April 29, 2010 News » Cover Story

Because of state law, selling Memorial Hospital likely wouldn't solve city's financial problems 

As pots of gold go, Memorial Hospital System definitely would be a large one. But before people start counting the treasure and planning how to spend it, they should be aware of strings attached to selling the city-owned conglomerate to a for-profit corporation.

Under a 1998 state law, the money couldn't go to fill potholes, water the parks, bring back night and weekend bus service, or chip away at a $700 million backlog of road work, concrete repairs and stormwater projects for which the cash-strapped city has no funding.

If that's an unwelcome blast of cold water, here's another: Though you'd naturally assume there would be proceeds from a sale, it's not a given. There might not be any money left after the hospital pays off its $315 million debt, coughs up tens of millions of dollars to pull out of the Public Employees' Retirement Association, and gives six executives, if they choose to leave or are terminated, a year's severance pay. Only CEO Larry McEvoy doesn't have that "change of control" clause in case of a sale, merger or consolidation, because Memorial's future ownership wasn't a hot issue when he was hired as chief medical officer in 2007 and promoted to CEO in 2008.

Those obligations, especially the spending restriction, make City Councilor Jan Martin and some of her colleagues cool to the idea of selling the health system.

"I think it would force us to reconsider what some of the advantages would be to selling the hospital if the money was restricted in that form," she says of the 1998 law. "Most importantly, if the committee should decide they wanted to sell the hospital and a ballot measure was put in place, it would be extremely important for the public to be made aware of this."

Too much risk

In August, the city's Sustainable Funding Committee called for an analysis of whether to sell Memorial, keep it, or change how it's governed to reduce the city's risk. Under a 1949 ordinance adopted by voters, Council could levy a property tax to plug a deficit, if necessary. City Attorney Pat Kelly says the ordinance predates and, therefore, trumps the Taxpayer's Bill of Rights, which requires voter approval of all tax increases.

Still, no tax money has gone to Memorial, city-owned since 1943, for decades. Because it's a city agency, Memorial enjoys tax-exempt status, which means it borrows money at lower rates and doesn't pay property taxes.

Given the unknowns surrounding health care reform and because the city could stand to get its hands on extra cash, Council appointed the Citizens Commission on Ownership and Governance of Memorial Health System in February to investigate how Memorial could best serve the community — through a sale, lease, merger or retention, and whether its structure should change. (Indy vice president of business development Jay Patel is a member of that commission.)

Hospital mergers and acquisitions are a big market nationally, with 172 transactions completed from 2007 to 2009, according to data compiled by consultant Irving Levin Associates, Inc., a leading publisher of health care industry merger and acquisition data. Though there's been a shift over the past decade toward nonprofits merging with nonprofits, for-profits again have become big players, industry data show.

The Sustainable Funding Committee said a sale could yield up to $400 million. Though that's a debatable figure, there might be plenty of interest in a system with $382 million in assets that posted $542 million in revenue last year.

Because of that value and recurring controversies over its management, Memorial's city ownership has often debated the idea of a sale. In the early 1990s, for example, health care consultant Steve Hyde, who now chairs the Citizens Commission, extolled the idea in an op-ed piece of diverting Memorial's assets to other purposes. Other citizens have gabbed for years about selling the hospital system, which today encompasses Memorial Central Hospital, the new Memorial North Hospital, and more than a dozen other clinic, rehab and administrative locations.

Protecting public assets

But in 1998, the state Legislature took away some of that temptation by adopting a law that would "assure that nonprofit assets of hospitals are preserved to serve the charitable purposes to which they were dedicated." Legislators noted in the transfer act's general provisions that the public is the beneficiary of nonprofit hospitals, especially those owned by the government, which have a "substantial and beneficial effect" on providing health care, including indigent care to the uninsured or underinsured. Those assets, they said, should be protected.

Hence, proceeds from the sale of Memorial to a for-profit company must go toward health care.

The transfer law is fuzzier on a sale to or merger with a nonprofit, Mayor Lionel Rivera points out. (City Attorney Pat Kelly is awaiting a formal opinion on this issue from Attorney General John Suthers' office.)

"My informal conversation with the attorney general is, if [Memorial] sold to a nonprofit with a similar mission, there's a lot more flexibility of what you could use the money for after a sale," Rivera says.

Steven Summer, president and CEO of the Colorado Health and Hospital Association, tends to agree, saying a charitable foundation wouldn't have to be created if a hospital system is sold to a nonprofit.

The mayor says he hasn't formed an opinion for or against selling, but notes, "If a sale of the hospital goes to a for-profit and the hospital nets $500 million, that would go into a nonprofit [foundation] that would benefit the entire region. Knowing there would be a large amount of money in a pool to benefit the region, that's a positive for the region. A large hospital system would continue to provide health care services."

Combining the two models is how the Colorado Health Foundation was created. In 1995, nonprofit HealthONE, doing business as the Colorado Health Foundation, and for-profit Hospital Corporation of America (HCA) pooled their Denver assets to form HCA-HealthONE, which owns seven Denver area hospitals and numerous clinics and other facilities. The foundation, with nearly $1 billion in assets, doles out millions annually toward its goals of expanding health care access to the underserved, improving healthy living, bringing insurance coverage to more people, and providing graduate medical education.

Gary Drews, the foundation's chief financial officer, says it's a good setup, because some proceeds from the joint venture remain in Colorado, where they're spent across the state from the Four Corners area to Weld County. In 2008, the most recent year for which stats are available, $5.4 million in grants went to El Paso County agencies — including Peak Vista Community Health Centers, which provides primary care to 54,000 patients annually, many of them low-income.

"The foundation's mission is to make Colorado the healthiest state in the nation," Drews says.

He notes HCA brings capital to the table in a capital-intensive industry, and its size (163 hospitals and 105 surgery centers in 20 states and England) translates to keeping costs down. The joint venture's profits replenish the foundation's coffers annually, with the foundation recording $127.8 million in earnings in 2008.

The great unknown

How much Memorial would bring, if placed on the market, is a huge question mark. But consider that the financially troubled Detroit Medical Center, with nine Detroit-area general and specialty hospitals and 1,734 licensed beds, has agreed to sell to Nashville-based Vanguard Health System, and no money will change hands, according to the Detroit News. Vanguard will assume $300 million in pension obligations and $200 million in bond debt, the News reports, which industry experts say normally would be the responsibility of the seller.

The benefit to Michigan is Vanguard's promise to invest $850 million in the system, which city officials estimate will create 10,000 jobs in the Detroit area, the News reports, while avoiding future instability in a system that racked up $500 million in cumulative losses in the past six years and required a $50 million government loan to avoid closing one hospital.

Some sounded the alarm, though, saying the sale will bring a sharp dive in indigent care in a state with one of the highest unemployment rates in the nation. Dr. Quentin Young, with Physicians for a National Health Program, warned in comments to the Socialist Equality Party website that for-profits do what's best for the bottom line, whacking services that don't show a profit. That's why, Young has said, for-profit hospitals generally steer clear of hospitals that provide an inordinately large amount of indigent care.

Memorial is the largest provider of indigent care in the Pikes Peak region and provided roughly $53.3 million (excluding write-off for bad debt, or debt that will not be repaid) in such care in 2009. Areas at Memorial that don't show a profit include behavioral health, obstetrics, emergency, primary care, disease management and many community outreach services, such as prevention and screenings.

McEvoy says some of those services might become profitable in certain markets due to a "richer" payer mix. In other words, if Memorial had more commercially insured patients and fewer patients that use Medicaid, the state's program for low-income residents, and TRICARE, the military's health program, those areas might at least break even.

As it is, McEvoy says, "We're the biggest provider of TRICARE west of the Mississippi that's not a military institution."

Councilor Scott Hente, a retired Air Force officer, has expressed concern that a for-profit institution taking over Memorial might reduce services to TRICARE patients.

In Chesterton, Ind., a different scene played out. Mired in controversy over executive pay and politics, Porter Memorial Hospital was sold in 2007 to Community Health Systems (CHS), based in Brentwood, Tenn., for $80 million. Although the hospital carried little debt, officials argued over whether the county-owned hospital could remain competitive, says Vicki Urbanik, who covered the sale for the Chesterton Tribune.

According to Mike Bucko, Porter County treasurer, after cashing out the hospital's investments and collecting the sale payment, the county pocketed $152 million, which has since earned $9 million in interest. In addition, CHS agreed to build a new hospital and maintain previous indigent care spending for five years. Urbanik says indications are that CHS is living up to the deal.

She adds that city and county officials vowed to leave the principal untouched and spend only interest earnings, about $5 million a year, on roads, bridges, economic development, wellness programs and other needs in the northwest Indiana county of 160,000 people. Meantime, Bucko says, CHS pays about $110,000 in property taxes a year; when it was county owned, the hospital paid nothing.

Here, Memorial has about $315 million in debt, which would have to be paid off prior to a sale — unless, as in the Detroit Medical Center case, the buyer assumes it. Also as in Detroit, Memorial faces what's likely to be a massive payment to the state's public employees retirement plan to withdraw from the plan and secure benefits for former and vested current employees.

For Detroit, with 19,200 workers, the payment was $300 million. Memorial has 4,100 employees at present; if Memorial's bill mirrors that of Detroit, the hospital would owe $64 million.

Katie Kaufmanis, spokeswoman for Colorado's Public Employees' Retirement Association, says no agency has withdrawn in years, if ever, from Colorado PERA, which has $37.1 billion in assets and 462,570 active, inactive and benefit recipient members.

Kelly, the Springs city attorney, says an actuarial study would determine how much Memorial must pay to withdraw. Even if purchased by a nonprofit, Memorial's employees would change retirement plans, because PERA doesn't cover employees of nonprofit organizations.

'What happened to my retirement?'

All of this is a big concern to Larry McEvoy as Memorial's CEO.

"If you're an employee, your question is, 'In the future what will happen to my retirement? Will PERA go away? Will there be alternatives?'" he says. "We have to be able to answer that question to be able to recruit and retain."

McEvoy also is concerned about a potential sale's effect on morale, given that the management team could be swept out by a new regime.

"I did, as interim CEO, have the opportunity to watch the difficulty that put an organization in," he says, referring to the coincidental departure of top Memorial leaders who resigned or retired within the past few years. "I certainly would prefer not to be part of that again. It puts an awful lot of strain on the people trying to do the work and the ability of the organization to focus on the task at hand. I can tell you, as positive as I am about what's going on at Memorial to create value for the community, it's difficult for an organization to have rapid, massive turnover at the top."

That's why the hospital board agreed to severance deals for its leaders, he says, which could total about $2 million. "That was done to allow us to hire people in a difficult economy and tell them if you are displaced, you'll be displaced at industry standard."

Although not all ownership transitions wreak havoc, the experience at St. Joseph Hospital in Denver might be instructive.

When Exempla Healthcare took over St. Joseph in 2000, firing nurses and replacing them with contract workers, it prompted Dr. David Glaser, who headed the emergency room physician group, to issue a letter to physicians amid the changeover.

"As the nursing structure implodes and accountability seems nonexistent, it is up to us to carry much of the load or else our department will descend into complete chaos," he wrote in a letter reported by the Denver Post. Glaser's letter also noted patients waited several hours for care at the emergency room. "Beds are tight. Nurses are tighter. If we are awaiting a bed, consider moving the patient to OBS, Ortho-lac, or simply to a spot alongside a wall so as to accommodate the next patient," he wrote.

Exempla, a nonprofit organization sponsored by Sisters of Charity of Leavenworth Health System and Community First Foundation, has since won awards and recognition for its operations of St. Joseph, Lutheran Medical Center and the Good Samaritan Medical Center in Denver.

Weighing in

Springs residents will get a chance to weigh in this summer when the citizens commission begins a "community conversation" at town hall meetings, although the panel has yet to identify which options it will present as most feasible. A recommendation is due to City Council in December so that, if needed, Council might consider placing a measure on the April 2011 city ballot. Voter approval would be necessary for a sale or a change in how the hospital is governed.

Some decision-makers, though, think all this effort might be a waste of time.

Councilor Randy Purvis, who's aware of the hospital transfer act's restrictions on spending, says the public is "not even close" to understanding that limitation.

"It's, 'Sell the hospital and fill potholes,'" he says.

Purvis notes that Memorial, not a series of nonprofit healthcare agencies, might be the best way to deliver quality health care to the community. He says the hospital already works closely with Peak Vista and other local agencies to redirect patients to primary care, so that the emergency room doesn't become their default doctor's office.

BJ Scott, president and CEO of Peak Vista, told the commission recently to be careful upsetting the apple cart.

"The Memorial Hospital management team has demonstrated a great deal of collaboration and cooperation," she said.

Vice Mayor Larry Small, a longtime Council member, agrees most residents are in the dark about the transfer act's mandates. But while he's been one of Memorial's biggest critics — he's used terms such as "completely out of line" and "the ultimate in poor management" to describe executive decisions that predate McEvoy — Small takes a longer view, casting a skeptic's eye on major change.

"I really don't have a desire to sell the hospital," he says. "I think the hospital is providing a good benefit to the community at very little risk. I'm happy to leave it like it is, because I think we would lose a considerable amount of health care if we were to sell to a for-profit."

He notes that despite Memorial having posted a $31.9 million loss in 2008, largely due to refinancing debt, it needed no tax money to recover.

"If we could get through that kind of a storm," Small says, "I think we should be able to weather almost anything that comes along."


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