The board of directors of Health Midwest, Kansas City, Mo., is battling the attorneys general of Kansas and Missouri-battling to survive and battling to control an estimated $800 million foundation that would result from the sale of its assets to HCA in a $1.1 billion deal.
The 21-member board has come under siege by Missouri Attorney General Jay Nixon and Kansas Attorney General Carla Stovall, who both asked courts in their respective states to dissolve Health Midwest and oust the board.
"They have breached their duty to the loyalty of their purpose," Nixon said in an interview with Modern Healthcare.
In a written statement, Stovall said she wants the court to place Health Midwest's Kansas assets in trust and turn the proceeds of any sale over to a new not-for-profit organization with directors appointed by Stovall.
The new 15-member board would be representative of the communities being served and would not include any current Health Midwest officer, director or employee for at least five years, Stovall proposed. The attorneys general painted a picture of a board that abused corporate power and lined the pockets of Health Midwest President Richard Brown and other executives. Brown is on track to receive a $7 million golden parachute upon completion of the sale, Stovall said.
An HCA spokesman said the Nashville-based chain is unsure whether it will hire Health Midwest executives, including Brown but does plan to hire all of the system's employees.
The claims by Stovall and Nixon-contained in countersuits following petitions filed by Health Midwest-accuse the not-for-profit system of "gross abuse of authority or discretion with respect to the corporation," Nixon said. "This is a case about making sure someone is watching," Nixon said. "We are making sure the not-for-profits are living up to the not-for-profit laws."
Stovall said she is reviewing the sale to ensure charitable assets remain in Kansas. Stovall said Health Midwest is "operating with callous disregard for the people it serves." In her claim filed in Johnson County (Kan.) District Court, Stovall is calling for a receiver to take over the charitable assets of Health Midwest. She also alleges that the company is violating two Kansas laws by using donated funds and investments for purposes other than those stated in Health Midwest's organizing documents.
Board members engaged in conduct that was inconsistent with the charitable goals of the not-for-profit organization, Stovall said.
Michael Peregrine, a Chicago lawyer with Gardner, Carton & Douglas who represents not-for-profit hospitals, said Stovall's charges that Health Midwest violated the two state laws governing charitable assets is unique. "Not-for-profit hospitals should take note," Peregrine said. "They are watching how hospitals are using charitable gifts."
The parties involved are unsure of when the issues will be resolved in court. A hearing was scheduled late last week in Cole County (Mo.) Circuit Court to discuss a schedule for the proceedings. The agreement between HCA and Health Midwest is scheduled to expire on March 31, 2003.
"We would like this to be done in an expeditious manner," Health Midwest spokesman Chris Whitley said.
At the center of the controversy are the executive compensation plan and the board's management of an approximately $800 million healthcare foundation that is expected to result from the sale.
Under terms of the sales agreement, Brown, who earned $1.1 million in 2002 according to his employment contract, would walk away with about $7 million when the deal closes.
Brown, who signed his last contract with Health Midwest in 1999, would receive three years worth of salary, a supplemental executive retirement plan and a leased automobile. He also would be let off the hook for a $125,000 loan-now valued at $400,000-he received in 1985.
Stovall is asking the court to void the terms of the agreement and to order Brown to repay the loan with interest.
"These are very lucrative compensation packages for not-for-profit organizations," said Chuck Hatfield, Nixon's counsel who is spearheading the Health Midwest case. "The fact they have these severance packages makes you wonder if the executives have incentives to sell this system. With a large golden parachute, does it make one focus more on selling the system than operating a successful not-for-profit system? They raised some flags."
Nixon said he plans to perform a lengthy review of the executive compensation package to determine whether a conflict of interest existed during the sale process.
"Their wallet should not get in the way of their fiduciary responsibilities," Nixon said. "We are not on defense, we are on offense. I am going to find out what happened."
Health Midwest defended its compensation plans for executives. The board "believes it has acted in good faith throughout the process," Whitley said.
The compensation plans have been in place for several years and had no connection with the proposed sale, Whitley said. Directors from outside of the organization helped develop the plans with the assistance of independent consultants, he said. Health Midwest filed petitions in late November in both Kansas and Missouri state courts seeking guidance on the system's sale and what to do with the proceeds.
The system owns seven hospitals, leases two hospitals and manages four hospitals in Kansas and Missouri.
The attorneys general have conducted public hearings to discuss plans for the proceeds of the sale, but Health Midwest contends that many of the plans were contradictory.
Whose foundation is it?
The Health Midwest board wants to oversee the foundation, with an estimated endowment of $800 million when the deal closes, even though Health Midwest will no longer be operating hospitals. If all the Health Midwest assets went to a single foundation, it would rank as the third-largest conversion foundation, according to Grantmakers in Health, Washington.
"The board believes it should have a role in the governance of any foundation going forward," Whitley said. "We still believe we have acted appropriately in asking the courts on clear definitions on the attorneys' general authority in the process and our board's role in any foundation."
But in reviewing the proposed sale, Nixon said the company's board should not have control of the foundation and should be ousted because Health Midwest would not be operating any hospitals in the Kansas City area, the main reason for its existence. The agreement with HCA requires that Health Midwest not operate any hospitals within a 300-mile radius of the Kansas City area.
"If they are taking themselves out of the business, we have to take the gain and make sure it is used for the right purposes," Nixon said.
HCA officials are "simply waiting for the next step," spokesman Jeffrey Prescott said.
Under the agreement, HCA has committed an additional $450 million in captial investments to the system over the next five years. It also would open an HCA division office in Kansas City and hire a division president. The company also pledged to keep the system's three inner-city hospitals open for three years and keeping the other 10 hospitals in the system open for three years, unless they are replaced by a new facility.
As the attorneys general review the proposed sale of Health Midwest, experts said it is becoming more common for the government to make its presence known in deals involving the sale of not-for-profit assets.
"This adds an exclamation mark to this controversy," said Peregrine, the Chicago lawyer. "This demonstrates the broad powers of (an) attorney general. He always has a bigger gun, and he has a lot of bullets in his chamber."
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