Almost two years after legislators expanded the state’s role regulating hospital mergers and acquisitions, the landscape of Rhode Island’s nearly $1.5-billion hospital industry is unaltered and its future murkier than ever.
Clouding the picture are a series of deals between Rhode Island hospitals and out-of-state suitors gone sour, and the proposed joining of two home-grown hospital groups that has yet to come under the microscope. It’s the outcome of Care New England’s bid to be absorbed in the larger Lifespan network that could also help clarify matters.
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A green light from the state’s attorney general and Department of Health would convince foes of for-profit and out-of-state hospital deals that the Hospital Conversions Act can find a middle ground. A red light would give leverage to advocates of consolidation who say they are doomed by a law that under any scenario goes too far.
”The proof in the pudding is whether the Lifespan/Care New England merger is going to have the same problems as the CareGroup/Care New England merger,” said Jeffrey Chase-Lubitz, a healthcare lawyer with the Providence firm of Brown Rudnick Freed & Gesmer.
Chase-Lubitz was referring to former Attorney General Jeffrey B. Pine’s rejection last fall of Care New England’s bid to be taken over by a major Boston-based health-care network. In announcing his decision, Pine said not-for-profit CareGroup would have too much control over Rhode Island’s Kent County Memorial, Women & Infants and Butler hospitals, as well as their multi-million-dollar charitable endowments.
Care New England and Lifespan announced their intentions to merge shortly thereafter, saying the arrangement would improve their chances of surviving into the next century. The agreement, now under review by the Federal Trade Commission, would create an eight-hospital network (including Boston’s New England Medical Center acquired by Lifespan in 1997) with in-state revenues of more than $1 billion a year. Pending FTC approval, the deal would be subject to separate and lengthy reviews by Attorney General Sheldon Whitehouse and the DOH.
It was public uproar over for-profit Columbia/HCA Healthcare Corp.’s almost three-year-old proposal to buy Providence’s Roger Williams Medical Center that brought about such scrutiny. The General Assembly at the end of the 1997 session passed the Hospital Conversions Act overriding Gov. Lincoln Almond’s veto. The landmark legislation gave the attorney general and the DOH broad discretion in approving or disallowing buyouts and shifts in control where one or more of that state’s not-for-profit hospitals are concerned. The law also requires hospitals to provide a certain amount of charity care and seek DOH approval before discontinuing emergency or primary care services. As a result of the law, there are those who say Rhode Island has one of the most burdensome regulatory structures in the country.
Chase-Lubitz is one.
”There are so many criteria for the attorney general and the Department of Health to look at that it ends up making the decision so subjective,” he said.
Under the law, parties involved in a merger or acquisition undergo a two-step process involving a simultaneous review by the attorney general and DOH of corporate documents including financial statements (including uncompensated care), real estate records, citations and violations, and a staffing plan, among others. That process is followed by a protracted review in which first the attorney general and then the DOH determines whether the proposed deal is in the public’s best interest; whether the transaction is for fair market value; whether the parties are committed to serving the uninsured; and whether the not-for-profit’s charitable assets will be protected and used toward community care, among other criteria.
The matter of charitable assets aside, “I fear that the Act really tries to supersede what has historically been the role of the (hospital) board of directors,” Chase-Lubitz said.
Chase-Lubitz declined to say if he thinks the Lifespan/Care New England deal will go through. However, he said it will be a good test of the law’s intended and unintended consequences, as the matters of valuation and charitable trusts are less complicated where same-state not-for-profits are concerned.
Peter Wasylyk
State Rep. Peter Wasylyk, a lawyer and primary sponsor of the Hospital Conversions Act, didn’t hesitate in his opinion that the merger “will be no problem.”
The law, so far, “has worked according to its prescribed statutory language,” Wasylyk said. And in the case of Lifespan/Care New England, “there would be one less hurdle that they would have to overcome.”
”I think that if” Lifespan and Care New England “comply with all the provisions of the Act and still provide quality healthcare, then it will happen and (the law) will have accomplished its purpose,” he said.
The Providence Democrat took issue with health care lawyers and industry leaders who call the law arduous and say it gives regulators too much leeway.
”I don’t agree that it’s subjective. I don’t think it’s a vehicle to just kill deals,” Wasylyk said. “It’s a vehicle to protect the public interest.”
People complain about the review process because “it’s easier to attack the law” than comply with it, he said.
However, more than a month after Tenet Healthcare Corp. called off its bid for Woonsocket’s Landmark Medical Center, the nation’s second largest for-profit hospital chain continues to blame the law.
The $32.5-million deal fell apart in January, more than a year after it was proposed, because of the paperwork demands complicated by Landmark’s changing financial picture, said Harry Anderson, a Tenet spokesperson.
”I won’t say that market forces were not a factor, but the overwhelming problem was the uncertainties and the problems created by the conversions law.”
Tenet found an ally in Governor Almond who made public his dismay over the quashed deal. In a Jan. 22 press release, he called on legislators and members of the health-care community to “work with him to address the impact of the Hospital Conversions Act.”
”It is time to step back and thoroughly review the implications of this law on the quality of health care in Rhode Island, our health care industry – our state’s largest industry – and on the overall economy of Rhode Island,” Almond said at that time.
So far, any review has been limited to meetings between Almond’s staff and members of the departments of administration and health and human services, according to Lisa Pelosi, the governor’s spokesperson.
Edward Quinlan, president of the trade group Hospital Association of Rhode Island, took a wait and see attitude regarding the law’s future application. However, he pulled no punches regarding hospitals’ survival in a time of tremendous financial pressures created by government cutbacks and managed-care insurers.
”Under the previous attorney general, there was a rather subjective and time-consuming application of the Act; so much so that we have yet to have a full implementation of it. The two-step process has yet to happen,” Quinlan said, referring to the DOH’s role in the review.
”My hope is that the new attorney general will apply the law in recognition of what’s taking place in the industry and with some speed.”
So far, the law has had a “chilling effect” on all mergers. “I hope he will take a more practical view.”
