Memorial: Financial fallout following?

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It’s been a tumultuous week for Memorial Health System and the City of Colorado Springs by anyone’s standards.

The hospital parted ways with its CEO and then fought with City Council over that CEO’s $1.15 million severance package. The City Council then fired the hospital’s board of trustees that approved the severance and will now put the deal under legal review. — And to top it off, there was a public protest at the hospital.

There’s no question it’s been hard on the city and on those involved, but what will all the turbulence mean in the financial arena and to lease negotiations with University of Colorado Hospital?

Memorial CFO Mike Scialdone, who will serve as interim CEO until the handover to UCH, says he has concerns, especially with the replacement of the board of trustees.

In a statement, he said the “unprecedented governance change” posed a major risk to the health system.

“We will begin to work immediately to address these risks, which include a potential change in our bond rating, possible regulatory agency concerns and keeping Memorial stable for an anticipated transition to University of Colorado Health,” he said.

Tim Leigh, one of the most outspoken opponents of the board of trustees, said he shares Scialdone’s concerns — but isn’t too worried.

“We’re all adults here,” he said. “And we’ll act quickly and adroitly with the transition.”

Bond ratings and financial risks

Bond rating agencies, like Moody’s or Standard & Poor’s, look at an institution’s instability when issuing the rating. Last month, Moody’s kept Memorial’s bond rating high, but revised its outlook to negative — based partly on the City Council’s handling of ownership changes.

“We believe this extended period of uncertainty … was a significant driver of the poor operational performance achieved in 2011,” the report said. “Furthermore, there have been cases of public acrimony between city council and the hospital, which we believe further undermines community confidence.”

Credit rating organizations certainly could view last night’s results in a negative light, said Tom Zwerlein, professor of finance at the University of Colorado at Colorado Springs.

“It’s always a possibility,” said Zwerlein. “Bond rating agencies use a set of specific factors to determine bond ratings. When there’s an unusual occurrence, they might well take a look.”

That could be a problem if Memorial has short-term bonds that are rolled over frequently, he said.

“It depends on their bond structure, a lower rating is a problem if they need credit,” he said. “If they only have long-term bonds, then it won’t be an issue until they need to borrow more money. But if they have revolving short-term credit — that is a problem.”

The hospital could be saved a lower bond rating if the UCH deal goes through — then the debt will be refinanced by UCH and its bond-rating will be used.

“Let’s hope that Moody’s is smart enough to realize that,” Zwerlein said. “Of course, it’s up to the voters and we know that voters are unpredictable.”

But Trinity Rodriquez, senior vice president of the municipal finance division at Denver firm George K. Baum & Company, believes the agencies will look at the change quickly.

“You can bet they know the leadership structure, so they’ll look at the change immediately,” he said. “Whether that means there is a downgrade depends on if they view it as a positive change or a negative change.”

The risk becomes one of perception, Rodriguez said, even without a downgrade in credit.

“Memorial might have more of a perception problem in the capital markets,” he said. “And that could require some finesse, some outreach to those markets.”

Regulatory Risk

While the change won’t automatically trigger any regulatory changes, Scialdone said there are always concerns with any change.

“We just have to stay on top of everything, and make sure we are dotting our I’s crossing our T’s,” he said.

Hospitals face a variety of regulatory agencies — the Joint Commission accredits hospitals on a voluntary basis; the federal government Centers for Medicare and Medicaid Services also provides regulatory oversight. In Colorado, the Department of Public Health and Environment is responsible for licensing hospitals.

The switch to a new board could force those regulatory agencies to take a closer look at Memorial, Scialdone said.

“I just think everyone should be aware of that,” he said. “The change in and of itself won’t force any changes in accreditation or regulation, but they will be paying close attention now. People need to realize when you make changes like this, in a complex regulatory environment, there is going to be scrutiny from a number of groups.”

For instance, the Joint Commission’s handbook has 20 pages on governing bodies and their duties. CMS has a likewise detailed regulation for leadership. All of those have to be followed by the new board.

“It’s very detailed,” Scialdone said. “City Council, I know, is working to fill the new board with people who are aware of the complexities in health care.”

Negotiations

Another issue that could arise: problems with negotiations to lease Memorial Health System. Publically, everyone involved with the negotiations says the process is moving quickly and smoothly. UCH says it is committed to the deal and to the Springs.

Privately, some wonder if the price tag could be lower because the hospital’s key leadership — those who know it best — has been questioned and removed.

“I would think UCH has the upper hand,” said Allan Roth of WealthLogic, a financial planning organization. “The issues with the bond rating could definitely tip the scales in their favor. They know we need this deal to go through.

The issue is one of power, said Ken Sylvester, professor of negotiations at UCCS, who’s been part of several national business and legal dealings.

“And in this case, UCH might have all the power,” he said.

However, one thing he’s learned in 42 years in the business — every deal is different. And in this one, the details are murky because of the stage in the negotiations.

Since only the people involved in the negotiation know the details, it’s hard to say who has the upper hand, he said. But too much uncertainty will create an imbalance at the negotiating table.

Sylvester was involved in the Microsoft anti-trust case, and said Microsoft’s stance was that the market would drive the legal decision. The Supreme Court held a different opinion, and the software giant lost the battle.

The lesson: it’s a mistake for Memorial negotiators to assume that UCH’s wants in the market badly enough to deal with political and leadership uncertainty.

One thing might delay the whole process, he said. Legal action.

“If this ends up in the courts, it could put the whole thing off,” he said. “At the very least, it’s another thing to negotiate — who will pay those legal bills.”

However large the board’s removal and McEvoy’s severance loom now in public minds, Sylvester says their neither new nor overall, important.

“Group interests versus individual interests — that’s at the heart of every conflict,” he said. “And there is some risk here. However, I think this is not a big problem. It won’t even be talked about in a week.”