Rhode Island's attorney general last week rejected an affiliation between Care New England of Providence, R.I., and Boston-based CareGroup, saying the deal surrenders the keys to the Rhode Island provider network's charitable vault.
The decision came after more than a year of regulatory fact-finding in the first major application of a stiff new law governing the transfer of not-for-profit hospital assets in Rhode Island.
Rhode Island's law, passed in July 1997, is considered one of the toughest of the sales laws passed in 33 states across the country because it allows the attorney general to review any hospital transaction in which 20% of charitable assets are transferred.
John Hynes, Care New England's president, said the system was considering whether to appeal the decision in court, file a revised proposal or forge a lesser relationship.
He defended CareGroup as an attractive partner, well-regarded in financial markets and clinical quality circles. "You don't find these kinds of partnerships that easily."
But in blocking Care New England's border crossing into Massachusetts, Attorney General Jeffrey Pine said the three-hospital system was risking its assets by ceding governance control to a larger organization that is suffering sizable operating losses.
Care New England includes Women and Infants Hospital, the leading obstetrics facility in the state, and Butler Hospital, a behavioral health facility, both in Providence; and Kent County Hospital, an acute-care facility in Warwick.
Pine said Care New England's nine seats on a systemwide 38-member board were insufficient to protect Rhode Island interests. What's more, he said, CareGroup was free to alter that proportion.
Pine said he didn't oppose the concept of a hospital system in the state mixing assets with an out-of-state partner, asserting he would rather leave the direction to local trustees. But he added, "I do believe that local entities . . . have to retain sufficient control to assure our state that the organizational purposes of the hospitals are going to be furthered into the future."
And that test was not met, he said. Rather, the deal as proposed "was not as attractive as they would have you believe."
He added that approval of the agreement's terms appeared to be engineered by a small core group of senior managers and trustees in the Care New England system.
When it came to CareGroup's finances, investigators "were not convinced all board members had all the information they needed at the time they should have had it," Pine said.
At issue were operating losses that were reported as part of the due-diligence process and, Pine said, were "increasing as time goes on." Pine failed to get assurances that those losses wouldn't affect Care New England facilities.
CareGroup declined to disclose its recent operating performance. In the fiscal year ended Sept. 30, 1997, the system posted a net profit of nearly $28 million but only after investment income and other revenues offset an operating loss of $117 million.
Care New England posted a $2 million operating profit during the same period. Its net profit, including nonoperating revenues, totaled $12.6 million.
"Care New England is probably the more attractive partner of the two," Pine said.
But Hynes said the attorney general misread the state of CareGroup's finances by picking up the wrong signals, focusing on operating results battered by cost-containment pressures that have affected most healthcare institutions. "They're continuing, as we all are, to suffer in this environment," he said.
A better indicator of finances is the view of the financiers on Wall Street, who "concluded without reservation that CareGroup is a financially strong institution," he said, noting that the system earned an AA rating on $375 million in recently refinanced debt.
For the moment, Care New England is benefiting from a low Medicare case mix of 33%, and its asset base is solid. But its continued ability to access capital at favorable rates will be impaired unless it combines with a financially fair-haired organization like CareGroup, Hynes said.
Besides financial critical mass, the Rhode Island system also would gain nonfinancial benefits such as access to the research and protocols of CareGroup's Beth Israel Deaconess Medical Center, he added.
Trustees of the system understood all that when they approved the deal more than a year ago, Hynes said.
However, they weren't questioned by the attorney general's office until May and June of this year and may not have remembered some of the details, he said.
"To say that the trustees were not really well-informed is just a misunderstanding, a total misunderstanding," Hynes said.