In a legal battle that could set precedents for state involvement in not-for-profit healthcare mergers and acquisitions, a national hospital system has taken a state attorney general to court in hopes of keeping him out of its business.
Phoenix-based Banner Health System, one of the largest secular, not-for-profit hospital systems in the country, filed a civil lawsuit March 8 against South Dakota Attorney General Mark Barnett in U.S. District Court in Rapid City, S.D. (Mar. 11, p. 4). The landmark lawsuit seeks an injunction that would prohibit Barnett from interfering with Banner's property rights and business activities.
Barnett, citing the state's charitable trust laws that protect assets arguably owned by the public, wants to keep the money from the sales of Banner hospitals in the community. In recent years, state attorneys general have tried to increase their jurisdiction over not-for-profit healthcare transactions by applying charitable trust laws, which hold not-for-profit corporations accountable for their business decisions.
"The issue of the ability of not-for-profit systems to use their money for systemwide purposes unrelated to a specific locale is an issue that is of substantial concern to systems around the country as they try to cope with financial challenges," said James Schwartz, a partner with Manatt, Phelps & Phillips in California. "This is being watched very closely."
Banner announced last fall that it would be selling several facilities, and Barnett-a Republican running for governor-in November 2001 wrote to Banner's in-house attorney, Donald Legreid, stating that under state law, the attorney general's office had to be part of the sale process if the buyer were a for-profit.
On Jan. 16, Rapid City (S.D.) Regional Hospital, a not-for-profit, signed a letter of intent with Banner to purchase 32-bed Lookout Memorial Hospital in Spearfish, S.D., 15-bed Sturgis (S.D.) Community Health Care Center and three other long-term-care facilities. Avera Health, a Sioux Falls, S.D.-based not-for-profit, on Jan. 17 signed a letter of intent to purchase Banner's 62-bed nursing home in Eureka, S.D., and Gregory (S.D.) Health Care Center, a 28-bed hospital and 58-bed nursing home.
In a Jan. 17 letter to Legreid, South Dakota Chief Deputy Attorney General Larry Long wrote: "This office is of the opinion that charitable trust principles apply to Banner's proposed divestiture of assets whether such a sale is to a for-profit entity or another not-for-profit entity."
Banner officials, who would not disclose purchase prices for the properties, said the company hopes to complete transactions with both Rapid City Regional and Avera by March 31. But Barnett has 20 days to respond to the lawsuit.
"We believe the proceeds from the sale of those assets should be Banner's to reinvest in other areas to further the mission of our not-for-profit corporation," said Dan Green, Banner's spokesman.
According to Banner, Barnett's opinion that some or all of the sale proceeds should be retained in South Dakota is not supported by state law. In its official nine-page complaint, a copy of which was obtained by Modern Healthcare, Banner further argued that the company's right to retain the sale proceeds is a federal issue, based on the "takings clause" of the Fifth and 14th Amendments and the commerce clause of the U.S. Constitution.
"To not allow the proceeds from the sale to be used to further our mission is a taking of our assets or a portion of our assets, and is in violation of our constitutional rights," Green said.
Banner has asked the federal court to allow the sales to proceed as planned and is "confident that the court will agree" with its position, according to a statement Banner released.
Long said his office has an obligation to protect the public interest given that the value represented by Banner's facilities is going to be moved out of the service area.
"I'm not sure that our reaction would be any different if they simply wanted to take them from Spearfish in the northwest part of the state and move them to Sioux Falls in the northeast," Long said.
As small not-for-profit corporations, the facilities existed individually until ownership was transferred to a predecessor of Banner and later to Banner after providers merged, Long said. Banner was formed in September 1999 when Fargo, N.D.-based Lutheran Health Systems acquired Phoenix-based Samaritan Health System in a $345 million deal. Long said, "Banner never paid a nickel for these facilities," which were built separately by their local communities almost exclusively with public donations.
"If I make a donation to you, and I give you a million dollars to erect a hospital and to run it for me, and the next year you sell it to the guy down the street for a million bucks and leave town with it, it strikes me that that cannot be the law," Long said. "That cannot be what the law says I'm allowed to do with your money. (Banner) kept the promise for many years and now they want to not keep the promise."
Last September, Banner announced plans to sell 10 of its 27 hospitals and 17 long-term-care facilities in seven states to concentrate its resources on its highest-growth markets in Arizona and Colorado. Banner now has 29 hospitals and 30 nursing home/skilled-nursing units operating in 14 states.
In a separate pending transaction, Banner is proposing to sell 47-bed Los Alamos (N.M.) Medical Center to for-profit Province Healthcare Co., Brentwood, Tenn., for an undisclosed sum. New Mexico's Assistant Attorney General Don Trigg said he has received a copy of a definitive agreement between Banner and Province but that Banner has not filed suit against New Mexico.