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Last June, accountants from the HSE were busy sanctioning payments to Ireland’s network of private hospitals. However, when it came to the Mater Private, the numbers just did not seem to reconcile.
To ramp up healthcare capacity following the arrival of Covid-19, the state had to effectively take control of Ireland’s €1.2 billion private hospital sector in early April. In return for covering the operating costs of the hospitals, the state had access to all their services.
The contract was negotiated between the HSE and the Private Hospital Association (PHA). It was an industry deal, and not hospital-specific. Indeed, the Beacon Hospital would later withdraw from the association in order to negotiate individually.
However, given the heightened uncertainty at the time and the need for a national response, the deal was understandably concluded at great speed.
However, just months after it was agreed, as the HSE was processing the latest instalment of payments to the various private hospital, it began to question the numbers being presented by the biggest operator: the Mater Private.
The group comprises hospitals in Dublin and Cork, an advanced cancer centre in Limerick, and a number of out-patient clinics in locations around Ireland. It employs 1,452 full-time equivalent staff, and from the five-month period to the end of 2019, it posted revenues of €100 million.
However, it was the relationship between the group’s Irish holding company, Oval Topco, and a related company in Luxembourg that caught the attention of the HSE.
The contract between the private hospitals and the HSE agreed to cover operating costs. It then set out what qualified as operating costs including rent, finance costs, use of infrastructure and decommissioning costs.
However, the HSE was concerned about interest payments on intercompany loans that had been used to help InfraVia Capital Partners acquire the hospital in 2018. The hospital was claiming significant sums, arguing that interest on intercompany debt payments fell under the terms of the HSE contract.
The HSE dug further, seeking to figure out the debt structure behind the 2018 buyout deal. It did not get very far. Not could it get an accurate handle on the hospital’s debt profile – who was owed money, and under what terms it was due to be repaid. From its own investigation, it could not get full clarity on whether any intercompany debt had been repaid since the 2018 deal.
The contract had been arranged in the national interest, and the underlying motif was that no hospital should profit from it. Instead, it should cover its costs and not lose money. The HSE believed the intercompany payments were against the spirit of this element of the deal.
So, the HSE took the decision to halt payments. This included a payment from May and for the full four weeks of June. The total outstanding sum was €6.2 million.
Within weeks, several corporate entities connected to the Mater issued legal proceedings.
But just what was going on behind the scenes? What irked the health service so much that it discontinued payments? And what do we know about the flow of cash from Ireland to Luxembourg?
Legal filings, an interim application, judgements and financial data point to the answer.
The money trail
To understand the HSE’s objection, you need first to understand the relationship between Oval Topco, a company registered in Ireland that serves as the holding entity for the Mater Private business, and a company incorporated in Luxembourg called Oval Healthcare Infrastructure SARL.
When InfraVia Capital Partners acquired the Mater Private hospital group from Harbourvest, a Capvest managed fund, in 2018, it funded the deal through a mix of intercompany debt and bank loans. The intercompany debt was funneled to Oval Topco came from the Luxembourg company.
Accounts for the Irish company give a sense of the numbers involved. At the end of 2019, the company owed €220 million to credit institutions. These included AIB, Bank of Ireland, Barclays, ING, BNP Paribas, Bawag PSK, and Intesa Sanpaolo. For the five-month period to the end of 2018, the interest on these loans was €1.69 million.
However, the real action comes in relation to intercompany debt. As a result of the buyout, the Irish company owed the Luxembourg group company €382 million. The loan was unsecured but carried a 7 per cent interest rate.
For the five-month period alone, the interest bill on this loan came to more than €10.8 million. On an annualised basis, this would represent interest payments of €25.92 million a year based on that five-month payment.
The impact of these finance costs is seen clearly in the company’s P&L. It generated revenues in the five months of €100 million and had an operating profit of €316,000. However, after interest costs and a further €8 million impairment on goodwill, it slumped to a pre-tax loss of €22.2 million.
The intercompany interest payment contributed half of that. And it is this issue that is at the centre of the dispute.
Namely, are the interest payments considered operating costs or acquisition costs? The Mater say it is the former. The HSE, on the other hand, told the court the payments are “are a mechanism for value extraction for Mater Private’s shareholders or represent a distribution to shareholders”.
A battle of discovery
A recent discovery battle between the two sides sheds light on the focus of the upcoming High Court case.
To back up its argument, the HSE sought access to a significant amount of financial data in relation to the Mater Private and its relationship with various group entities. It asked the court for access to details of “flow of funds” from various group companies to finance the 2018 acquisition as well as well as details around the overall debt refinancing to the banking syndicate in 2018.
The HSE has also sought details of how InfraVia acquired the hospital – including from what entities the money flowed through and where it came from. It also sought the closing debt position of the hospital group on the date of the acquisition.
It also sought information about the loan from the banking syndicate, particularly if any of it had been used to pay down intercompany debt or used to cover intercompany interest payments.
In his submission to the High Court on behalf of the HSE, barrister Michael Cush said the “information currently to hand did not allow HSE to assess what proportion of the debt referred to pure acquisition and what proportion referred to refinancing, and within refinancing debt, what proportion was attributable to working capital”.
He added that there “was at least a possibility that some level of recoverable debt had arisen under the agreement, but the position of HSE is that it has insufficient insight into the underlying financial arrangements of Mater Private to assess what might be properly payable under the agreement”.
He said the Mater Private was perfectly entitled to construct legitimate structures for profit extraction and tax planning. However, he said “the concern of the HSE is that the agreement limited recovery to actual costs incurred by Mater Private within the definitions within the agreement”.
For the Mater, barrister Nessa Cahill said that the “HSE took a unilateral decision on 19 June 2020 on the basis of the information available to them, and they, in effect, now had to stand over that decision on whatever basis it was reached at that time”.
The Mater, meanwhile, sought paperwork in relation to all requests by Mater Private for reimbursement of funding costs under the agreement and any documents within the HSE relating to these requests. It also sought similar documents for infrastructure costs.
It also sought HSE documents in relation to weekly costs estimates, weekly provided costs statements and monthly actual provided costs statements provided by the Mater. It also sought HSE documents in relation to the decision not to pay the disputed money.
Nessa Cahill said it was necessary for Mater Private “to know what was going on” in the HSE prior to the decision of 19 June 2020. Cahill added that the Mater Private was concerned about the rationale for the decisions taken by HSE on 19 June, and was entitled to “test, understand and present their case as to what happened around that time”.
In response for the HSE Michael Cush referred to a to a letter from the HSE to Mater Private of 19 June 2020, the date when it was decided that the disputed payment would not be made.
He submitted that this letter did, in fact, set out the reasons of HSE for non-payment. A judgement by Mr Justice Tony Hunt sets out the summary of the letter under five areas:
- Interest costs had been claimed which did not relate to the ongoing operation of the hospitals.
- The fundamental and overriding basis of the heads of terms was that any payments must relate to costs actually incurred in the provision of relevant services.
- Interest costs claimed relating to a loan provided by Oval Healthcare Infrastructure SARL were, in the view of the HSE, acquisition-related and did not relate to the ongoing operation of the hospitals.
- On the information available to the HSE at that time, no interest payments had been made on that loan since the inception date in July 2018.
- Mater Private had not provided adequate information in relation to financing arrangements”.
In his judgement, Judge Hunt ruled that the Mater should hand over the documents sought in this hearing, while the HSE was not obliged to hand over documents.
He ruled:
“Having considered the submissions of the parties in relation to both motions, I am satisfied that the position of the HSE is correct in relation to both applications. As to the Mater Private motion, I am satisfied that the material sought does not satisfy the tests of relevance or necessity. The central issue of relevance in these proceedings is whether HSE breached the terms of the agreement by the refusal on 19 June 2020 to pay any further sum to Mater Private pursuant to the agreement.”
No Loss, no profit
The Mater position is quite clear. Financing costs are included in the contract as part of operating costs. As such, they should be paid in accordance with the deal.
Supplementary affidavits from the HSE set out the nuances of their position. A key element of the case centres on the clause within the contract that no one should profit from the deal.
“It was an express and fundamental term of the agreement between the parties that ‘the common purpose does not envisage a commercial or economic benefit or profit beyond the Costs’” (Clause 5.11). The Costs recoverable in accordance with the heads of terms strictly exclude the recovery of any costs by the plaintiffs or any of them beyond “the operational costs of the Providers providing the Service at the Relevant Hospital” (Clause 2.1),” according to one affidavit.
The HSE added:
“It follows from the foregoing express provisions in the heads of terms that in order for any cost to become properly subject to reimbursement in accordance with the Heads of Terms, three qualifying criteria need to be met as follows:
“(i) The cost must arise from the provision to (HSE) of full hospital capacity and services, including total bed capacity, facilities, diagnostics, staffing, management and full organisational capability;
“(ii) The cost must be an operational cost; and
“(iii) The cost must be actually incurred.
“In the event that a cost claimed under the Heads of Terms does not meet each of the 3 qualifying criteria set out above, the cost does not fall to be reimbursed by (HSE).”
Under the heading “The Disallowable Costs”, the HSE set out an extensive plea as to why it believes that certain costs claimed by Mater Private are not recoverable under the agreement. These pleas specifically refer to “depreciation and interest costs” and to a related facility.
The reply and defence to counterclaim denies the relevance of these matters, or that Mater Private has claimed in excess of entitlements under the agreement.
The High Court had hoped the matter would be solved by mediation. However, as the discovery battle shows, the two sides remain far apart, and unless an agreement is reached, it will be for the High Court to ultimately decide.
