July 6, 2008 in City
Empire deal gives foundation liabilities
Pension promises, malpractice claims and other financial liabilities hooked to Empire Health Services would be offloaded to a new charitable foundation established to capture the proceeds of the hospital system sale.
The arrangement, which could drain several million dollars from the new foundation, is worrisome to a citizens group scrutinizing the sale of Deaconess Medical Center and Valley Hospital and Medical Center to Community Hospital Systems Inc.
Empire officials insist the liabilities are fully disclosed, manageable and insurable.
Initial projections had the foundation collecting $100 million from the sale, making it by far the largest grant-making charity in Spokane. Yet continuing financial problems plaguing Deaconess, along with national trends diminishing the value of hospitals, led to a renegotiation of the original purchase agreement that left the foundation with a projected $80 million.
Asking Community Health to absorb Empire’s trailing liabilities – rather than including and funding them through the sale process – would further erode proceeds.
“No question we’d have to take a bigger haircut,” said Keith Anderson, a Chicago attorney hired by Empire who specializes in health care transactions. “If we said to Community Health, ‘You take the $20 million in liabilities,’ it would come right off the purchase price.”
Anderson acknowledged that attaching the trailing liabilities to the foundation is an unusual twist to what otherwise is a straightforward asset-purchase agreement between Empire and Community Health.
The foundation is not getting any less money, but is taking on administrative duties, Anderson said.
“This is not a shell game to create more (debt) exposure for the foundation,” he said. Rather, it’s the cleanest and simplest way to handle the liabilities while routing as much cash as possible into the new grant-making charity.
Although Empire as a corporate entity will continue to exist after the sale of its hospitals, it will be reduced to little more than a name, with no assets and thus no ability to satisfy pension liabilities or pay for insurance to cover malpractice claims and other debts.
Empire will retain membership and board appointment rights in ventures such as the Genetics Clinic, and Inland Northwest Health Services.
Amy Freeman, a Columbia Legal Services attorney working for the citizens group Protect Our Hospitals Coalition, flagged several issues for the Washington state attorney general’s office to consider as it studies the sale.
“The world of liabilities can be huge,” she said, “and we’re questioning whether that’s an appropriate use of the foundation’s time and resources.”
Now is the time to raise such issues, Freeman said.
“While these hospitals will cease to be nonprofit, their nonprofit missions will continue to live on through the work of this foundation.”
Scott Benbow, a philanthropy legal specialist in San Francisco, said saddling a new foundation with old liabilities is an inappropriate use of charitable assets.
“I’ve looked at a lot of health insurance company conversions and I’ve never seen this sort of arrangement,” Benbow said. “A new foundation should be planning its grant-making, not planning its legal strategy to defend itself.”
In this case, Benbow said, the foundation doesn’t even have its own board of directors to fight or even vet the liability issues.
Community members nominated to serve on the foundation include: Garman Lutz, a former Empire senior executive; Dr. Deborah Harper, of Group Health Cooperative; Rodolfo Arevalo, president of Eastern Washington University; Anne Hirsch, a current Empire director and senior associate dean and professor of the Washington State University Intercollegiate College of Nursing; Anne Cowles, a community volunteer and the spouse of Stacey Cowles, publisher of The Spokesman-Review; Dr. Pamela Silverstein, of WomanHealth; Theresa Sanders, economic development director for the city of Spokane; retired physician Dr. Samuel Selinger; Michael Senske, a current Empire director and chief executive officer of Pearson Packaging Systems; and Dr. John Demakas, of Spokane Brain & Spine.
“I would bet that there are not a lot of foundations that would accept these sorts of liabilities, because if there are unforeseen problems, the foundation could get into a real bind over this.”
He suggested that if the trailing liabilities carried a maximum sticker price of $20 million, they should be incorporated into Community Health’s purchase agreement.
In public comments submitted in the sale process, Freeman pointed to a 2002 Lock Haven, Pa., hospital sale completed by Community Health.
In that arrangement, the transfer of pension liabilities bankrupted the health and wellness foundation created by the sale within six years. When the $13.5 million in foundation assets weren’t enough to cover the pension promises, the federal government’s Pension Benefit Guaranty Corp. had to make up the $2.3 million shortfall.
Community Health spokeswoman Rosemary Plourin said what happened in Lock Haven cannot be compared to the pending Empire sale. Lock Haven’s financial problems were more severe and its assets less valuable than those of Empire, she said.
Empire’s pension liabilities are estimated at $5.5 million.
Community Health’s desire for a fresh start with Deaconess and Valley will not trigger such problems.
“This is typical,” she said. “Companies like ours, in these sorts of deals … don’t want to be exposed to unforeseen or undisclosed issues that may be out there.”
The company plans a five-year, $100 million upgrade of the hospitals that will include remodeling and investments in technology.
Empire board Chairman Ron McKay has billed the sale as a last resort, garnering support from stakeholders including physicians, many hospital employees and the business community.
Anything less will result in deep cutbacks or closure of the two hospitals.
Yet the coalition, financed in part by Service Employees International Union 1199NW, has asked regulators to safeguard charity care standards, unprofitable essential services, worker pay, job security and the independence of the foundation, which is expected to carry out Empire’s 112-year-old mission of providing quality health care to the region’s ill and underprivileged.
The foundation, with $80 million in assets, would rank as the largest grant-giving charity in Spokane.
Records with the secretary of state’s office show just a handful of large charitable trusts. Notable among them are the Inland Northwest Community Foundation, with assets of $61.8 million, according to the latest Internal Revenue Service filings; the New Priorities Foundation, with about $4.1 million in assets; the Avista Foundation, with assets of about $3.3 million; the Spokane County United Way, which listed assets of about $2.4 million; and the Quiet Group, with assets of about $5.9 million.