Memorial task force exploring lease-payment options

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The Memorial Health System task force is exploring options for leasing the hospital’s assets to a nonprofit organization and what kind of payments it should expect, but finding that answer hasn’t been easy.

In other markets, hospital lease payments are as varied as the communities developing them, ranging from free rent to $17.5 million annual payments.

Some cities just want to be free from hospitals that are bleeding red ink. Some want to encourage growth within the health care system, and some want the fair market value for the assets leased.

The lease payments are the latest detail to be ironed out in the roughly 16-month discussion about how to change Memorial’s ownership structure.

The latest plan is to lease the asset to a nonprofit — still to be organized — for annual rent, and a guarantee of services to the poor.

Memorial is arguing that the payments should reflect the charity care and unprofitable services — such as women’s health care — that the hospital already provides.

Council member Merv Bennett is hoping for an outside opinion — someone to give him a dollar amount reflecting what the hospital is worth.

But that might be easier said than done.

There isn’t a set standard for government leasing hospitals to nonprofits — or to for-profit systems.

At Poudre Valley Health System in Fort Collins, the annual lease payment is $330,000, equal to the debt payment at the time of the lease. Even though the debt has been paid, the payments remain.

At Carson-Tahoe Medical Center in Nevada, the lease payment is $1 — and that’s after the city turned down a multi-million dollar sale offer from a for-profit system.

“You really aren’t going to find a single formula,” said Larry Singer, the Chicago-based consultant that is leading the task force through the process of deciding Memorial’s fate. “These decisions are, in large part, political, not economic.”

The Carson-Tahoe decision to create a nonprofit and lease the assets was done because the community wanted to keep the hospital locally owned and controlled, he said.

“These people weren’t stupid, they didn’t value the asset at $1,” he said. “They leased it for $1, because they recognized the continued value to the community.”

And in some cases, counties are actually paying nonprofits to make sure health care is provided to poor residents. In Fresno, Calif., the county transferred its hospital to Community Health System, a private, nonprofit hospital system. Contract terms required Fresno to pay Community $17.5 million annually, to cover indigent care. In return, Community paid Fresno a single payment of $36 million to lease the facility and its inventory.

As in nearly all the cases, Community agreed to continue services — AIDS care, burn care, neo-natal intensive care and trauma care. It also agreed to provide health care to prison inmates. And if Community becomes a for-profit system, the county can reduce its payments for indigent care.

Typically, hospital leases fall into two categories, he said.

The first is that the group leasing the assets is essentially buying the cash flow of the business — they make a payment and then keep the money from the business. Singer said that sort of lease required bringing in valuation firms to determine the exact market value of the asset.

“My sense is that Colorado Springs is looking at the other kind of lease,” he said. “It’s not about cash flow, it’s about keeping the city involved in operations — making sure the group performs as it says it would, still provides care, keeps all its lines of service, no matter how unprofitable.”

That’s harder to put a dollar figure on, he said.

“I really believe we’ll find, as we start to research this, that the vast majority of leases are $1,” he said. “Communities want to keep the services; they want something more than just the physical plant back at the end of the lease.”

Colorado Springs already has a $1 lease system in place. It leases part of the Colorado Springs Airport to Peterson Air Force Base — all for $1 a year.

“That thinking shows that the city understood the economic impact of Peterson and wanted to foster it,” Singer said. “That’s the same kind of thinking here. Memorial stands to have a greater economic impact under a different governing system. The city wants to embrace that.”

Chances are slim that the city will recommend a $1 lease for Memorial’s assets, which were valued at $388 million in 2008 by the Sustainable Funding Committee.

The first task force asked for $5 million immediately with additional payments based on the profit of the hospital system. That money would have gone to a health care foundation. The current task force is considering $1 million a year, which the city could use as it chooses.

But Chris Blees, president of the local accounting firm Biggs-Kofford, believes the city should look at Memorial more as a business.

“The best way to determine the lease amount is to let the market decide,” he said. “Put an RFP out there and see what other groups would lease it for — we know there’s interest.”

Blees’ proposal is based on current commercial leasing practices.

“That’s what you do when you have commercial space,” he said. “Say you have the only office space downtown, and you aren’t sure what to charge per square foot. You put it out there and see what the market will bear. That’s what we should do here.”

Blees said he isn’t opposed to leasing Memorial’s assets to a newly created nonprofit, but he does believe the city should find out what others are willing to pay to lease the hospital.

“That way, you can go back to the nonprofit and tell them — this is what the market will bear,” he said. “This is what you should pay.”

Lease structures vary

In 1981, half of the hospitals were city- or county-owned, according to the National Association of Public Hospitals and Health Systems. Today, only 10 percent are. Government oversight remains at the majority of them, however, thanks to lease terms, board members and service agreements.

Grady Memorial Hospital Corp. in Atlanta, leased the assets of the former Fulton-Dekalb Hospital Authority for $2.5 million the first year and an additional amount annually, not to exceed a 3-percent increase a year for the next 40 years. The lease agreement generated $200 million from the Robert W. Woodruff Foundation and $5 million from Kaiser Permanente.

Tampa General Hospital was formerly operated by the Hillsborough County Hospital Authority and became an independent nonprofit in 1997. The hospital, which had total revenue of $993 million, leases the asset for a dollar, but the hospital authority maintains a “monitoring role,” and makes sure Tampa General provides indigent care that equals 24 percent of its total budget.

University Medical Center in Fresno, Calif., the county transferred its hospital to Community Health System, a private, nonprofit hospital system. The new entity was called University Medical Center. Contract terms required Fresno to pay Community $17.5 million annually to cover indigent care. In return, Community paid Fresno a single payment of $36 million to lease the facility and its inventory.

Regions Hospital in Minnesota, the legislature created two nonprofits to merge assets — and no cash exchanged hands. Regions Hospital in St. Paul moved from county ownership to a stand-alone nonprofit, then merged with HealthPartners, another private health corporation. The merger had to be approved by the state.

Desert Regional Medical Center in Palm Springs was leased to Tenant HealthSystem, a private, for profit system. Tenant paid $15 million for the 30-year lease and agreed to retire more than $100 million of the hospital’s long-term debt. Tenant competed with HCA and Eisenhower Medical Center to partner with the hospital.