August 12, 2013

Malloy to hold for-profit hospital merger talks

Kurt Barwis, CEO, Bristol Hospital

CT Medical Foundations

In 2009, state lawmakers passed a bill that allowed nonprofit hospitals to create medical foundations that could legally employ physician practices. The legal structure is meant to protect nonprofit hospitals from violating anti-kickback laws.

Since then, 11 medical foundations have been created.

They include:

• St. Vincent's Multispecialty Group (St. Vincent's Medical Center)

• L&M Physician Association Inc. (Lawrence & Memorial Hospital)

• Alliance Medical Group Inc. (Waterbury Hospital)

• Northeast Medical Group Inc. (Yale-New Haven Hospital/Bridgeport Hospital)

• Bristol Hospital Multispecialty Group Inc.

• Community Medical Partners Inc. (Backus Corp./Backus Hospital)

• Eastern Connecticut Medical Professionals Foundation Inc. (ECHN)

• Day Kimball Medical Group Inc. (Day Kimball Healthcare Inc.)

• HHC PhysiciansCare Inc. (HartfordHealthcare Corp.)

• Connecticut Geriatric Specialty Group Inc. (Hebrew Health Care Inc.)

Bristol Hospital CEO Kurt Barwis will meet this week with Gov. Dannel P. Malloy to try to alleviate concerns the governor has raised about for-profit hospitals entering Connecticut.

The meeting, scheduled for Friday, comes a month after Malloy vetoed legislation to make it easier for Vanguard Health Systems, a Tennessee-based for-profit hospital operator, to acquire Bristol and Waterbury hospitals in two separate deals.

Vanguard also recently announced plans to acquire Eastern Connecticut Health Network (ECHN), parent to Rockville General and Manchester Memorial hospitals.

Malloy's controversial veto, however, has put all three mergers on hold and brought to the forefront a major debate over the future of health care in Connecticut.

The state historically has been resistant to for-profit hospitals, but the rapidly changing health care landscape is forcing the few remaining cash-strapped community hospitals in Connecticut to seek out mergers with deep pocketed partners. Increasingly, they are turning to for-profit operators like Vanguard, which spooked Malloy and other health care advocates.

Some have questioned whether for-profit hospitals will meet the needs of uninsured patients and/or cut low margin programs or staff.

Barwis was surprised by Malloy's veto, but he is interested in having a larger, public discussion about the role of for-profits in Connecticut.

“I understand why people may have an inherent objection to for-profits,” Barwis said. “The question is where we go from here.”

The bill Malloy vetoed in July would have allowed Vanguard to establish a nonprofit medical foundation to employ physicians.

The legal structure is necessary, Barwis and others say, to prevent for-profits from bumping up against anti-kickback laws, which could come into play if Vanguard purchases for-profit physician practices. Concerns have always been raised about hospitals acquiring doctor practices that, in turn, refer patients to their parent company, regardless of whether it is in the best interest of the patient.

In 2009, however, lawmakers passed a similar law that allowed nonprofit hospitals to create medical foundations.

Since then, 11 medical foundations have been formed in Connecticut, according to the state Department of Public Health, and nonprofit hospitals have aggressively acquired or affiliated with physician practices.

Without that same ability, officials say, for-profit operators are at a competitive disadvantage, particularly at a time when hospitals are asked to form more integrated health care systems with community doctors.

Barwis said without the legislative exemption, for-profit hospitals essentially can't operate in Connecticut, closing the door to several potential deals percolating recently.

“I can't see a for-profit hospital operator coming into Connecticut without a way to legally employ physicians,” Barwis said.

Peter Karl, CEO of ECHN, said he also plans to meet with Malloy in the next month, because his hospital's deal with Vanguard also can't be finalized until it is clear for-profits can form medical foundations.

Vanguard's acquisition of ECHN also includes a joint venture agreement with Yale-New Haven Health System.

“We are planning on meeting with the governor,” Karl said.

Malloy, through his veto, was accused of siding with union employees at Waterbury Hospital, who raised concerns Vanguard's takeover of the struggling health care provider would lead to job losses and benefit cuts.

In his veto message, Malloy said further consideration is needed to “determine whether current law provides adequate safeguards to guard against any perceived or actual threat to the independence of medical decisions made by providers employed by for-profit entities.”

Malloy spokeswoman Juliet Manalan confirmed that the governor is meeting with Barwis Aug. 16, but she declined to provide details on conversation topics.

Meanwhile, Waterbury Hospital spokesman Matt Burgard said his hospital doesn't have a meeting planned with Malloy at this point.

Complicating the ECHN and Bristol and Waterbury hospital deals further is that Vanguard recently reached an agreement to sell itself for $1.7 billion to another for-profit operator, Tenet Healthcare Corp. of Dallas. That combination would create a more than $15 billion organization.

Mergers and affiliations have become common in Connecticut in recent years as cash-strapped community hospitals run out of options to remain independent.

State and federal budget cuts, the need to invest in health IT, and major payment reforms related to the Affordable Care Act are putting pressure on hospitals' bottom lines, and forcing them to rush into the arms of larger networks to gain scale and capital.

Barwis said Malloy's veto isn't the end of the world for Bristol Hospital, but it will make it harder to do business long term without a deeper pocketed partner like Vanguard. With that deal now on hold, Bristol Hospital is working with investment bankers on a financial plan to include refinancing $29 million in debt and borrowing $10 million for infrastructure investments.

“We are only planning this if they can't get a solution to for-profits in the state of Connecticut,” Barwis said.

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