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Auditor will examine Empire Health assets

Fri., May 16, 2008

Washington state officials have hired a large auditing firm to ensure the $156 million sale of Empire Health Services is fair.

It’s a move applauded by watchdog groups concerned that the purchase by for-profit hospital chain Community Health Systems Inc. includes sweetheart provisions that undervalue some of Empire’s key assets.

Among them: Empire’s stake in Inland Northwest Health Services, the successful Spokane enterprise that runs St. Luke’s Rehabilitation Hospital, the MedStar air ambulance service, and a lucrative electronic medical records business.

If Empire doesn’t collect a fair price for those assets, it could mean less money for future health care services to Spokane’s poor.

The electronic medical records business – Information Management Resources – was developed by Inland Northwest Health Services. A decade later, it has evolved into a $45 million success story expected to grow.

Nicholas Straley, an attorney with Columbia Legal Services that represents a diverse group of community churches, charities and unions, wants state officials to ask KPMG International, the accounting firm hired by the state, to separately value INHS’s services to achieve full-market price.

“What we have right now appears to be a for-profit company trying to access valuable services developed by a nonprofit organization without paying a fair price,” Straley said.

“If Community Health Services wants to use that technology, they should pay for it.”

INHS has proved to be a thorny issue in the sale. Empire Health officials exchanged tart letters with their counterparts at Providence Health Care regarding its future.

The competing hospital systems collaborated more than a decade ago to found INHS. The idea was to curb losses relating to air ambulance services and rehabilitation patients, and to invest in electronic records managements.

Fourteen years later, INHS is an important community organization with more than 1,100 employees and annual revenues exceeding $130 million, said Chief Executive Officer Tom Fritz.

Providence is concerned that this unusual collaboration will unravel if Community Health takes over Empire’s governance duties. The Catholic health system that owns Sacred Heart Medical Center, Holy Family Hospital and other facilities has offered to buy Empire’s INHS share for more than $25 million.

Empire considers its stake in INHS a hard-earned asset that bolsters its sales price, and thus the worth of a new community health care foundation that will be created with part of Empire’s proceeds from the sale.

Community Health spokeswoman Rosemary Plourin said the INHS functions are impressive.

“We recognize the benefit its continued operation brings to the community,” she said.

According to state records, Empire pays about $5.2 million a year for electronic records services provided by INHS. That’s $3 million to $5 million below market value – a substantial amount of money to a chronically cash-strapped hospital system – according to an analysis done for the Empire board of directors.

Community was poised to inherit that INHS discount before critics complained.

While some speculate that Community seeks to quickly “monetize” the electronic medical records system and turn a profit — perhaps through a sale or licensing deal — Empire board Chairman Ron McKay says that’s nonsense.

“It’s really about (Community Health) having equal and fair access to INHS services,” said McKay, who also serves as board chairman of INHS. “They consider that to be essential for this hospital system.”

Community signed a long-term contract with a another electronic records company in January to meet the needs of its 128 hospitals stretched across the country.

What’s more, he said the charitable foundation set up in the wake of Empire’s sale would capture any dollars earned should the INHS board spin off the electronic records business or convert to a for-profit business once the sale is completed.

Fritz said while Empire and Providence share a common interest in INHS, neither is considered an “owner” with an equity stake or right to demand dividend payments.

It makes an outright valuation of Empire’s share tough to develop, Fritz said.

Straley said he hopes KPMG tries.

“We feel it would provide the most accurate and responsible valuation of Empire,” Straley said. “No one is saying this deal can’t go through. We are saying it should be done in a way that best serves the public interest.”

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