Public outcry thwarts deal
Move to create foundation left to attorney general
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.”