Despite restrictions ...
… docs buy out partner in ailing Mich. hospital
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.