Public out­cry thwarts deal

Move to cre­ate foun­da­tion left to at­tor­ney gen­eral

Modern Healthcare - - COVER STORY - Me­lanie Evans

In a de­railed deal to buy Christ Hospi­tal, Prime Health­care Ser­vices never learned whether the New Jer­sey hospi­tal’s as­sets would be con­verted to a foun­da­tion. For-profit Prime Health­care, based in Wil­do­mar, Calif., dropped a $35 mil­lion of­fer for 381-bed Christ Hospi­tal af­ter public out­cry over the for-profit takeover of the not-for-profit hospi­tal. “Prime Health­care’s decision to with­draw its bid was due to in­di­ca­tions from re­spected lo­cal elected of­fi­cials who wanted Christ Hospi­tal to ex­plore the op­tion of keep­ing the hospi­tal non­profit and un­der lo­cal own­er­ship,” the com­pany an­nounced.

Prime spokesman Ed Bar­rera said in an e-mail that the decision to cre­ate a foun­da­tion is typ­i­cally left to the not-for­profit sellers and state at­tor­neys gen­eral. When the Christ Hospi­tal deal col­lapsed this month, New Jer­sey’s at­tor­ney gen­eral had not in­di­cated a foun­da­tion would be a con­di­tion of the deal, he said.

Op­po­nents of the for-profit suitor in­cluded the New Jer­sey Ap­ple­seed Public In­ter­est Law Cen­ter, whose ex­ec­u­tive di­rec­tor, Re­nee Steinhagen, wrote in an ed­i­to­rial for the Star-ledger that “four of the county’s hos­pi­tals would have been owned and op­er­ated by for-profit en­ti­ties” and “no longer ded­i­cated solely to de­liv­er­ing qual­ity and af­ford­able health care ser­vices to their pa­tients.”

For Christ Hospi­tal, the col­lapse of the deal

pro­hibits close con­nec­tions be­tween for-profit hos­pi­tals and their con­ver­sion foun­da­tions.

“We thought it was im­por­tant for the foun­da­tion to have a clean start and not be un­duly in­flu­enced by the pro­gen­i­tor of the process,” Kahn said.

Su­san Zepeda, pres­i­dent and CEO of the Foun­da­tion for a Healthy Ken­tucky, which was cre­ated af­ter the con­ver­sion of a Blue Cross af­fil­i­ate, said her per­sonal opin­ion is that it’s “very healthy” to cre­ate bar­ri­ers be­tween the new foun­da­tion and the for­mer health­care or­ga­ni­za­tion. “I think my strong rec­om­men­da­tion is that mem­bers of the old board not be the ma­jor­ity of the new board,” she said.

Some foun­da­tions have found them­selves in ad­ver­sar­ial roles with their for­mer hos­pi­tals.

Nashville-based for-profit chain HCA found it­self in court last Oc­to­ber af­ter a con­ver­sion foun­da­tion it helped es­tab­lish, the Health Care Foun­da­tion of Greater Kansas City, sued it for al­legedly fail­ing to meet the com­mit­ments HCA laid down in pur­chas­ing Health Mid­west in 2003, in­clud­ing spend­ing $450 mil­lion on cap­i­tal projects and $300 mil­lion on char­ity care.

HCA Mid­west spokes­woman Su­san Kauf­mann said in an e-mailed state­ment that a trial was held last Oc­to­ber, and a judge is ex­pected to ren­der a decision this year af­ter both sides sub­mit post-trial briefs.

In Michi­gan, the ac­qui­si­tion of six-hospi­tal Detroit Med­i­cal Cen­ter led to the con­ver­sion of the hospi­tal’s for­mer board into an or­ga­ni­za­tion now called Legacy DMC, which is charged with mon­i­tor­ing Van­guard’s com­mit­ments in the deal.

Those in­clude prom­ises to spend $500 mil­lion on cap­i­tal projects and an­other $350 mil­lion on gen­eral main­te­nance at the Detroit hospi­tal sys­tem, along with an agree­ment to at least main­tain if not ex­ceed DMC’S for­mer char­i­ty­care poli­cies. In all, Legacy DMC is mon­i­tor­ing 20 com­mit­ments by Van­guard, none of which was vi­o­lated dur­ing the first year.

Joe Walsh, pres­i­dent of Legacy DMC, said the or­ga­ni­za­tion is still grow­ing into its watch­dog role, in­clud­ing the es­tab­lish­ment of tem­plates to mon­i­tor spend­ing and poli­cies, and set­ting up a hot­line for res­i­dents to re­port is­sues. (Keith Crain, chair­man of Crain Com­mu­ni­ca­tions, which owns Mod­ern Health­care, chairs the Legacy DMC board.)

Legacy DMC also has its own covenants to worry about, Walsh said, be­cause the $150 mil­lion set aside fol­low­ing the Van­guard pur­chase came with many strings at­tached. “The very, very high ma­jor­ity of those as­sets rep­re­sent donor gifts with fairly spe­cific re­stric­tions on their use.” Walsh said.

Since re­ceiv­ing the money, Legacy DMC has trans­ferred $90 mil­lion to the Chil­dren’s Hospi­tal of Michi­gan Foun­da­tion, which will use the funds to ben­e­fit pe­di­atric pa­tient care and preven­tion of child­hood dis­eases, the group’s web­site says. The re­main­ing $60 mil­lion will even­tu­ally go to the new Health & Well­ness Foun­da­tion of Greater Detroit, which will use it for grant-mak­ing con­sis­tent with donors’ in­tents.

An­other is­sue is whether cre­at­ing a foun­da­tion is even fea­si­ble.

The $895 mil­lion ac­qui­si­tion of Bos­ton’s not-for-profit Car­i­tas Christi Health Care by a sub­sidiary of pri­vate-eq­uity firm Cer­berus Cap­i­tal Man­age­ment in Novem­ber 2010 did not end with the cre­ation of a con­ver­sion foun­da­tion, ac­cord­ing to a spokesman for the health sys­tem, now called Stew­ard Health Care.

Mas­sachusetts At­tor­ney Gen­eral Martha Coak­ley, who closely scru­ti­nized the deal be­fore giv­ing her ap­proval, said in a 64-page writ­ten state­ment in Oc­to­ber 2010 that forc­ing Stew­ard to carve out a foun­da­tion fund would have just driven up the over­all cost of the trans­ac­tion, since all $895 mil­lion went di­rectly to re­tir­ing the sys­tem’s old debts and mak­ing long-needed cap­i­tal im­prove­ments.

“To re­quire it to as­sume the char­i­ta­ble obli­ga­tions of Car­i­tas, and to pay taxes, and to fund a com­mu­nity foun­da­tion, has no ba­sis in law or sound public pol­icy,” Coak­ley said in the state­ment. “The at­tor­ney gen­eral has con­cluded that the pur­chase price is fair and rea­son­able. Re­quir­ing an in­crease in price to fund com­mu­nity foun­da­tions is nei­ther ap­pro­pri­ate nor rea­son­able.”

Martin Rash—chair­man and CEO of Re­gion­al­care, the in­vestor-owned sys­tem whose ac­qui­si­tion cre­ated the Ot­tumwa foun­da­tion—said Coak­ley’s state­ment that a foun­da­tion would in­crease pur­chase costs was “a bizarre thought.”

In the case of the pur­chase of the Iowa hospi­tal, Rash said Re­gion­al­care sub­mit­ted its pur­chase price with­out re­gard to whether a foun­da­tion would be es­tab­lished. “When we sub­mit­ted our pur­chase price, at that point it was un­clear whether there would be a foun­da­tion or not, to be can­did. It had no im­pact on the pur­chase price,” Rash said.

So far, Brent­wood, Tenn.-based Re­gion­al­Care has ac­quired seven hos­pi­tals since the com­pany started op­er­a­tions two years ago, and the re­sults have been a “mish-mash” of so­lu­tions for keep­ing char­i­ta­ble funds in the lo­cal com­mu­ni­ties, Rash said.

The pur­chase of 85-bed Clin­ton Me­mo­rial Hospi­tal in Wilmington, Ohio, led to the es­tab­lish­ment of a fund of more than $62 mil­lion ad­min­is­tered through county gov­ern­ment. The ac­qui­si­tion of two other com­mu­nity hos­pi­tals in Alabama did not re­sult in any foun­da­tions be­cause Re­gion­al­care com­mit­ted to new hospi­tal con­struc­tion in­stead, Rash said. “It’s re­ally the com­mu­nity that drives it.”

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