Wakefield, R.I. — Lawrence & Memorial Hospital on Thursday cleared a major hurdle in its bid to acquire The Westerly Hospital when the judge presiding over the smaller hospital's receivership proceedings approved L&M's offer of $69 million in cash and other financial commitments.

"This sale will provide Westerly Hospital ... with years of experience of sound management, and a highly experienced management team at L&M to make it a more efficient hospital," said Judge Brian Stern, noting that creditors, hospital union and community groups all expressed support for the transaction at a pre-decision hearing on Tuesday.

Stern said L&M's commitments to assume $22 million in Westerly Hospital debts, infuse $6.5 million in cash in the first two years to fund a turnaround plan and another $30 million in equipment and facility upgrades over the next five years were key to his support for the deal.

Also key were L&M’s commitment to keep all clinical, support and trade staff currently employed at Westerly Hospital, and to maintain it as a full-service acute-care hospital for at least two years and retain its nonprofit community hospital culture. While the two hospitals will have the same corporate parent, they will have separate licenses, medical staffs and tax status, L&M President Bruce Cummings said.

Westerly Hospital will also retain its name, with the L&M affiliation added.

L&M has already reached an agreement with Blue Cross & Blue Shield of Rhode Island for reimbursement rates at Westerly Hospital, Cummings said.

The judge's decision is the culmination of a nine-month process that began when Westerly Hospital entered receivership after ending the most recent fiscal year with a $5.8 million operating deficit. The 125-bed hospital had not generated a surplus in 20 years, Judge Stern noted.

L&M has set a goal of achieving a 3 percent operating margin at Westerly.

The closing on the sale is expected to take place in January, according to Attorney Mark Russo, the special master in charge of the receivership. Before the transaction becomes final, it will also have to be reviewed and approved by Rhode Island state regulators.

Russo said the orderly and relatively prompt outcome of the receivership is a testament to the strength of L&M's offer and its conduct through the process. L&M's offer was solicited by Russo as a "stalking horse" bid as a means to attract other credible offers, but no others were made.

"We have an extremely credible buyer," he said. "They've abided by the process and done what they said they would do."

For the 240-bed L&M, celebrating its 100th anniversary this year, the acquisition is a significant expansion of its geographic reach and patient capacity, Cummings said.

"This is a big deal for both communities," he said.

A time for expansion

L&M is by far the larger of the two, however. With 3,000 employees and numerous outpatient facilities and affiliates from Old Saybrook to Stonington, L&M has an operating budget of $350 million, more than triple what it was at the smaller hospital.

In addition to the acquisition of Westerly, L&M is also building a $34.5 million cancer center in Waterford that will be the first Dana-Farber Cancer Institute affiliate in the state.

Along with the differences, the two hospitals also have much in common, Cummings said, such as their longstanding commitment to remaining nonprofit community institutions. They serve neighboring shoreline towns, share patients in communities such as North Stonington, Pawcatuck and Westerly, with some patients going to one hospital for some services and the other hospital for others.

About 25 percent of Westerly's patients are from Connecticut, Cummings said, and many Rhode Island residents come to L&M for services such as those offered at its Joslin Diabetes Center. L&M seized the opportunity to acquire Westerly both for defensive and offensive reasons, he said.

"We had significant concerns about the two for-profit parties that were pursing Westerly Hospital," he said, referring to two companies that submitted letters of interest but did not bid. "That would have been injurious to Westerly Hospital and to our own community."

For-profit hospitals, he said, tend to "cherry-pick" the most profitable services and leave others for nonprofit community hospitals.

Coming changes

By becoming one-third larger, Cummings said, L&M better positions itself for the coming changes in how health care will be reimbursed that will favor larger institutions with a greater patient population base.

In addition to some building renovations and new equipment for Westerly, new services may be added there, Cummings said. Those under consideration include a geriatric psychiatric program and a facility for subacute care for patients who do not need full inpatient hospital services but aren't ready to go home.

In remarks leading up to his decision, Judge Stern commended the employees of Westerly Hospital who agreed to wage, benefit and pension concessions. Without them, he said, "I do not believe we would be here at this sale hearing today," but rather, still working to find a way to save the hospital.

He also noted the "very painful" layoffs of about 50 employees by the special master during the receivership. These included staff of hospital subsidiaries — the North Stonington Health Center and Women's Health of Westerly, among others.

"The employees have in fact made substantial concessions in their pension plan," Stern said. "Some will not receive the amount they were promised. The employees accepted this to save the hospital."

Cummings said the deal would not have been feasible for L&M had it had to assume all of Westerly Hospital's financial obligations.

"Some liabilities were left behind," he said. These included $26 million in pension fund liabilities that are now being assumed by the Pension Benefit Guaranty Corp.

In addition to retaining all nurses and union and nonunion staff, L&M also considers retaining Westerly Hospital's medical staff essential to the hospital's future success, Cummings said. He noted that during the pre-sale hearing, Dr. William Conlin, president-elect of The Westerly Hospital medical staff, spoke in support of the sale.

j.benson@theday.com