network of news bureaus supported by grants and a coalition of donors as a 501c(3) public charity. Iowa Capital Dispatch maintains editorial independence. Contact Editor Kathie Obradovich for questions: info@iowacapitaldispatch.com. Follow Iowa Capital Dispatch on Facebook and Twitter.