Lee Memorial Health System was prepared to file a lawsuit to stop Columbia/HCA Healthcare Corp. from acquiring scandal-ridden Cape Coral (Fla.) Hospital. But the planned legal action became unnecessary June 6 when Cape Coral's board agreed unanimously to be acquired by the Fort Myers, Fla., not-for-profit system.
Florida Attorney General Bob Butterworth received a copy of Lee Memorial's draft lawsuit just days before a decision was to be made in the highly competitive duel between Lee Memorial and Nashville, Tenn.-based Columbia to acquire Cape Coral. Besides submitting lucrative bids and currying public favor, Lee Memorial and Columbia had lobbied state legislators, federal antitrust officials and the attorney general to support their causes.
In its 38-page draft lawsuit, Lee Memorial contended Columbia's acquisition of Cape Coral would violate federal antitrust laws and lead to higher prices and fewer services to the residents of Cape Coral, an affluent coastal town of 75,000 residents in western Lee County. Columbia owns three of the six hospitals in Lee County. Lee Memorial owns two hospitals.
"Unlike defendant Columbia, whose very purpose is to maximize profits and shareholder stock value, Lee Memorial...(uses its profits) to lower costs and improve the quality of hospital...services," the lawsuit said. It was prepared for Lee Memorial by John T. Cusack, an attorney with Gardner, Carton & Doug-las in Chicago.
Weighing heavily in favor of Lee Memorial was overwhelming public sentiment for the public system. In addition, the Cape Coral board also knew Butterworth planned to challenge a Columbia acquisition.
Sources told MODERN HEALTHCARE the Cape Coral board knew about the planned Lee Memorial lawsuit on June 5. However, Cape Coral officials denied the board was aware before their vote that Lee Memorial planned to sue if Columbia had been chosen.
James Nathan, Lee Memorial's president, said the lawsuit was not intended to be used as leverage to win the vote.
"We were prepared to file the lawsuit because we did not believe Columbia should be permitted to do this transaction," Nathan said. "We didn't try to threaten (Cape Coral) with a lawsuit. ...We were not going to roll over."
Nathan said the decision was made to prepare the lawsuit after the Federal Trade Commission in May granted Columbia antitrust clearance to acquire Cape Coral (June 3, p. 6).
"The FTC deviated from their (antitrust) review policy for Columbia," Nathan said. "Because of that, we need to be prepared (with a lawsuit)."
With that backdrop, Cape Coral held its first meeting open to the public in its 19-year history. After 30-minute presentations from Lee Memorial and Columbia, the Cape Coral board voted 3-0 in favor of Lee Memorial. At least one board member, Cora Gilbert, had tried to persuade the others to vote for Columbia. Afterward, another trustee, Fred Cull, who initially had abstained from the vote, added his vote to make it 4-0.
Three other board members abstained from voting on advice of their attorneys. The trustees were named in a lawsuit filed by former employees that charged the hospital with underfunding its employee pension plan. The lawsuit, which since has been dismissed by a federal district court judge in Fort Myers, could be refiled, a Cape Coral attorney said.
Lee Memorial's cash offer was $145 million, and Columbia's was $142 million. But the bids differed in many ways. For example:
Lee Memorial's bid includes a $5 million nonrefundable payment to Cape Coral if a merger challenge is filed by the government or Columbia. Lee Memorial also agreed to pay legal costs to defend Cape Coral trustees and officers if Columbia files suit to block the merger.
A Columbia spokesman in Fort Myers said the chain doesn't plan to sue. Columbia owns a surgery center across the street from Cape Coral.
Lee Memorial also agreed to loan Cape Coral $2.4 million to pay bills and cover other costs until the deal closes, which is expected sometime in July, Nathan said.
Besides the $142 million cash offer, Columbia's bid included an offer to donate $15 million to charity or for Cape Coral's investment purposes. Columbia also agreed to purchase the hospital's accounts payable and receivables.
Hours before the final bid deadline, Lee Memorial and Columbia sweetened their offers by millions of dollars. After analyzing loans, incentives and other factors, Lee Memorial's bid was $368,000 more than Columbia's, said Thomas Singleton, vice president with Quorum Health Resources, the Nashville-based company that manages Cape Coral.
"The bids were about even. The board was leery of going forward with Columbia with a lawsuit out there," Singleton said. "Given Cape Coral's history, the board felt comfortable with Lee Memorial and that all the meetings and financial records (of Cape Coral) would be open for public inspection."
After the deal closes, Nathan said Lee Memorial plans to conduct a facility assessment of Cape Coral and integrate management and services with Lee Memorial Hospital and its satellite hospital, HealthPark Medical Center. He denied rumors that Lee Memorial planned to downsize the hospital.
As part of Lee Memorial, Cape Coral also will join a three-hospital regional provider organization Lee Memorial formed earlier this year with Sarasota (Fla.) Memorial Hospital. The company, which is unnamed, will compete against Columbia in southwest Florida, where it operates seven hospitals (Feb. 26, p. 61).
Meanwhile, U.S. District Judge Steven Merryday in Fort Myers dismissed three lawsuits filed against Cape Coral by former executives J. Michael Ward and Daniel Edgar and a group of former hospital employees. In 1994, Ward, Edgar and Jay Murphy, another former executive, were fired by the hospital in 1994 for allegedly embezzling $2.3 million.
Last year, Murphy was indicted by a federal grand jury and has pleaded guilty. Earlier this year, Ward and Edgar also were indicted by a federal grand jury (April 29, p. 122).
One of the lawsuits Merryday dismissed was a wrongful discharge and breach of contract suit filed by the executives to recoup nearly $2 million in lost wages and benefits.
Merryday, who said the lawsuits could be refiled with another lawyer, warned the executives about the danger of filing frivolous lawsuits, a Cape Coral attorney said. Alan Woodruff, attorney for Ward and Edgar, said he has filed a notice to appeal the decision.