Westerly - The Westerly Hospital announced Tuesday that it would file for receivership today with Rhode Island Superior Court, a move that will mean a suspension of the talks begun this summer toward a possible merger or partnership with Lawrence & Memorial Hospital in New London.

Under receivership, a court-appointed administrator would work with the hospital to restructure its debt and stabilize its finances. Hospital President Charles Kinney said the hospital ended fiscal 2011 with a $5.2 million operating deficit due to lower patient volumes and other factors. The 125-bed nonprofit hospital has repeatedly had operating deficits for the last several years.

"We decided to do something now before we're in a total crisis mode," he said. Similar to a bankruptcy proceeding, receivership will allow the hospital to reduce some of its debt.

"It allows hospitals to in essence take a time out," said Ed Quinlan, president of the Hospital Association of Rhode Island. "It puts creditors in suspense while the finances are resolved."

Day-to-day hospital operations will not be affected by the receivership, the hospital said in a news release. It will continue to pay employees and fund benefits as before, and patient care will be unchanged.

Jan Salsich, president of the United Nurses and Allied Professionals Local 5075 union, said she hopes this will be the start of a turnaround for the hospital, an important community institution that is the town's largest employer, with 700 workers. In May, the hospital took a series of cost-cutting actions including laying off 29 employees, reduced hours for 59 others and changed schedules for others.

"We anticipated this," she said of the receivership. "There's no reason on earth someone couldn't come in and right the ship. It just needs to be managed appropriately."

Despite its financial problems, the hospital has consistently scored well on quality of care and patient satisfaction measures, she noted.

No one should fear that receivership moves the hospital toward closure, Kinney emphasized.

"That's not the road we're on," he said. "We will be restructured."

This summer, the hospital began talks with Lawrence & Memorial Hospital toward a possible merger or partnership. Under receivership, the exclusive agreement between the two hospitals is voided. The court-appointed receiver will be able to entertain offers from other parties in addition to L&M.

Kinney said he is still hoping to work out some type arrangement with L&M.

In a statement, L&M spokesman Mike O'Farrell declined to comment specifically on Westerly's decision to enter receivership.

"From this point on, we are obliged to step back while the court-appointed special master assumes responsibility for overseeing The Westerly Hospital and determining its future. Therefore, it would not be appropriate for us to speculate or comment further," he said. "We wish them well as they proceed. At some future point, we may again consider resuming our discussions about a potential relationship between the two organizations."

He characterized the talks to date as "cordial, respectful and productive."

Dr. George Bourganos, president of The Westerly Hospital's medical staff, said the receivership could make the hospital a more attractive prospect for merger or partnership, because it will be able to shed some of its debt.

The receivership decision, he believes, was necessary.

"Something had to be done," he said. Among the factors that weakened the hospital's finances, he said, were reductions in the numbers of patients coming for elective procedures because of high co-pays and high overhead due to union contracts.

Kinney said the hospital is also at a disadvantage because of its small size, which gives it less negotiating leverage with insurers. It receives the lowest insurance reimbursement rates of all 12 hospitals in Rhode Island, he said. Statewide, reimbursements rates for hospitals are one of the nation's lowest. High state licensing fees and the economic recession also contributed to the hospital's financial problems, he said.

Westerly Hospital will be the second one in receivership in the state. Landmark Medical Center in Woonsocket has been in receivership since 2008. Recently an application has been filed with state hospital regulators for Landmark to be purchased by Steward Health Care System, a for-profit company based in Massachusetts.

Quinlan, of the state hospital association, noted that nine of Rhode Island's 12 hospitals are part of a larger network. Only Westerly, South County in Wakefield and Memorial Hospital of Rhode Island, in Pawtucket, remain independent.

"Now Westerly has done what many other hospitals have done and they've looked for a partner," he said. "This is a confirmation of the financial stresses experienced by Westerly Hospital and virtually all other hospitals in the last decade."

The situation is particularly pronounced in Rhode Island. Statewide, the average annual operating margin is under 1 percent, and several have had operating deficits, Quinlan said. Nationwide, hospitals average about four percent of revenues over expenses.

j.benson@theday.com