Anyone hoping that a sale of Memorial Health System will replenish the city’s coffers will want to think again.
A major stumbling block — the Colorado Hospital Transfer Act — has thrown into question the very premise that fueled talk of a potential sale.
Under the law, any proceeds from the sale of a nonprofit hospital — such as Memorial — have to be used for a similar charitable cause.
That would dash any hopes of using the proceeds to bolster the city’s general fund.
On the other hand, those hoping for a cash infusion from a sale say the city should be able to reap the proceeds because the law says nothing about municipal hospitals that are nonprofits. To them, that silence amounts to an exclusion from the act.
The question is expected to be settled by the state attorney general’s office.
The Colorado Hospital Transfer Act was adopted to prohibit cities from selling hospitals that provide the majority of charity care in their communities. The fear was that, if these hospitals were sold to a for-profit group or a company headquartered out of state, the indigent would suffer.
The law says the state attorney general must approve any sale of a nonprofit hospital.
That’s why Colorado Springs city attorney Pat Kelly plans to ask Attorney General John Suthers to issue an opinion about whether the law applies to Memorial, since it is both a public hospital and a nonprofit organization.
Kelly has already told the Memorial Commission on Governance and Ownership, which is exploring whether to sell the hospital, that it wasn’t clear to her if the law applies.
“Memorial is a nonprofit, according to the IRS because it (the government) allowed MHS to set up a deferred compensation (pension) plan (for its employees),” she said at a commission meeting last month. “However, it is clear from all historic documents that Memorial is owned and operated by the city.”
Passed in 1998, the Colorado Hospital Transfer Act was the creation of consumer groups, the Colorado Hospital Association and the state attorney general’s office.
Its supporters were spurred into action because of a large number of nonprofit hospital sales to for-profits at the time.
“HealthOne bought Rose, Swedish and St. Luke’s. There was a lot of ferment in the hospital area,” said Ed Kahn, senior counsel at the Colorado Center on Law and Policy, a nonprofit policy research organization.
“Basically, nonprofits had gotten some financial benefit during a period of years from not paying taxes,” Kahn said. “And if a (hospital) system wasn’t valued with that taken into consideration, then the buyer benefited at the expense of the public.”
In other words, buyers were in some cases paying less than the nonprofits were worth.
The law makes sure the public still has access to charitable care, while also giving the government the ability to bless a transaction, to ensure the public isn’t getting short-changed, Kahn said.
The act was used first in 2006, when Sisters of Charity tried to sell its interest in Exempla in Denver to the Lutheran Hospital Foundation for $311 million.
While the attorney general saw no legal problems with the transfer, the deal ended up in arbitration because the board opposed any transaction. The result: no money could exchange hands. The deal finally went through in 2009, after a new board was installed, with Sisters of Charity agreeing to operate all four of Exempla’s Colorado hospitals.
Since then, no complete hospital system has been sold.
The attorney general approved agreements that allowed St. Anthony’s to sell a psychiatric unit. A Boulder hospital sold an addiction center that had been operated as a nonprofit.
Mike Scialdone, chief financial officer for Memorial, said the transfer act is one of the biggest stumbling blocks to selling the hospital.
“We have to find out if it applies, and if it does, it would certainly change the direction of the commission,” he said. “So right now, we’re in a holding pattern.”
To a point, anyway.
Memorial commission Chairman Steve Hyde said waiting for a state attorney general ruling wasn’t holding up the body’s work. “Of course, it is an important piece of information, but it isn’t the only consideration,” he said.
Selling Memorial isn’t a new idea. But it is one that has gained more traction as the city faces ever-tighter budgets.
Memorial, a city asset with a pretty healthy financial picture at the moment, looks like a promising way to transfer money to the city. But it’s only a one-time transfer, as Scialdone noted.
“People have to remember, once it’s sold, it’s sold,” he said. “The city doesn’t get any more benefit than that one-time boost.”
So far, HealthONE and Community Health Systems have publicly expressed their interest in buying Memorial, while other for-profit groups have made inquiries, Memorial officials said.
Memorial is valued at $388 million, according to an estimate provided to the city in 2008.