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Examining the lease deal for our city-owned hospital

In 1943, Colorado Springs City Council voted to buy Beth-El Hospital for $76,500 and rename it Memorial Hospital. In today's dollars, that's the equivalent of $1 million — a bargain by any measure.

Now, voters are being asked in a special Aug. 28 mail-ballot election to cash out by leasing Memorial Health System for 40 years to University of Colorado Health, recently formed by the merger of University of Colorado Hospital Authority and Poudre Valley Health System of Fort Collins.

The lease represents the biggest financial deal in city history, and the outcome could change the face of health care in the Pikes Peak region, if not the state.

The city's crown jewel is worth $1.9 billion over 40 years, the city has decided, and UCH agrees. There's little chance the Springs could muster the funds to buy back the system in 2052 when the lease expires, and UCH says it views the deal as a lifetime commitment.

So it's appropriate to wonder if the city has chosen the right partner and made a good deal for its citizens.

City officials say they couldn't have hoped for a more attractive suitor. Mayor Steve Bach has even called the deal a "grand slam opportunity for our community."

There's no doubt UCH is a health care powerhouse. University Hospital is located on the sprawling Anschutz Medical Campus, the largest academic health center between Chicago and the West Coast, north of Texas, according to its website. U.S. News and World Report recently ranked five specialties at University Hospital as among the best in the nation, with respiratory care earning the No. 1 ranking.

With well over 10,000 employees, UCH is one of the state's biggest health care players, and it's getting bigger. It recently began negotiations for a management agreement with Ivinson Memorial Hospital in Laramie, Wyo.

Adding Memorial, with two hospitals, 671 beds and 4,136 employees, would give UCH a chance to dominate the Front Range and control facilities that command more than half Colorado Springs' market share. Memorial has been so financially robust that until uncertainty over its future ownership and governance weakened its market position last year, it survived a $32 million loss in 2008 without a city subsidy. The next year, Memorial lost another $22.5 million on a bad investment but still posted net revenue of more than $15 million. It's never required a city property tax for support.

Taking over Memorial also would set the stage for a local branch of the University of Colorado School of Medicine that would train students at Memorial and potentially attract more doctors to Colorado Springs.

All that said, voters might be surprised to know:

• UCH would run Memorial as it wishes, even subletting facilities to other providers, though it would still have to meet the lease's requirements, including monetary payments to the city. A new local Memorial board would be powerless to stop the UCH board's decisions, even if they went so far as to abolish certain services and types of care.

• The sweet spot for the city — the payoff — could turn sour if liabilities like malpractice lawsuits and environmental problems surface, even years from now. The city also is on the hook to withdraw Memorial employees from the Public Employees' Retirement Association (PERA), which might require a huge payment. Moreover, whatever money is left after all that would be controlled by an appointed board, not elected officials, and no specific mandates for spending the money have yet been adopted.

• The lease requires UCH to spend an average of $28 million annually on capital investment, but that's no big deal. Memorial already spends at that level, and in 40 years, that amount won't buy much. The agreement contains no inflation escalator.

• UCH would provide uncompensated care to the poor, but won't commit to a dollar figure.

Getting here

Facing no organized opposition, supporters are stuffing mailboxes with brochures touting the lease and citing support from a "who's who" of local power brokers whose politics range from ultraconservative to liberal.

Council President Pro Tem Jan Martin, who's worked on the Memorial deal for more than a year, acknowledges the lease isn't perfect, but says, "I think the pros outweigh the cons. There's always risk involved, but this one feels pretty good."The city has periodically studied selling Memorial, but the conversation became dead serious after the recession deepened and the health care industry coped with reimbursement reforms that forced providers to tighten their belts and improve quality.

Although Memorial followed suit, it found its hands tied by city ownership. As Memorial spokesman Brian Newsome explained in 2010, "A number of physicians have said they are not interested in partnering with a public hospital, in large part, because they don't want their medical practices associated with city politics or they dislike the idea of their salaries being made public." Suppliers, he added, "tend to bristle" at having their deals disclosed under open records laws.

For example, Memorial wanted to work a deal with PayPal to offer an alternative pay method, but it fell through after the vendor learned of the city's disclosure requirements and contracting rules.

When Memorial lost money in 2008, some wondered if Council would have to turn to a never-before-used city Charter provision allowing the city to impose a property-tax levy to bridge deficits at Memorial.

Another complicating factor was the PERA obligation. From 1997 to 2009, the city's contribution, mandated by the statewide association, rose from 10 percent of salaries to 13.7 percent, "a financial liability of unknown proportions going forward," says Lionel Rivera, who was mayor from 2003 to 2011.

"That would impact the rates the hospital would charge," he says in an interview, "which would make them less competitive."

When the Patient Protection and Affordable Care Act, commonly called Obamacare, muddied the future of the health care industry, it was no surprise that the city's Sustainable Funding Committee in August 2009 called for revisiting Memorial's ownership question. Besides the complexity and uncertainty of the business, the committee noted the city got no money from Memorial.

Since then, a series of city panels has debated what to do with Memorial. The lease is the product of that effort. So was a ballot measure approved by voters in November 2011 to remove from the charter the safety-net mill levy for the hospital.

Local control

Today, Memorial is run by a Council-appointed board. It makes decisions about hiring the CEO, expanding facilities, and contracting with doctors and vendors.

The Integration and Affiliation Agreement between UCH and the city, part of the lease documentation, prohibits a majority of the new Memorial board from being elected officials, which would cause the board to be subject to the Colorado Open Meetings Law. In other words, board meetings would be closed to the public, and Memorial, which would convert to a nonprofit, wouldn't be subject to open-records laws.

Under the lease, an 11-member board would run the show. It'd be composed of UCH CEO Bruce Schroffel, three people appointed by UCH, and seven others nominated by a committee of three city appointees and three UCH appointees; those seven must have lived in El Paso County for at least a year.

The new board would oversee local operations, such as licensing requirements, but the big decisions would come from the UCH board, on which the city has no seat.

Here's how that's spelled out in the Integration and Affiliation Agreement, with emphasis added: "During the Term, the UC Health Parties will use commercially reasonable efforts to offer at the [Memorial] Hospitals a range of services that is reasonably responsive to the acute care medical needs of the community. If at any time following the third (3rd) anniversary of the Effective Date the UC Health Parties believe that prudent hospital management principles warrant the suspension or termination of any Core Service, such matter must be explained at a meeting of the New Memorial Board (but, for the avoidance of doubt, such decision shall not be subject to any voting or approval requirements of the New Memorial Board)."

Schroffel says in an interview that almost all services offered at Memorial today would be preserved under the lease except "esoteric" services, such as organ transplants and other sophisticated procedures, which will be done for all UCH partners at University Hospital in Denver.

"Are we going to move services out of there? We absolutely have no plan to do that," he says. "We hope to grow the programs down there. You can plan on continuing to have a full-service hospital."

City Attorney Chris Melcher says the local board will have authority over "everyday" operations, including the hiring of doctors and doctor groups, although those decisions apparently wouldn't be binding.

"Can [the new Memorial board] be overruled by the parent board? Yes, they can," he says. "That's also true of the Denver hospital [University of Colorado Hospital] and the Fort Collins hospital. I think the city's voice will be heard loud and strong."

Melcher says that voice will "give feedback" on executive team hires, investment decisions, whether to expand service areas or not, annual operating budgets and capital investment. Martin says while major budget decisions will rest with the UCH board, "We've been assured that the Memorial board will have a lot of authority over operations of the facility."

That includes establishing Memorial's level of uncompensated care, which historically has been several times greater than the level provided by the competing Penrose-St. Francis system, owned by nonprofit Centura Health.

In 2011, Memorial provided $90.5 million in uncompensated care, or 16 percent of net operating revenue that year.

UCH agrees in the lease to provide indigent care at levels equal to that provided by nonprofit hospitals in Colorado generally and by Memorial specifically. But the lease contains no dollar amount or percentage or any other measure, so it might be hard to hold UCH to that.

When asked about that, Schroffel says, "Remember who we are and our historical commitment to uncompensated care. We have provided close to $300 million of uncompensated care [this year at University Hospital]. We are able to do that, quite honestly, because we feel we owe that to the community, in our case the Rocky Mountain region. We are financially strong, so we're able to continue to do it. It's in our genes. We provide above and beyond what similar hospitals do."

But Schroffel notes that neither Memorial nor UCH's other partners can treat everyone. "If we said 'yes' to everyone, we would be bankrupt," he says. Noting that Memorial's level of uncompensated care is "way above" community standards, he adds, "We hope to continue to do that, but we can't make any guarantees, and we've got to be able to pay the bills."

Martin and other supporters note that UCH is required to provide an annual report to the community to keep citizens informed about how things are going, including how much is spent on indigent care.

The money

Memorial's much-touted $1.9 billion price tag is deceiving. An advocacy brochure says the lease plan "will invest almost $2 billion in our community." But that's not true. Hundreds of millions wouldn't directly benefit the city or its citizens.

The city is to receive $330 million in cash from Memorial. But that money is earmarked for retiring Memorial's $327 million bond debt, Melcher says. The bonds, most of which span 30 years and were issued over the past 10 to 12 years, could take a long time to pay off, he says, because some of the debt can't be repaid early without penalty.

The city is also to receive an additional $259 million from the deal — $74 million in a one-time, up-front payment that would go into a city foundation to fund anything the city chooses, and $185 million to settle the PERA obligation, if there is one. PERA has insisted that it would need more than $200 million from the city to assure it has adequate money in the future to pay retirement benefits for Memorial workers who have earned those benefits, though the city claims it would owe nothing.

"We expect to resolve PERA for less than the funds set aside for that," Melcher says. "Obviously, if that's not the case, then we have the foundation funds available to address any additional costs as a result of PERA." In other words, they'd be allowed to raid the foundation money.

Meantime, UCH has set up a defined benefit plan to replace PERA for all UCH employees, including those at Memorial, that UCH spokesman Dan Weaver calls "the strongest and most employee-centric plan among hospital systems in the state."

But whether the city actually receives all of that $589 million total for PERA, bond debt and the foundation depends on how much cash Memorial has on hand at the time of the Oct. 1 transfer. The city currently has $313.8 million on hand, plus a bond reserve of $24.1 million. The city must give UCH $42.4 million in Memorial cash to close the deal; anything less must come out of the city's share. (Anything more would be retained by the city.)

The city also is to receive annual lease payments of $5.6 million for 30 years, and for 40 years it would receive "margin sharing payments" based on Memorial's financial performance. Melcher estimates the margin payments at $2.5 million annually.

But the lease's margin sharing formula excludes revenue from services Memorial provides that aren't typically offered at Colorado hospitals of similar size and type. So money from certain specialty services might not be part of the calculation, which would have the effect of lowering the payment to the city. Revenues from Children's Hospital also would be omitted, except for those stemming from use of Memorial's facilities, Schroffel says, because Children's isn't a party to the lease.

How UCH's operation of Memorial might affect jobs is another unknown. As UCH searches for economies of scale and consolidation of administrative services, some jobs could disappear, though the lease stipulates that no layoffs could occur in the first six months of the lease.

Schroffel emphatically notes the provision is a city requirement, not UCH's. "We have not laid off anybody at University of Colorado [Hospital] or Poudre Valley," he says. "We think we can grow this system. We've been hiring people consistently for the last three years."

Data provided by UCH shows that Poudre Valley Health System has increased its number of employees by 4 percent in the last year alone, to 5,452 as of July 19. University Hospital has seen a 4.7 percent increase during that same period, to 4,521. And even bigger increases have been seen in other components of the system, such as physicians.

The investment

In response to government record-keeping requirements, UCH has pumped $65 million into EPIC, a new electronic records management system, at University Hospital. Memorial and other UCH partners, including Medical Center of the Rockies in Loveland, would become part of that system.

"By doing it together, we're saving at each hospital $10 [million] to $15 million per hospital," Schroffel says. "Because they can be on our license, we can share hardware, we can do a lot of things together, not to mention the expertise we will have."

Memorial's share would cost about $40 million over a couple years, an expenditure that would count toward UCH's contractual obligation to funnel an average of $28 million a year into capital at Memorial.

The lease doesn't contain an inflation adjustment, though. And $28 million in today's dollars is projected to equate to $154 million by the year 2052, based on the past 40 years' inflation rates.

In addition, just like the margin calculation, UCH makes sure the lease allows certain costs to be counted toward that $28 million, such as investments made by Children's Hospital, "ongoing replacement, maintenance and upgrading of property, plant and equipment," and financing or refinancing costs for capital improvements.

But Schroffel dismisses the idea UCH is trying to cheap it out.

"We're looking at it like a lifetime, forever," he says. "Therefore, we have to make [Memorial] a success, both from a quality perspective and an economic perspective. We plan on investing in this hospital, just as we invest in University Hospital and Poudre Valley Hospital. What you're seeing is a baseline."

Schroffel predicts that UCH would likely someday spend hundreds of millions to replace Memorial Central, at 1400 E. Boulder St., where some parts of the building date back 100 years. "We plan on doing a lot more than we've committed to," he says. "We have to make that a state-of-the-art facility to compete. Our goal is to invest as much as needed to make this a world-class community hospital. Otherwise, I wouldn't be doing this."

But he adds that UCH needs flexibility to make sure the system remains viable financially, and that might mean some leaner years for capital investment. "We've had years here [at University Hospital] where we didn't have the money, and we didn't invest," he says. "Seven years ago we invested $12 [million] to $13 million one year. We've got to be able to pay the bills."

Should UCH decide to sublet part or all the Memorial facilities to another entity, it can do so, the lease states, but UCH would still be liable for its obligations. At the end of the lease, the city could take Memorial back, but only if it pays UCH fair market value, as determined by a national expert, for facilities, personal property, accounts receivable and inventory.

The city's liability

Although a chief goal of the UCH deal is to exempt the city from liability, the city would assume considerable burdens under the lease.

Besides the debt and PERA obligations, the city is on the hook for any claims, judgments or fines from malpractice or reimbursement errors that happen before the transfer date. And it can happen. A jury in Colorado Springs recently awarded $15 million to a Springs man in a medical malpractice case filed against Memorial and an emergency room physician, according to Law Week Colorado. Memorial had settled with the man before the trial, so it won't have to pay again, but was assigned fault by the jury, along with the doctor.

Melcher says Memorial's insurance policies will handle lawsuit settlements and court judgments, even if the claim is filed years later. To cover any lingering liability, Melcher says the city is exploring a "tail" policy that would cover liability incurred on the city's watch, no matter when it's discovered. "We're negotiating to make sure we get a good price on that," he says.

Anything that isn't covered would have to come from UCH's up-front $74 million payment; for that reason, $50 million would be held aside for the first three years of the lease, and $25 million for the fourth and fifth years. In addition, the city would cover any environmental liabilities discovered in future years, such as the cleanup of a buried fuel tank or some other contamination problem. Melcher, though, doesn't seem worried.

"We have done an analysis of [liabilities], and we believe the monies the city will retain and receive once the transaction is completed will be more than sufficient to cover any liabilities we're aware of and will provide substantial funds for the foundation," he says.

Speaking of the foundation, money from Memorial that's free and clear of liabilities would be placed in the City Health Foundation, governed by a nine-member board nominated by the mayor and appointed by a majority vote of Council.

Although a resolution Council adopted on June 27 directs the foundation "be focused solely and exclusively on health issues" in the city and Memorial's service area, Councilors waver on what that means (see "Health care powerhouse," June 13, 2012). And state law doesn't dictate that the money be tabbed solely for health care.

Councilor Martin suggests outdoor recreation — trails, open space and parks — would qualify as relevant to community health. But she promises that spending guidance will be determined by the community, not just elected officials. (For one, anti-tax activist Douglas Bruce suggests that the money might be used to improve the city's stormwater drainage system.)

"I think we need to take our time to determine what we as a community want to do with that money," she says. "I don't want us to be rushed right now to make a decision on the future of how that money will be spent."

Med school and more

Perhaps the flashiest part of the plan is the promise of a University of Colorado School of Medicine branch, to which UCH will give $3 million annually for 40 years.

"What that $3 million will buy is the personnel — the salaries and time of physicians in Colorado Springs who will become our faculty and our associate dean for student affairs and various and sundry other things, counseling, support services," says Dr. Richard Krugman, med school dean. "The only real space we need are offices for the people who are administering the school, and that might be a dozen people."

Faculty jobs will be part-time, he notes, and the branch school will be located in the Lane Center for Academic Health Sciences on the UCCS campus. No new buildings are anticipated, he says.

"If all goes as spectacularly well as we hope, the first group would start rotations in May 2015," Krugman says, noting the branch needs to be accredited by the Liaison Committee on Medical Education, an arm of the American Medical Association and the Association of American Medical Colleges.

The plan calls for a couple dozen students in each of the third- and fourth-year classes to gain clinical experience at Memorial through rotations in surgery, pediatrics, neurology, emergency medicine and the like. The med school also wants to place students in physicians' offices, Peak Vista Community Health Centers, and Penrose-St. Francis facilities.

"We will look for the best possible rotations that we can," he says.

The benefit to Colorado Springs? "If [doctors] train somewhere, they're more likely to settle there."

The arrangement helps the med school, too, because state support has dropped from $19.8 million some years ago to $10 million this year. It also will enable a school that accepted only 160 of 5,000 applications this year to grow its enrollment, Krugman says.

Does all this add up to a marriage made in heaven? Or as "Great City. Great Care" vote-yes committee organizer Stephannie Finley calls it, a "blockbuster deal," one that would bring in cash and help make Colorado Springs a better place to live?

Schroffel says all components of the system — University Hospital, Poudre Valley and Memorial — would be well-served by adding Memorial to the UCH family. And if voters say "no" on Aug. 28, Memorial will have a hard time going it alone, Schroffel says. "It's really darn hard to run a 350-bed system independently anymore," he says.

Even Kevin Walker, a local consultant who represented for-profit HCA-HealthOne amid the bid process, has something good to say about the UCH lease. "We learned we can get through a process like this and come to the right conclusion in an open and transparent way," he says. "We can have a community discussion about these things and manage to get ourselves to the finish line."

zubeck@csindy.com

The payoff

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