Nebraska has declared itself hostile ground for not-for-profit hospital takeovers by for-profit chains.
It has become the first state in the country to pass a law mandating state approval of not-for-profit hospital sales to for-profit companies and requiring public disclosure of all sales-related information and documents.
The new law, which took effect April 16, is the latest manifestation of the growing public backlash against takeovers of not-for-profit hospitals by for-profit chains such as Columbia/HCA Healthcare Corp.
Over the past several months in Nebraska, a number of not-for-profit hospital takeovers by for-profit chains have been scrapped, had their terms significantly altered or were delayed because of concerns from the public, state lawmakers or competing not-for-profit hospitals.
"For-profit companies are welcome to come here and buy hospitals, but now they have to lay their cards on the table and tell the public what the terms are," said Gerald Matzke, a state legislator from Sidney, Neb., who sponsored Nebraska's new law. "The law is designed to do away with secret deals."
Anecdotally, for-profit chains have been accused of secretly offering lucrative "finder's fees" and high-paying corporate jobs to not-for-profit hospital executives who help secure sales of their facilities to the chains. None of the allegations, though, has been proven.
In Nebraska, the overwhelming majority of hospitals are owned by not-for-profit corporations. Of the Nebraska Hospital Association's 93 members, only two are operated in whole or in part by for-profit companies: 299-bed Saint Joseph Hospital in Omaha, owned by Tenet Healthcare Corp., and 160-bed Midlands Community Hospital in Papillion, owned by Quorum Health Group through a joint venture with a not-for-profit hospital system.
The possible defection of two not-for-profit hospitals to the other side of the ledger prompted the Nebraska Legislature to get involved.
In the first deal, Columbia in 1994 proposed to buy 231-bed Bishop Clarkson Memorial Hospital in Omaha for $84 million. In the second, 265-bed Regional West Medical Center in Scottsbluff solicited bids late last year for a possible buyout from several undisclosed for-profit hospital companies.
It was the Scottsbluff deal that got Matzke interested in proposing the new law.
According to Matzke and other sources, who requested anonymity, Regional West is the sole regional referral center for western Nebraska, and it provides many administrative and clinical services to a number of small rural facilities in that part of the state.
The sale of Regional West to a for-profit company, consequently, raised several concerns, Matzke said. They included the possible elimination of needed but unprofitable medical services, the possible elimination of low- or no-cost administrative services to small rural facilities, the possible alienation of the hospital's medical staff by an out-of-state corporate owner and the potential misuse of the hospital's charitable assets.
MODERN HEALTHCARE*requested an interview with Regional West executives and submitted written questions to them. However, they declined to answer questions verbally or in writing.
Matzke introduced his measure in January, and two days before the Legislature voted on it, Regional West scrapped its sale plans, sources said.
Nebraska's unicameral Legislature passed the measure April 11 by a 46-0 vote. Nebraska Gov. Benjamin Nelson signed it into law April 15, declared it "emergency" legislation and made it effective the next day.
Just 20 days earlier, the second deal that prompted the state Legislature to take a look at not-for-profit hospital sales was called off. Bishop Clarkson scrapped its proposed sale to Columbia because of a long-running legal dispute with the University of Nebraska Medical Center in Omaha, which said it had the right of first refusal to buy Bishop Clarkson under an old contract.
But Bishop Clarkson wasn't thrilled with the state law anyway, given its own sales plan, and had lobbied against the law's passage, as did Columbia. In fact, the Nebraska Hospital Association's support for the law subsequently spurred Bishop Clarkson to drop out of the association in protest.
"We believe that it's inappropriate for an organization of this nature to take a stand on an issue that pits its members against each other," said James Allen, Bishop Clarkson's director of public affairs, sales and marketing. "In this circumstance, we feel it would have been more appropriate for them to remain neutral."
The hospital notified the NHA of its intent not to renew its membership in 1997, and Allen said there's no chance the hospital will change its mind between now and the end of the year.
"Bishop Clarkson dropped out because of our support of the bill," confirmed Roger Keetle, the NHA's senior vice president and general counsel. "We're disappointed they left. It's their decision to make whether to rejoin."
The NHA supported the bill primarily because it was backed by many of the NHA's small rural hospital members, Keetle said. Those hospitals depend on many larger hospitals for administrative and clinical support, and they felt uncertain about their fate if the larger hospitals sold out to a for-profit company, he said.
The NHA also supported the bill because it backs full public disclosure of the disposition of a not-for-profit's assets when it's purchased by a for-profit company, Keetle said.
The new law requires such sales to be approved by the Nebraska Health Department under its existing certificate-of-need approval process. However, the law creates three new criteria to judge whether a deal receives CON approval. The criteria are designed to ensure that such a sale is in the public interest.
For example, the law requires the department to consider whether the for-profit purchaser has made a "commitment to provide healthcare to the disadvantaged, the uninsured, and the underinsured and to provide benefits to the affected community to promote improved healthcare."
The department already has a history of being tough on the few for-profit buyers that crossed into Nebraska.
In 1993, the state was the first to deny a CON simply because the acquiring company was a for-profit. The state said converting the hospital to a for-profit from a not-for-profit would raise its operating costs. A state court later overturned the CON decision, and the sale of Midlands Community Hospital to Quorum ultimately went through (June 27, 1994, p. 24).
The new law also specifically gives the Nebraska attorney general's office the authority to review a sales transaction at the office's discretion. The office would review a deal using nine new criteria, including whether charitable funds are being misused and whether a conflict of interest exists for the not-for-profit hospital's executives and governing board members.
At a minimum, an acquiring company must submit extensive sales documents and information to both the Health Department and attorney general's office, and all documents and information would be available for public inspection (See chart, p. 40).
Allen at Bishop Clarkson said the original version of the bill, which he called "Draconian in nature," would have required both the Health Department and attorney general's office to approve a deal before it could go through. Although they failed to kill the bill altogether, Bishop Clarkson and other opponents successfully watered down the measure to primarily a public disclosure law.
"The final version of the bill will not necessarily act as a deterrent to hospital acquisitions in the state and hopefully leaves the door open for the infusion of outside capital to the state's hospitals," Allen said.
A statement by Tenet said the law will have no impact on the company's plans in the state and won't change its approach to strategic alliances with not-for-profit hospitals.