Sell, lease or do nothing? Memorial has some options

What to do with Memorial?

For months now, the future of the city-owned hospital system has been the subject of debate, both on the Citizens’ Commission on Ownership and Governance of Memorial Health System and in the community at large.

Often the debate is phrased as “selling off Memorial,” but selling the hospital is not the only option. Before the Memorial commission recommended hiring Chicago health care expert Larry Singer as a consultant, he laid out the basic options: Sell it to a for-profit, sell it to a nonprofit, spin it off as an independent nonprofit, lease it, or affiliate it with another hospital system. At Tuesday’s commission meeting, Chairman Bob Lally said he wanted to hear from a public hospital system that became a nonprofit.

Memorial CEO Larry McEvoy declined to reveal the health system’s preferred ownership and governance structure, saying he would respond in detail after the commission requested Memorial’s opinion.

“Remember, we’re trying to respond to a community conversation rather than have the community conversation respond to what we’re trying to do,” he said.

McEvoy said the uncertainty surrounding health care makes a strong case for changing, not selling, Memorial. But the public will have to be discerning, he said.

“Like if you go from Toyota to Ford to Chevrolet to Hyundai, all of them are going to tell you, ‘Man, we got a great car. It’s a great value. It’s got these things. You’re going to love it.’ There’s kind of a sell aspect here on these models from different perspectives that I think the readers and the public will want to reflect on in some detail,” he said.

The city isn’t obligated to sell Memorial or spin it off. Even if the citizens commission favors a change in ownership, it would still be up to the city’s voters to approve any sale.

Larry Gage, president of the National Association of Public Hospitals and Health Systems, said Colorado Springs is in good company as it ponders whether it’s smart for the city to own a hospital.

“There are very few pure city or county hospitals left compared to 20 or 30 years ago,” Gage said. “It’s a trend that’s clearly not letting up.”

Industry analyst Jim Hertel, who publishes the Colorado Managed Care newsletter, said the unpredictability around health care is prompting many organizations to consider selling.

“Any existing owner of a health care system has to be nervous about the future viability of that organization given the changes that appear to be ahead of us,” he said.

Following are some of the likely options for the hospital system and what each might look like. The list isn’t exhaustive, and it includes some options not mentioned by consultant Singer but that have been mentioned by others in the community. Also, the commission could come up with other options as its work continues.

Sell to a for-profit corporation

This is the option most people think of when the talk turns to “selling Memorial.” In some ways, it would work very much like selling a house or a car: A big hospital corporation would write a check and take the keys.

What the city of Colorado Springs could do with that check is unclear: A Colorado law requires that money from selling a nonprofit hospital to a for-profit be used for charitable purposes. Colorado Attorney General John Suthers is reviewing whether Memorial qualifies as a nonprofit under the law and will present his findings to the Memorial commission on May 25.

A number of big, for-profit hospital systems have already expressed interest in buying Memorial, notably Franklin, Tenn.-based Community Health Systems and Denver-based HealthOne. Community Health Systems is a Fortune 500 company, with 120 hospitals in 28 states.

HealthOne is a joint venture owned equally by for-profit health care giant Hospital Corporation of America (HCA) and the nonprofit Colorado Health Foundation. In 1995, each partner put its Denver-area hospitals into the combined company. HCA gets a share of the profits, while the foundation’s share is ploughed back into the community in the form of grants dedicated to improving Coloradans’ health.

“That makes us unique — we are private, for-profit at the same time we are nonprofit,” said Linda Kanamine, HealthOne’s vice-president of marketing and public affairs.

And she makes no secret that HealthOne would like to add Memorial to its portfolio.

“HealthOne would only go in there if it were right for the community and right for HealthOne,” Kanamine said. “We are, on that note, obviously very interested.”

Hertel said other public hospitals have been sold to for-profit corporations.

“There are a number of examples across the country where nonprofits in Boston and Detroit sold to for-profit entities who believe they can successfully manage those organizations in the new environment where the prior owners did not,” he said.

But a sale, whether to a for-profit or nonprofit, comes with no guarantees of service, he said.

“Often times in situations like this, some believe that they can make a transaction that puts someone else’s resources at risk while still maintaining control of an entity,” he said.

“It’s one thing for me to sell you my car and expect you to make oil changes every 5,000 miles because that’s good for the car, but once I sell it, it’s going to be difficult for me to have you send me a schedule showing that you made the oil changes,” he said.

Another possible wrinkle could be working with a for-profit corporation that partners with nonprofit hospitals — doing on an individual basis what HealthOne did statewide. One example is the county-owned Portneuf Medical Center in Pocatello, Idaho. Portneuf partnered with Plano, Texas-based for-profit LHP Hospital Group in an agreement where control of the hospital is split evenly, even though Legacy holds a majority of the ownership. The deal gave Portneuf the money to build a $200 million expansion.

Selling Memorial to a for-profit would end Memorial’s affiliation with PERA, the public employee retirement plan, affecting thousands of employees. If Memorial was sold to a nonprofit, the nonprofit would have to commit to funding the pension plan at the same rate, according to Colorado Springs City Attorney Patricia Kelly.

Become a nonprofit

A nonprofit Memorial might look very much like Memorial does today, but it would answer to an independent board, not the City Council, and the city would not be financially liable for the hospital.

Lally, chairman of the citizens’ commission, said Tuesday he plans to call officials at the Poudre Valley Health System in Fort Collins this week to ask them to appear before the commission to share their experience.

Poudre Valley is a two-hospital system that operated as a public hospital district until 1995 when it reorganized into a nonprofit that runs the system under a 50-year lease from the district.

“The one that’s kind of popping up the top right now is Poudre Valley as a system that we ought to consider precedence-wise,” Lally said. “They went through a process and they made some adjustments to their governance and ownership.”

Lally said commission members and others, including Memorial staff, have touted Poudre Valley as “someone we should engage.”

Although he wouldn’t go into specifics, McEvoy acknowledged in a recent interview that Memorial officials have talked about transforming the health system into an independent non-profit.

“We’ve discussed that as alternative that might be highly beneficial to the community,” he said.

Become a hospital authority

One way to spin Memorial off from the city while maintaining local control and accountability would be to form a hospital authority — a quasi-governmental entity — that looks something like Denver Health.

Until 1997, Denver Health, which includes Denver Health Medical Center along with a system of clinics and other services, was a department within the city of Denver. At that time, the hospital system was spun off into an authority — with a board appointed by the city’s mayor. Peg Burnette, Denver Health’s chief financial officer, said the city and the hospital still work closely together, with the hospital providing functions like medical care at the jail and paramedic service, while the city gives the hospital money to care for patients without insurance. Burnette said creating the authority allowed the hospital to react more quickly, without going through a political process for every decision, and absolved the city of financial liability for the hospital.

It’s been a good arrangement, Burnette said.

“From the average citizen’s perspective, I would say they still see Denver Health as part of the city or integrally connected with the city,” she said.

Denver Health has operated in the black since 1991, Burnette said. The authority was given the ability to levy a sales tax in 2008 to comply with changes in Medicare regulations, but hasn’t actually levied any taxes yet and would need to get voter approval before it did.

McEvoy said he suspects the commission will consider an alternative similar to Denver Health.  

“Those models are inevitably funded and one of the issues, I think, of pride both within Memorial and in the community around Memorial is that this has been community health care, but the community has never had to fund it” with tax dollars, he said. “So, I think there will probably be a conversation with regard to how would you build a health district because that’s a category, not a specific solution, and if you did, who would fund it.”

Join a non-profit network

Another model would be to sell or lease Memorial to a non-profit group. Banner Health of Phoenix, Ariz., owns or operates 22 hospitals in seven Western states, including four in northern Colorado. Banner spokesman Bill Byron said Banner would be interested in acquiring Memorial through a lease agreement or a lease-purchase deal, although he said there have been no discussions with Memorial.

“We’re very interested in Colorado because Colorado has been a wonderful area” for us, Byron said.

Colorado Springs’ other hospital system, Penrose-St. Francis Health Services, offers an alternative example of a non-profit network. Penrose-St. Francis is part of Centura Health, the state’s largest hospital network.

Centura’s hospitals enjoy the benefits of a big system when it comes to negotiating contracts and finding efficiencies, but they’re still responsive and responsible to their local communities, said Margaret Sabin, Penrose-St. Francis’ president and CEO.

Centura operates as a management company — the hospitals in the system are still legally owned by Centura’s sponsors, Catholic Health Initiatives and Adventist Health System. At least theoretically, CHI or AHS could buy a hospital system like Memorial and then merge it into Centura, or Memorial could become an independent nonprofit and then decide to partner with a network like Centura.

Don’t change a thing

So maybe nothing happens and Memorial continues on exactly as it has since 1943, the year it was purchased by the city.

If so, Colorado Springs wouldn’t be the only city in the country hanging onto its hospital. West Tennessee Healthcare, based in Jackson, Tenn., is jointly owned by the city of Jackson and Madison County. It has 5,000 employees, about the same as Memorial, its largest hospital has about 600 beds, the same as Memorial, and, according to communications director Beth Naylor, locals often talk about selling it off. The same as Memorial.
“There’s been rumblings in the community since the hospital was first built in 1950,” Naylor said.

Nevertheless, she said, the city and county have no plans to sell the system.