State lawmakers trying to rescue the Hawai'i Health Systems Corp. are concerned about two recent loan requests from Maui and Kaua'i that raise red flags about the system's financial solvency and management.

Lawmakers have been meeting with system administrators for weeks about bills that would allow public hospitals to convert to private status or escape civil service rules to become more competitive. But the loan requests are reminders of the precarious financial situation at many of the hospitals and the doubts some lawmakers have had for years about the competency of system management.

Maui Memorial Medical Center has asked the state for $20 million as an operating subsidy and to pay down bills to vendors that are delinquent for more than three months. The operating subsidy would be used to cover a cash-flow deficit that averages $2.5 million a month, while the money for late bills would reduce the accounts payable delay to about 45 days.

Maui Memorial told the state the loan could be repaid by the sale of all or a portion of the medical center to private investors, or if necessary, by extensively downsizing services, both of which, state officials say, would require approval from the Legislature.

"I'm disappointed that there's not a firm decision yet, especially considering what's at stake," said Wesley Lo, the chief executive officer of the Maui region, adding that the timing is "fairly critical."

"If we didn't get this, it would probably have a pretty radical impact on healthcare, not only on Maui but in the state."

Perhaps more unsettling, according to a memo prepared by the state budget office, about half of the $11 million Maui Memorial raised from a bond sale last year was "given" to system administrators in Honolulu to gain approval for Maui to become more independent. Maui Memorial has been talking with private investors and would likely be the first public hospital to consider going private if granted authority by the Legislature.

Lo said he agreed to share the money from the bond sale to help other public hospitals because at the time, before the financial markets collapsed last year, Maui Memorial was expecting another infusion of private financing. He said he made the payment in good faith as the Maui region was seeking to attract private investors and gain control of its own finances.

"One of the things we wanted to do was control our own cash, so any of the revenues we collected on Maui would stay on Maui," Lo explained.

Gov. Linda Lingle and state lawmakers met privately in the governor's office last Monday afternoon to discuss public hospitals. Several Lingle administration officials met privately on Thursday with Lo about the Maui Memorial loan request. A spokesman for the governor said the administration would not comment on the talks because of an agreement that they remain private for now.

FINANCING FELL APART

The Kaua'i region, meanwhile, asked the state for an emergency $10 million in February to pay off a private loan for design work on a failed $80 million project to expand the West Kaua'i Medical Center. The Kaua'i region had hoped the private loan would be folded into a larger loan to pay for construction, but after the collapse of the financial markets, financing for the project fell apart. The private loan was secured by a mortgage on the medical center's campus, according to a memo sent from the Kaua'i region to Lingle, and system administrators warned that a default could have an "immediate impact on current and future financing for all HHSC facilities."

The Kaua'i region has since paid down all but $3 million of the private loan and obtained an extension from its partner, Academic Capital, to pay the balance by June.

Jerry Walker, the interim chief executive officer of the Kaua'i region, explained that the state was one of several potential financing sources approached in February to avoid default. "For us, we were trying all possible markets," he said.

Thomas Driskill Jr., the system's president and chief executive officer, has been on unsteady ground with several lawmakers for years. The fact that he signed off on the private loan for Kaua'i has given his critics another reason to question his leadership.

"I think he should be fired," said state Rep. Bob Herkes, D-5th (Ka'u, S. Kona).

In the state House's draft of the budget, Driskill's job is one of the 374 that would be eliminated to help close the budget deficit. Herkes said he would abolish the system and its regional boards and place public hospitals back under the state Department of Health, where they were before the system was created in 1996.

Herkes said a "czar" could be hired to work with a corporate management team and help guide public hospitals during the transition.

State Senate Vice President Russell Kokubun, D-2nd (S. Hilo, Puna, Ka'u), said he does not recall Driskill mentioning the potential loan default on Kaua'i during the multiple meetings with lawmakers earlier this session on the system's future. "When you look at the whole picture, HHSC is on shaky ground," he said.

Driskill acknowledged that some lawmakers want him out. But he said he would concentrate on helping lawmakers with restructuring bills that would give public hospitals the option to go private and the system more flexibility on civil-service issues.

Driskill has asked lawmakers for the authority to create a dual workforce within the system to contain labor costs. Existing public hospital workers would keep their state benefits, but newly hired workers would be subject to new salary, work hours, health plan and retirement benefits negotiated with the Hawai'i Government Employees Association and the United Public Workers.

"I'm often the subject of controversy," Driskill said of the threat to his position. "It comes with the job."

REQUEST TURNED DOWN

The system, the fourth-largest public hospital system in the nation, oversees 13 public hospitals with 4,200 workers and 800 affiliated doctors. A corporate board and five regional boards set policy.

Layoffs and spending restrictions helped the system with a $62 million deficit this fiscal year. Most of the layoffs were at Kona Community Hospital in the system's West Hawai'i region. The system asked the Lingle administration twice for emergency appropriations this fiscal year but was turned down. Driskill told lawmakers in January that administrators estimate a $35 million deficit in fiscal year 2010 and a $31 million deficit in fiscal year 2011.

Maui Memorial, which avoided layoffs, had been the catalyst for the creation of regional boards, and bills are moving this session to allow the Maui region to leave the system. Maui Memorial had helped fight off a proposal for the private Malulani Health & Medical Center two years ago, arguing that the competition would have led to a loss of revenue and reduced its ability to care for the poor.

The Wailuku public hospital, the main acute-care hospital on Maui, has expanded in recent years and is developing a cardiovascular program that would make it distinct on the Neighbor Islands.

Last year, Maui Memorial issued bonds that were purchased by JPMorgan Chase & Co. for $11 million. Half of that money, according to the state budget office memo, was used to pay down delinquent bills to vendors and the other half was given to system administrators in Honolulu so that Maui Memorial could be free to negotiate with potential buyers.

State Sen. Josh Green, D-3rd (Kohala, Kona Ka'u), a Big Island doctor who has a contract with the system, said Maui Memorial's $20 million loan request to the state shows it is far from a model.

"We're working very hard right now to secure the financial structure of our hospital system," he said. "Maui Memorial continues to spend recklessly and irresponsibly, while other hospitals are tightening their belts and making difficult cuts. Maui can't keep both spending and asking for money from the state while the rest of our system accepts cuts and restructuring.

"If we don't successfully restructure the hospital system and cut spending, one or more of our community hospitals may close within the year."

'AGGRESSIVE, INNOVATIVE'

State Sen. David Ige, D-16th (Pearl City, 'Aiea), the chairman of the Senate Health Committee, said lawmakers have known about Maui Memorial's predicament for months. He noted that the money Maui Memorial raised from the bond sale allowed it to opt out of the emergency $14 million lawmakers provided to public hospitals to get through the past fiscal year. He said the additional private financing that Maui Memorial expected suffered after the decline in the financial markets.

"I think the fundamental, critical component that we can't lose sight of is what Maui was looking at doing was upgrading the facility so that they can pursue those kinds of procedures and activities that can generate a profit and offset the safety-net services they take a loss on," Ige said of the cardiovascular program.

Ige defended Maui Memorial's decision to share proceeds of the bond sale with the rest of the system. "These guys were being aggressive and innovative in seeking a different kind of future," he said. "They had a game plan. There definitely was a need in the state. It would provide backup support to activities going on at The Queen's Medical Center.

"Clearly, from a systemwide perspective, it would have added more value in addition to making them more cost effective."

State Rep. Marcus Oshiro, D-39th (Wahiawa), the chairman of the House Finance Committee, said lawmakers want to move toward restructuring the system regardless of Driskill's fate or the financial challenges on Maui and Kaua'i.

"We need to explore that because the current system is broken," he said.