Report: DMC charged interest for not paying $80 million escrow on capital requirement
Legacy DMC, the not-for-profit board overseeing the sale agreement of Detroit Medical Center for 10 years to an investor-owned hospital chain operator, has sent DMC a bill for $2.5 million in interest on the $80.5 million escrow deposit it allegedly owes.
Overall, however, DMC essentially is in compliance on the required $850 million in total capital spending under a 2010 sale agreement, according to Legacy DMC's sixth annual report.
The report, which was filed June 30 with the office of Attorney General Bill Schuette, noted a disagreement between Legacy DMC and DMC on the $80.5 million escrow payment.
DMC argues that, under the contract, it does not have to pay based on changes in Medicare and Medicaid disproportionate share reimbursement policy. Legacy DMC contends any changes are continuing policies by the government payers.
The annual reports to Schuette are part of the 2010 purchase agreement from the conversion of DMC into an investor-owned six-hospital system now owned by Dallas-based Tenet Healthcare Corp. DMC, under then-CEO Mike Duggan, originally sold the former city hospital to Vanguard Health System that was subsequently acquired by Tenet.
John Truscott, a DMC spokesman with Lansing-based Truscott Rossman, said another reason DMC withheld the escrow payment was because it had reconfigured the new Children's Hospital of Michigan patient tower and had allocated funds for the building. "This is better for the community and the new design is significantly better than the original plan," he said.
Truscott said DMC is negotiating a settlement with Legacy DMC over whether any interest is owed on the $80.5 million escrow payment.
The report also said DMC came up $80 million short by the end of 2015 in its obligation to spend $500 million on specified capital projects over five years. DMC spent about $75 million in 2016 on the patient tower for Children's Hospital, leaving it $5.4 million short of the $500 million by end of 2016. DMC expects to exceed in 2017 by about $25 million the $500 million in spending for 15 specified capital projects.
Based on the purchase and sales agreement, Legacy DMC decided to enforce the requirement that DMC should escrow $80.5 million because of the $80 million shortfall by end of 2015 in specified capital expenditures, the report said.
In previous years, DMC had agreed to escrow funds on other projects, including a $20 million escrow in 2011 and a $40 million escrow in 2012, Legacy DMC said.
"My board is very pleased with the capital spending and they expect a settlement with the escrow" dispute, said Joe Walsh, CEO of Legacy DMC. "We got what we bargained for."
Walsh said the 20-member board is concerned there has been a dramatic dropoff in routine capital spending. The contract did not require DMC to report routine capital spending after year five of the agreement.
"As board members describe it, through the end of year six there is great agreement that the indigent are well taken care for. (DMC) has exceeded their commitment of $850 million and has spent over $900 million," Walsh said. "We are looking to the future that (routine) capital expenditures will deteriorate from the spending so far."
Despite spending $117 million on routine capital expenditures in 2015 to catch up, DMC was still $3.9 million short on its commitment to spend $350 million to improve its hospitals by Dec. 31, 2015, the report said.
DMC declined to publicly report how much it spent in 2016 on routine maintenance, Walsh said. However, Legacy DMC officials believe DMC spent several million, just not enough.
Truscott confirmed that DMC spent at least $4 million on routine capital maintenance in January 2016, meeting the $350 million contract requirement. He said he didn't know how much was spent on maintenance in 2016 or so far in 2017.
Legacy DMC estimates $50 million to $70 million should be spent annually in routine updates to "preserve the facility and capital improvements" over the last six years.
Truscott said he didn't know whether DMC will continue to spend at the same level on routine capital maintenance in the future.
"While the covenant has been lifted the commitment (on physical building upkeep) has not," Truscott said. "When you spend these kinds of dollars on major systems and buildings you want keep them in shape. DMC is held in very high regard (by Tenet) nationally."
Some of the 15 specified completed capital projects already completed include:
• the new DMC Heart Hospital patient tower
• DMC Sinai Grace Hospital emergency room expansion and intensive care unit renovation
• a new outpatient center in Troy for Children's Hospital
• DMC Huron Valley Hospital's intensive care unit
• the facade and unified lobby at Harper University Hospital
The $155 million new patient tower for Children's Hospital is nearly complete with a soft opening Wednesday for VIP guests and media. Some parts of the lobby and entrance are still under construction with a grand opening for the five-floor, 226,000-square-foot tower expected in early 2018.
Legacy DMC also reported that DMC has met the charity care, educational and research commitments and clinical service requirements. None of the six hospitals have closed. DMC Surgery Hospital in Madison Heights closed because of extensive flooding.
However, Legacy DMC is concerned that DMC negotiated only an 18-month contract renewal with Wayne State University School of Medicine for various clinical and administrative services.
Legacy DMC said it is comfortable that problems in DMC's sterile processing department have been resolved. Deficiencies in federal and state quality regulations led to negative reports and mandated staffing and supply increases and changes in instrument cleaning processes.
Over the past three years, because of Healthy Michigan Medicaid and private insurance expansion, Legacy DMC reported that DMC's bad debt and charity care expenditures, which are considered uncompensated care, remain "significantly below levels in 2011, 2012 and 2013."
The report said DMC is spending more than $150 million a year less in uncompensated care, but bad debt and charity care rose 4 percent in 2016.
Legacy DMC also is concerned that proposed changes in the Affordable Care Act, mainly provisions in Republican bills in Congress that would diminish funding for Medicaid over time, would negatively impact safety net providers like DMC.
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