Memorial sale could create heavy-hitting health charity

What could an extra few hundred million dollars mean for health care in the Pikes Peak region?

That’s a question the Citizens’ Commission on Ownership and Governance of Memorial Health System will ponder in the coming weeks as it decides whether to recommend selling the city-owned hospital system.

Last month, Colorado Attorney General John Suthers gave an advisory opinion that a sale of Memorial to a for-profit company would require the proceeds to be used for charitable purposes, in accordance with the state’s Hospital Transfer Act. Had the attorney general’s opinion gone the other way, the city could have sold the hospital system to the highest bidder and used the money for whatever it pleased: potholes, community centers or tax cuts.

That’s off the table now, but the question remains, what could a richly endowed charitable foundation do for the community?

“That would be one of the greatest gifts the city could give to its citizens,” said Thayer Tutt Jr., president and chief investment officer of El Pomar Foundation, the region’s largest charitable foundation. “That’s a good investment in the community... not good — that’s a great investment.”

Tutt said a hypothetical $400 million foundation — to pick a number in the middle of the generally accepted range for Memorial’s value — would generate roughly $20 million a year in grants dedicated to improving health care in the community.

“To me, the idea of having $20 million new dollars to address the health care needs of the Pikes Peak region would be tremendous,” he said. “That’s ($20 million) every year, not just one year. That’s a lot of money.”

Steve Hyde, a health care consultant who served as the commission’s chairman before stepping down May 3, said the commission should absolutely continue to consider selling the system to a for-profit. Memorial is a valuable asset worth as much as $500 million, Hyde said in an e-mail, and a foundation is one way to preserve that value.

“One could argue (and I do) that the proceeds of a sale — whether to a for-profit or not-for-profit organization — should continue to produce long-term benefits for this and future generations of our citizens, not just those lucky enough to be living here at the time of a sale,” Hyde said.

Larry Singer, the Chicago lawyer the commission hired as an expert consultant, said the attorney general’s ruling limits the city’s options. It doesn’t, however, take a sale off the table and that the commission will consider the pros and cons before it makes its recommendation, he said.

“Some people had an initial reaction that, ‘Oh well, the attorney general removed a sale as an option — he absolutely did not,” Singer said. “It may be less attractive to your community if people thought those monies could be used for something else. He certainly didn’t say it couldn’t be sold, it’s just the proceeds couldn’t be used for a particular purpose.”

The state’s Hospital Transfer Act requires that the proceeds of a hospital sale be used for purposes in line with the mission of the original institution. In Memorial’s case, that likely means the money from a sale would have to go into a type of nonprofit called a hospital conversion foundation that would focus on making grants to support health care.

Health care is a pretty broad topic, however, and similar foundations in the state are finding plenty to keep themselves busy. There were three big foundations in Colorado established after the sale of non-profit hospitals, each worth hundreds of millions of dollars and each spending millions every year on health care and related causes in the state.

“We’ve got some good examples (of hospital conversion foundations) that are very successful,” Tutt said. “We don’t have to reinvent it here.”

The oldest of the three is The Colorado Trust, established in 1985 after the nonprofit PSL Hospital Corporation, which owned the Presbyterian and St. Luke’s hospitals in Denver, was sold to a for-profit corporation for $191 million. In the 25 years since, the trust has given away more than $300 million in grants for a wide range of activities meant to improve health care and access to health care. Despite the giving, the trust still has assets of about $400 million, said John Samuelson, The Colorado Trust’s chief financial officer.

The Internal Revenue Service requires private foundations like The Colorado Trust to give away at least 5 percent of their assets every year (that’s why Tutt assumed a $400 million foundation would generate approximately $20 million a year in grants). That means that foundations require careful management to maintain and grow their endowments, Samuelson said.

“In order to do this year after year, forever, you have to pay out 5 percent, you have to earn enough to cover inflation and you need to keep the lights on,” he said. “You’ve got to earn between 8 and 9 percent every year. That’s not an easy thing to do.”

The Rose Community Foundation, formed in 1995 after the sale of Rose Medical Center for $170 million, has a more varied mandate than The Colorado Trust. The Rose Community Foundation, with assets of $250 million, splits its grant-making among aging, child and family development, education, health and Jewish life (because of the Rose’s roots in Denver’s Jewish community). The foundation’s founders took a broad view of the hospital’s legacy, said foundation president and CEO Sheila Bugdanowitz.

“They felt that a community hospital doesn’t deal only with sick people, they were thinking about the health of a community,” she said. “The nonprofit community was thrilled to know that we weren’t going to be just health care.”

The Colorado Health Foundation, the state’s third big hospital conversion foundation, was formed in 1995 when the for-profit Hospital Corporation of America combined its Denver-area hospitals in a joint venture with the nonprofit HealthOne, which also owned several hospitals in the Denver area. The Colorado Health Foundation owns half of the partnership and has assets worth about $950 million. Officials at HealthOne have expressed an interest in buying Memorial if the city decides to sell the system.

Colorado Springs is home to another hospital conversion foundation, the Colorado Springs Osteopathic Foundation, which was formed in 1984 after the sale of the Eisenhower Osteopathic Hospital. For most of its existence, the foundation ran training programs and clinics, but became strictly a grant-making organization last year, executive director Doris Ralston said.

At $7.5 million in assets, the osteopathic foundation is far smaller than the big Denver-area health foundations, but there’s a greater demand for nonprofit services than ever in the Pikes Peak area, Ralston said, and no shortage of work for foundations to do.

“The service demand has increased dramatically” at area nonprofits, Ralston said. “They’re struggling to figure out how to service everyone that has needs.”

All of those foundations were established before the Hospital Transfer Act was passed in 1998. The act imposes additional requirements and review on hospital sales, although the process of setting up a foundation remains the same.

Millions more for health care in Colorado Springs sounds great, but a sale means losing control over Memorial, and the community may not be willing to give that up, Singer said.

“There’s no free lunch,” Singer said. “There’s no outside group that will come in and rain money on the citizens of Colorado Springs and not try to earn some of that money back. You have to weigh, ‘What is the value of local control or local responsiveness? What is the value of having a foundation versus what you’ve given up?’ There’s always a cost to these things.”

Memorial CEO Dr. Larry McEvoy said through a hospital spokesman that there have been no internal discussions about the pros and cons of a potential conversion foundation.

Ralston, director of the osteopathic foundation, said she’s undecided on whether the city should sell Memorial, but said the area can benefit from either scenario.

“I think it’s a noble and honorable way to go, if they sell Memorial, our community will still benefit if they decide to form a private foundation,” she said. On the other hand, she said, “Memorial serves a vital role, they take care of a lot of the uninsured in our community. Our community would have to figure out how they were going to handle that.”

Finally, it’s important to remember that selling Memorial to a for-profit corporation is just one of myriad possibilities the citizens commission is looking at as it works toward making a recommendation on the hospital’s future by November. Selling the system to a non-profit group would come with fewer requirements from the Hospital Transfer Act, while spinning it off as an independent nonprofit or as a hospital district would be far less complicated — but would also come without the pot of gold that a sale would bring.

Whatever the commission recommends, it’s the citizens of Colorado Springs who will decide at the ballot box whether selling, transferring or spinning off the hospital system is really the best deal for the city.
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Call the writer at 636-0275

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Health care foundations

When a nonprofit hospital or health system is sold to a for-profit corporation, the proceeds go into a charitable foundation. There are about 200 such foundations nationwide and five in Colorado. If Colorado Springs sold Memorial Health System to a for-profit company, a new or existing foundation would manage the money.

Caring for Colorado Foundation
Founded: 1999 from the sale of the sale of Blue Cross-Blue Shield of Colorado to Anthem
Assets: $125 million

Colorado Health Foundation
Founded: 1995 from the merger of HealthOne with Hospital Corporation of America’s Colorado hospitals
Assets: $950 million

Colorado Springs Osteopathic Foundation
Founded: 1984 from the sale of Eisenhower Osteopathic Hospital to Summit Health
Assets: $7.5 million

Colorado Trust
Founded: 1985 from the sale of the PSL Hospital Corporation to American Medical International
Assets: $400 million

Rose Community Foundation
Founded: 1995 from the sale of Rose Medical Center to Hospital Corporation of America
Assets: $250 million
Source: Grantmakers In Health