The biggest Connecticut business news of 2014 was the decision of for-profit Tenet Healthcare Corp. to withdraw from its planned acquisition of five financially challenged nonprofit Connecticut hospitals (Waterbury, St. Mary’s, Bristol, Manchester and Rockville). My first thought upon hearing the news was that Connecticut had “grabbed defeat from the jaws of victory.”
Upon reflection, I found some solace in the old saw about “finding a silver lining in every dark cloud,” hoping that the lining within this thunderhead is a wake-up call that nudges our regulatory apparatus back into equilibrium.
For readers not familiar with the matter, Tenet is the publicly traded owner and operator of 80 hospitals in 14 states, and it would have brought to Connecticut a massive injection of capital and operating efficiencies derived from service consolidation and its national buying power.
Waterbury Hospital was the first hospital in the acquisition queue, but on Dec. 11, Tenet walked from that deal (and the others) because of onerous regulatory conditions imposed by the state. The conditions would give even first year MBA students heartburn.
Here are just a few examples: no reduction or relocation of inpatient or outpatient services for five years; no termination of certain identified service lines for seven years; no clinical workforce reductions for five years; and no increase in pricing levels for services, pharmaceuticals, or supplies for five years.
The decision to withdraw was no small potatoes as Tenet and these hospitals had both invested over two costly years of effort in negotiations and discussions.
While for-profit hospitals are increasingly common, the only for-profit in Connecticut is Sharon Hospital, which was sold to a for-profit operator in 2002. I represented Sharon Hospital in that transaction so the three comments that follow are derived from having been through the legal and regulatory thicket.
First, something is backwards.
The imposed conditions are really operating covenants (though not this severe) that a person bringing money to the closing table (a lender or an equity investor) might attach to a loan or investment in a company. But here we have the reverse — the party bringing the money to the table (Tenet) is being told how it must use its own money to operate in Connecticut.
The word chutzpa comes to mind — though regulatory dyslexia may be a more accurate description if we contrast driving away a company bringing its own money to the state to preserve five vital institutions with the multiple millions the state has doled out to other for-profit businesses such as Cigna ($71 million), ESPN ($25 million), NBC Sports ($20 million) and Pratt & Whitney ($400 million in tax credits) to keep or attract them here.
Second, when it comes to the issues of the uninsured, charity care, community benefit, an open emergency room and the like, the operations of for-profit and nonprofit hospitals have become so indistinguishable that members of Congress have actually questioned why nonprofits still deserve tax-exempt status.
Moreover, the term nonprofit is a misnomer because even nonprofit hospitals must operate with a financial profit or they will fail (the five nonprofits could never abide by the conditions imposed on Tenet). Both types of hospitals are paid by a combination of private insurance, Medicare and Medicaid (hospitals must treat Medicare and Medicaid patients even though both programs reimburse at rates below cost).
For-profit hospitals and their shareholders pay tax on profit earned and distributed as dividends at an average state and federal integrated rate of 56.5 percent. For-profit hospitals pay local property taxes and nonprofit hospitals do not.
Finally, the money for-profits pay to buy the assets of nonprofit hospitals (Tenet would pay market value for the assets in addition to its future capital commitments) stays in the community in a charitable foundation to support area health needs. The community retains an asset of equal value to the hospital (the foundation) and still has a hospital.
Third, let’s contrast the NAACP’s input into the Waterbury Hospital regulatory proceedings (it was a formal intervener), to the remarks Tom Swan, the executive director of Connecticut Citizens’ Action Group (CCAG), delivered after Tenet announced its withdrawal.
The NAACP rightfully pointed out the critical challenges facing the Waterbury community — high rates of child poverty, low weight babies, unemployment, and teen pregnancy. Mr. Swan was quoted as follows in the CT Mirror: “Tenet has confirmed our worst fears about their intentions to plunder Connecticut’s hospitals and that they were not serious about addressing the health needs of our families.”
Let me see if I have this right. The community of needy Waterbury families is currently being serviced by two financially challenged hospitals. The state’s finding of fact noted that Waterbury Hospital had five consecutive years of losses from 2006 to 2012, ranging from $2.5 million to $17.8 million, had defaulted on bond covenants, and had been impeded by limited access to capital, inadequate reimbursement, aging facilities and an accrued pension liability. Plunder what Mr. Swan? The socially afflicted families are the folks most damaged by what happened here.
Only time will tell if this massive defeat wakes us up in time to deal with the even darker clouds gathering on the health care horizon.
John M. Horak has practiced law at Reid and Riege P.C. in Hartford since 1980. The views expressed are his own.
