CHS nixed lease renewal|Board forced to seek funds from state when CHS ended lease

Published 11:10 am Friday, December 10, 2010

Daily News Staff

One of the four suitors that may enter into an affiliation or management agreement with Beaufort Regional Health System did not renew a lease with neighboring Washington County Hospital several years ago.
As a result, the Washington County commissioners were forced to seek a $2 million loan from the state to keep the hospital running.
According to David Peoples, Washington County manager, Community Health Systems of Franklin, Tenn., had agreed to lease and operate Washington County Hospital for five years.
The county owned the facility, but CHS, a for-profit business, managed the hospital.
“CHS, when the lease arrangement was expiring, indicated to the county that they had made a corporate strategic decision not to lease or manage hospitals that had a bed capacity of 100 beds or fewer,” Peoples said.
Washington County Hospital has 49 beds, according to its website.
CHS wasn’t interested in negotiating the extension of the Washington County lease, and didn’t want to draw up new terms, Peoples said.
“The terms and conditions of the lease were such that when CHS did leave, the lease contract allowed them to take all the cash that was in the bank and any accounts receivable that were generated during their lease and management of the hospital,” Peoples commented.
The lease terms, in effect, left Washington County with no operating capital to run the hospital, he said.
The county was able to secure the $2 million loan from the N.C. Department of Health and Human Services, injecting operating capital into the critical-access facility until the Washington County commissioners could make a decision on its future, Peoples said.
CHS is one of four suitors being considered as a partner for the financially-troubled BRHS, which oversees Beaufort County Medical Center.
CHS has offered to lease Beaufort County’s hospital for 30 years, with two 10-year renewal phases at fair-market value and a prepaid lease of $30 million.
Under the terms of the original CHS offer, BRHS would retain ownership of its assets at the end of the lease but the medical center would be required to reimburse CHS for the net book value of any preapproved expenditures on construction projects made by CHS within five years of the lease termination. The CHS original proposal was not clear as to the treatment of BRHS net working capital, according to HealthCare Appraisers Inc. of Florida. 
HAI is the consultant group hired by the BRHS board to seek potential suitors for the hospital.
Beaufort County’s hospital is licensed for 142 beds, 22 of which are psychiatric beds.
As they searched for a new management partner, the Washington County commissioners cycled through a lengthy requests-for-proposals process, reaching out to approximately 20 different firms across the United States, Peoples said.
The county’s goal was to determine if any of these firms was interested in leasing or owning the hospital, he shared.
Eventually, the county sold the hospital to HMC/CAH Consolidated of Kansas City, Mo.
HMC assumed ownership of the hospital in July 2007. HMC is not one of the BRHS suitors.
According to Peoples, prior to inking an agreement with HMC, the county had a dialogue with another current BRHS suitor — University Health Systems of Eastern Carolina.
UHS has offered BRHS a 20-year lease/purchase agreement with a prepaid lease of $18.1 million and a minimum of $21 million in capital expenditures in the first five years of the lease.
“We were extremely interested in trying to put together an association with them,” Peoples said of UHS. “Unfortunately, they were at a period in their operations that they were not in a position to make an offer to us to lease and/or purchase the hospital.”
Peoples said three factors sold Washington County on HMC. The group had been in the hospital ownership business for around 30 years and owned and operated rural and critical-access hospitals across the country, as well as some overseas medical facilities, he said.
The hospital’s soon-to-be owners also understood rural health care better than other companies with which the county had held discussions, he added.
HMC ended up paying $3.2 million for the hospital, a figure that surpassed its appraised value.
“The price that they paid us exceeded what we were anticipating,” Peoples remarked.
The Kansas City outfit also agreed to build a new hospital, which could come to pass in the first quarter of next year, he said.
As part of the county’s agreement with HMC, ownership of the current hospital buildings will revert to the county once the new hospital opens. The old buildings will be used for county operations, Peoples related.
If HMC failed to build a new hospital, ownership of the present hospital complex would revert to the county, which also would get remuneration amounting to about $700,000, Peoples said.
In an e-mailed statement, Tomi Galin, vice president of corporate communications for CHS, responded to the Daily News’ inquiries about the health-care entity’s relationship with Washington County.
“Regarding your question about Washington County Hospital, we had a five year management contract with that hospital, which expired several years ago,” Galin wrote. “During the term of the agreement, we fulfilled the duties of the contract, and beyond that, invested approximately $500,000 in capital near the end of the lease to further improve the facility.
“At the time the contract was about to expire, an executive with our organization met with the hospital’s Board of Directors and County Commissioners to share our belief that the community could not sustain a full-service, inpatient hospital for the long-term. We offered to build a more viable out-patient diagnostic, treatment, urgent care and surgery center that would have continued to provide significant health services for local residents, but the Board opted to move in a different direction. Our contract and relationship ended amicably.”
Tracey Johnson, chairwoman of the Washington County commissioners, started serving on the board a few months before the hospital negotiations began.
“You might say the ideal situation is that the county be able to run the (hospital) organization for their county, but this day and time that’s not possible,” Johnson said. “You have to try and find an organization that’s going to do the best for your citizens.”
Asked if she had any advice for the Beaufort County commissioners, who will have final say on any BRHS management or purchase agreement, Johnson replied, “The commissioners are going to have to decide what’s best for their county and try to do their best. Basically with us, none of us were hospital people, but we were doing the best that we could to keep it going.”
Contributing Writer Betty Mitchell Gray contributed to this story.