Health foundation part of hospital sale

More than a century of nonprofit health care in Spokane could translate into a $100 million community foundation following the announcement Wednesday that Empire Health Services has reached a sales agreement with the nation’s largest for-profit hospital system.

Empire officials confirmed plans to sell the system that includes Deaconess Medical Center and Valley Hospital and Medical Center to Community Health Systems Inc. of Franklin, Tenn.

Under terms of the deal, which must be approved by state regulators, CHS also has agreed to invest $100 million in capital improvements within five years, to improve an existing charity care policy and to retain current employees at the same rate of pay and seniority.

“It’s a great day for Spokane and health care in this region,” said Ron McKay, chairman of the Empire board of directors.

McKay and CHS officials refused to release financial terms, other than to say that the $100 million community health care foundation would be created from Empire’s net proceeds from the deal. Under Washington state’s hospital conversion law, the public must be compensated for the value of a nonprofit hospital sold to a for-profit buyer.

But a valuation expert who examined Washington’s first-ever nonprofit conversion in Yakima four years ago said Wednesday it’s much too soon to place a price on the foundation.

“That can be anything from cast in concrete to very iffy,” said Jim Greenleaf, president of Greenleaf Valuation Group Inc. of Seattle. “Until you actually sit down and look at the agreement and the funding for the foundation, it’s hard to know.”

State law requires the proceeds to be used to create an independent charitable foundation with a mission to continue regional health care services according to the nonprofit entity’s original values.

CHS has not yet filed documents required for the nonprofit conversion or the certificate of need application that must accompany the process, state officials said Wednesday. The shift, which must be analyzed by the state attorney general’s office and approved by the state Department of Health, could take six months, according to Janis Sigman, manager of the Health Department’s facility certification process.

But Empire officials hope that the regulatory review will go smoothly and that the deal may be complete within “four or five months,” according to Keith Anderson, a health care lawyer who advised the board.

When it’s done, Spokane residents can expect revitalized hospitals and ancillary services ready to recruit new doctors, attract new patients and compete aggressively in the regional health care market, McKay said. About 40 percent of the $100 million in promised investment will go toward capital improvements, and the rest will be targeted toward technology and equipment.

“The community can look forward to a much stronger hospital system,” McKay said.

That was the goal, after all, of seeking a buyer for Empire, which posted a $36 million loss in 2004 and ensuing $40 million turnaround that led the organization to barely break even nearly two years later. Finances have been on firmer footing recently, and board members last year began seeking investors or buyers to maintain the system that began with Deaconess in 1896.

“We think it’s a great deal. That’s why we’ve been working so hard on it,” said Ken Hawkins, an executive with CHS, which owns or operates more than 130 hospitals in 28 states. “It’s got good growth, a lot of employment, it’s a great community.”

Some in the community, however, have raised concerns about selling the nonprofit system to a for-profit buyer. Officials at Providence Health System, the parent company of Sacred Heart Medical Center, have worried that the change would shift more charity care to them.

“Programmatically they can eliminate programs that might have provided for the poor,” Ryland “Skip” Davis, a Providence chief executive, said last week. “It doesn’t officially look like a shift on the surface, but it means that they no longer take a category of patients.”

Empire officials said that charity care policies will be more generous than the existing plan under CHS management, although no one at Empire or CHS could detail what the new policies would be. It also was unclear whether CHS would sign a Washington State Hospital Association charity care pledge approved by all hospitals in the state this year. Hawkins said he hadn’t yet seen a copy of the pledge.

In any case, Empire officials said CHS would have no reason and no means to avoid taking charity care patients.

“Community Health sees the emergency room as the front door of the hospital,” McKay said.

Others have raised questions about the ability of CHS to live up to its financial obligations. The company recently struck a $6.8 billion deal to buy Triad Hospitals Inc., which left the firm heavily leveraged.

In SEC filings, CHS officials have said they’re working to reduce the debt, and that the Empire agreement marks the last acquisition in 2007 and 2008. A CHS spokeswoman said the company has rebounded from similar situations in the past.

“It was more highly leveraged in 1996,” she said. “The company deleveraged and was able to succeed.”

Now that a sales agreement has been reached, it’s up to community members to ensure that the public is properly compensated in the final deal, Davis and others say.

“This is really a community asset that is going through a transformation, and we think the community ought to be involved in its transfer and review,” Davis said.

That message was echoed by Kyle Tanner, a consultant hired by the Empire employees union. Tanner coordinated the campaign to fight Premera Blue Cross’ plans to change into a for-profit company, and he intends to spearhead a similar campaign to question the Empire sale.

Rather than fight the conversion, however, he said he is more interested in ensuring that there’s a fair and open public process that leaves the community with confidence that the agreement was vetted and is best for Spokane.

“It’s not too late to ask the important questions and get some firm answers,” he said. “Our interest is to protect the community benefit Empire provides as well as the patients, workers and physicians.”