AG: Sale of Memorial to a for-profit won’t make city richer

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The city won’t be made any richer from the sale of Memorial Health System to a for-profit hospital, but could reap the proceeds if it sells Memorial to a nonprofit system.

That’s the word from Colorado Attorney General John Suthers, who presented his determination Tuesday afternoon at a meeting of the Commission on Governance and Ownership of Memorial Health System, in an opinion that could influence how the city moves forward.

Suthers said that based on his reading of the Colorado Hospital Transfer Act, Memorial is a nonprofit.

Suthers

Suthers

That means the proceeds of a sale to a for-profit entity would have to be “given to a charitable entity with essentially the same charitable purpose as Memorial, ” Suthers said.

If, on the other hand, the commission decides to transfer the hospital to another nonprofit, the city most likely ends up with the money.

About two months ago, City Attorney Pat Kelly had asked Suthers to rule on whether the act applied to Memorial. The commission is tasked with making recommendations to the city council about the future of the hospital.

While Colorado law might not dictate what happens to the money in case of a sale to a nonprofit, the IRS might want a share of it.

Neither Suthers nor Larry Singer, a health care consultant recently retain by the commission to help it do its job, were sure what the tax implications might be from such a sale.

The city might also have to be sure to include certain provisions in a deal with a nonprofit, including provisions that the hospital can’t be closed and that it will still see the same level of indigent patients, said Ed Kahn of the Colorado Center on Law and Policy.

Memorial is valued at $388 million, according to a 2008 estimate produced for the City Council’s Sustainable Funding Committee.

The hospital transfer law was passed in 1998 after a flurry of sales of nonprofits to for-profit systems, out of fear that access to care for the indigent would be affected.

Memorial obtained 501(c)3 status from the IRS in 1978, classifying it as a nonprofit.

The Colorado Hospital Transfer Act does not define what constitutes a “nonprofit entity,” although “for-profit” is defined, Suthers said.

“Our conclusion is that this means the legislature intended for purposes of the act that ‘non-profit’ includes all hospitals not defined as ‘for profit,’” Suthers said in his presentation to the board.

Kahn said he agreed with the attorney general’s opinion that Memorial was a nonprofit – and was subject to the transfer act.

“I agree with that completely,’ he said. “And it’s clear that proceeds from the sale have to be used for a health care foundation.”

Suthers, however, said there was room for argument.

He said the IRS approved Memorial’s nonprofit status, but at the same time determined it was not a private entity required to file IRS Form 990, as all other private nonprofits must.

Suthers said an argument could be made that Memorial is a “government instrumentality” and not a nonprofit, and that failure to define the term doesn’t mean government instrumentalities are nonprofit.

However, he stood by his opinion.  The act classifies all state hospitals with two designations: for profit or nonprofit. Since Memorial isn’t a for-profit hospital, it automatically falls into the other category, he said.

Similar hospitals in other states have been considered public, nonprofit entities, he said.

Carm Moceri, chief medical officer for Memorial, said the hospital did not have an opinion about the AG’s decision.

“This isn’t our area; it’s for the commission,” he said. “We’re glad that he issued an opinion because that directs the commission’s work. But we haven’t been asked what direction we would like to see the hospital move in.”

If area voters, who have the ultimate say in what happens to Memorial, decide to sell the hospital system to a for-profit, the AG will review the transaction to make sure it is in the public interest and access to health care services in the community will continue at the same level.

He will review the sale to make sure:

  • No officer or director of Memorial Hospital benefits directly or indirectly form the proceeds.
  • Memorial used due diligence in selecting the purchaser and negotiating appropriate sale terms.
  • Proceeds of the transaction are equal to the fair market value of the hospital and re-distributed to one or more 501(c)3 organizations. Each of those organizations must remain independent of the hospital and its governing body.
  • Recipient organizations must meet provisions prohibiting conflicts or interest and self-dealing by their officers and directors.
  • The charitable mission receiving proceeds “shall reflect the historical charitable purpose of the nonprofit entity proposing the transaction,” according to state law.

If they disagree, the city or Memorial may now seek a declaratory judgment from the district court clarifying whether the act applies.

Suthers did not take any option off the table, Singer said.

“But he possibly made some options look less favorable,” he said. “I think it’s safe to say the for-profit option looks less favorable right now.”

Click here to read Suthers’ analysis.