De­spite re­stric­tions ...

… docs buy out part­ner in ail­ing Mich. hos­pi­tal

Modern Healthcare - - The Week In Healthcare - Andis Robeznieks

In spite of a pro­vi­sion in the health­care re­form law seen as a death knell to physi­cian in­vest­ment in hos­pi­tals, a group of Detroit-area doc­tors has upped its stake to save a strug­gling hos­pi­tal in Pon­tiac, Mich.

A pur­chase agree­ment has been signed, which has physi­cians buy­ing out the 35% own­er­ship stake Flint, Mich.-based McLaren Health Care Corp. had in Doc­tors’ Hos­pi­tal of Michi­gan, a 106-bed in­sti­tu­tion for­merly known as North Oak­land Med­i­cal Cen­ter.

McLaren had in­vested about $5 mil­lion in the fa­cil­ity since Novem­ber 2008, ac­cord­ing to a hos­pi­tal news re­lease, and some of the physi­cian share­hold­ers paid McLaren about $3 mil­lion to buy out its own­er­ship share.

“It hasn’t ‘changed own­er­ship,’ they bought out a ma­jor in­vestor,” said hos­pi­tal spokes­woman Anne Man­cour.

The Pa­tient Pro­tec­tion and Affordable Care Act pro­hibits the per­cent­age of physi­cian own­er­ship to in­crease from the level it was at when the law was passed last March, which would ap­pear to put the le­gal­ity of the deal in ques­tion. But at­tor­ney Michael Lam­pert, a Bos­ton-based as­so­ciate in the health­care group of law firm Ropes & Gray, noted that the hos­pi­tal’s news re­lease stated that “a por­tion of DHM’s physi­cian own­er­ship” bought out McLaren.

In its pre­am­ble to the fi­nal rule amend­ing Stark reg­u­la­tions on self-re­fer­ral, pub­lished in the Nov. 24 Fed­eral Reg­is­ter, the CMS stated that non­prac­tic­ing and non­re­fer­ring physi­cians do not need to be counted as part of the per­cent­age of a fa­cil­ity’s physi­cian own­er­ship. The word­ing of the re­lease, Lam­pert said, “sug­gests that not all of the (physi­cian) own­ers are ac­quir­ing an in­creased share.”

McLaren ac­quired its own­er­ship stake for $2 mil­lion and loaned the hos­pi­tal $3.5 mil­lion in the form of a promis­sory note. The med­i­cal cen­ter had en­tered into Chap­ter 11 bank­ruptcy in 2008 af­ter miss­ing a Jan. 15 pay­ment to bond­hold­ers that year. At the time, ac­cord­ing to a Stan­dard & Poor’s re­port, the med­i­cal cen­ter had $35.8 mil­lion in bond debt, a $13.4 mil­lion op­er­at­ing loss in 2007, and only 18 days of cash on hand.

As part of last week’s deal, Clarence Sevil­lian, a McLaren em­ployee, stepped down from his post as hos­pi­tal pres­i­dent and CEO on Feb. 8, and Chief Fi­nan­cial Of­fi­cer Michael DeRubeis has been named acting CEO.

“The share­hold­ers worked very hard to make this deal hap­pen and to save 600-plus jobs,” Dr. Yatin­der Sing­hal, chair­man of the hos­pi­tal’s board of direc­tors, said in the re­lease. “Our busi­ness re­la­tion­ship with McLaren did not work out, but we ap­pre­ci­ate all they have done to help us start up Doc­tors’ Hos­pi­tal and keep it a vi­able health­care provider.”

Sing­hal, through an as­sis­tant, de­clined to be in­ter­viewed. Sevil­lian, who was se­lected as one of Mod­ern Health­care’s Up & Com­ers in 2009—in part for his ef­forts to turn around Doc­tors’ Hos­pi­tal—did not re­spond to a re­quest for com­ment.

On Nov. 4, Sevil­lian sent a letter to the Michi­gan Depart­ment of La­bor and Eco­nomic Growth an­nounc­ing that the hos­pi­tal was “en­gaged in se­ri­ous ef­forts to re­struc­ture its or­ga­ni­za­tion and/or sell its fa­cil­ity,” and warn­ing that—if these ef­forts fail—the hos­pi­tal could cease op­er­a­tion and lay off up to 690 em­ploy­ees.

The hos­pi­tal’s re­lease noted that Doc­tors’ Hos­pi­tal is the only physi­cian-owned acute­care in­sti­tu­tion in the state, and at­tor­ney Scott Oost­dyk, a part­ner in the Rich­mond, Va., of­fice of the McGuireWoods law firm, noted the doc­tors were “do­ing it all in the face of con­straints” on fu­ture growth con­tained in the re­form law.

Oost­dyk, who is rep­re­sent­ing Physi­cian Hos­pi­tals of Amer­ica and Texas Spine and Joint Hos­pi­tal in Tyler in a law­suit seek­ing to over­turn the re­form law’s re­stric­tions on physi­cian own­er­ship, de­scribed the physi­cian­in­vestor ac­tion in Pon­tiac as a “res­cue” op­er­a­tion that is pre­serv­ing health­care ser­vices in an area where they are des­per­ately needed.

PHA spokes­woman Les­lie Fossey said sim­i­lar res­cues were go­ing on in Hous­ton as well as in ru­ral Alabama and Ten­nessee.

While physi­cian-owned hos­pi­tals are of­ten ac­cused of “cherry-pick­ing” lu­cra­tive ser­vices away from com­mu­nity hos­pi­tals, Man­cour said that, at Doc­tors’ Hos­pi­tal, “We don’t pick and choose—we treat ev­ery­one who walks through our doors.”

Doc­tors’ Hos­pi­tal also owns sev­eral other fa­cil­i­ties, in­clud­ing ur­gent-care, imag­ing and am­bu­la­tory surgery cen­ters.

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