When Columbia/HCA Healthcare Corp. completes the purchase of Bishop Clarkson Memorial Hospital in Omaha, Neb., later this year, the Louisville, Ky.-based hospital chain will have paid $85 million.
After paying off $38 million in debt, the hospital's foundation will reap proceeds of $47 million.
However, that's probably not all that Clarkson Foundation will generate from the sale. The federal government may kick in another $12 million, effectively jacking up the sales price by 14%.
That $12 million is known in the trade as "Medicare recapture," an accounting detail that's figured on hospitals that are sold. In effect, sold hospitals settle depreciation costs with the federal government, which has paid part of those costs if the hospital is a Medicare provider.
In the Omaha hospital transaction-a deal announced last month by Columbia/HCA, the nation's largest hospital chain-the 300-bed hospital is expected to be sold at less than its book value.
That means that Bishop Clarkson didn't depreciate the hospital fast enough in its annual cost reports to Medicare. The hospital's owner is allowed to recoup Medicare's portion of that underdepreciation cost.
How its done.In its simplest
version, here's how the depreciation calculation works. Suppose a hospital is built for $100 million and, over several years, was depreciated to $70 million. Then, one day, it's sold for $50 million.
In the hospital's "terminating cost report," which is filed when a hospital is sold, the hospital reports a negative depreciation adjustment of $20 million. If 50% of the hospital's business comes from Medicare, the hospital can collect $10 million.
However, this calculation can work to a hospital's detriment as well. For example, if the hospital is sold for more than its depreciated value, then the hospital may end up writing a check to Medicare.
Take the same hospital. Its book value was $70 million, but suppose it sold for $150 million. That means the hospital took too much depreciation. In that case, HCFA would calculate the amount of depreciation taken-$30 million-and figure it's owed 50%, or $15 million.
A HCFA staffer noted that Medicare doesn't recoup more than it has paid out. In other words, even if the hospital is sold at a big gain-in this case $80 million more than its depreciated value-Medicare wouldn't recoup more than the depreciation it had already paid.
Buyers and sellers.Obviously, these calculations can mean big bucks to the buyer or seller.
Lonnie Busby, president of Columbia/HCA Healthcare Corp.'s Midwestern division, explained that in Bishop Clarkson's case, the Medicare recapture will go to the seller. However, "sometimes the buyer collects any recapture," Mr. Busby said, adding that "it's negotiated on an individual basis."
When buyer and seller go into the negotiations knowing how much the Medicare recapture will amount to, that amount effectively becomes part of the sale price. That's obviously the case when hospitals deal with companies such as Columbia/HCA that are experts in mergers and acquisitions.
However, sometimes hospital boards aren't aware of this issue, which can put them at a disadvantage, noted Josh Nemzoff, a principal who specializes in mergers and acquisitions for Ponder & Co., a bond-advisory firm.
"If it (Medicare recapture) is an asset, you try to take it; if it's a liability, you try to give it away," he said. "If the party on the other end doesn't know what you're talking about, it's pretty easy to do."
In many markets, hospitals are selling at higher earnings multiples, which could mean that a hospital is sold at a premium over its book value, Mr. Nemzoff said. In that case, it's more likely that the hospital will end up owing Medicare money.
For example, after Montgomery County Hospital District sold its Conroe, Texas, hospital to Healthtrust, a Nashville, Tenn.-based hospital company, in 1993, the hospital district initially found it owed Medicare $8.5 million on the deal, said Ken Thornton, the hospital district's executive director.
However, the district hired reimbursement experts from the accounting and consulting firms of Price Waterhouse and Deloitte & Touche to work on it. Although the final Medicare cost report has not yet been filed, Mr. Thornton said the district now expects to get a $1.6 million check from Medicare. "It all depends on the structure" of the sale, he added.
Avoiding recapture.There are other ways of getting out of paying Medicare recapture funds, experts said.
For example, a HCFA staffer who declined to be identified said he recently was on a panel with healthcare lawyers who were explaining ways to get around Medicare recapture. One way is to establish a corporation in which the stock of the hospital is transferred but the asset is not. In such a case, Medicare recapture doesn't apply.
Even if a hospital has to pay Medicare recapture, that payout often can be reduced, said Scott Davis, a senior manager who specializes in Medicare recapture in the Miami office of Ernst & Young.
"It's very useful to the hospital to get down to the lowest level of detail" on the calculations, he said. "Usually, when there's been a client that had to write a big check, we've been able to reduce it."
Because there are ways to reduce the liability or get around it, "my suspicion is that Medicare is paying out a lot more on this than they're taking in," Mr. Davis said.
However, that's difficult to find out. A HCFA spokesman told MODERN HEALTHCARE that type of information hasn't been compiled.