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Legal snags kill Community-Eskenazi hospital merger

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Community Health Network and Eskenazi Health quietly called off their engagement months ago, when they found out federal laws effectively prohibited their marriage.

Now they’re trying to figure out how to just be friends.

Leaders of the two Indianapolis-based hospital systems are holding out hope they still may be able to join together, but doing so would require Congress to change federal tax laws—and getting anything passed in Congress these days is extremely difficult.

 Gutwein“What we initially conceived we now know is legally not possible. We regret that,” said Matthew Gutwein, CEO of the Health & Hospital Corporation of Marion County, the governmental agency that is the parent of Eskenazi Health.

The two hospital systems announced in February 2013 a joint operating partnership that would create a joint board to form common strategies, pricing and clinical collaborations. They staged a splashy press conference at City Market, with public officials in attendance.

Their plan would have created a primary care behemoth here, with more front doors to access health care than any other hospital system in the area. That would have put Community and Eskenazi in a position to scoop up customers newly insured under Obamacare.

 MillsBut in late September, Community CEO Bryan Mills called off the deal so the two organizations could focus on the changes coming from Obamacare and so Eskenazi could focus on completing its new 315-bed hospital, which opened in December.

“It’s still hard to admit we couldn’t find a way to do this,” said Mills, during a discussion with Gutwein and Dr. Lisa Harris, Eskenazi’s CEO, on the top floor of Eskenazi’s executive offices, which overlook the campus of the Indiana University School of Medicine downtown.

The plan ran into two legal problems. First, federal antitrust laws require that two competing organizations be joined before they start discussing sensitive things like pricing and strategy.

Second, the rules for the special bonds Eskenazi sold to finance its $754 million hospital require that the recipient of proceeds be separate from any private organizations. The bonds were part of the Build America section of President Obama’s 2009 stimulus package, and offered lower interest rates for publicly funded projects.

Gutwein, Mills and Harris all said they were aware of those legal obstacles when they announced their working agreement in February 2013. But they thought they could find a structure that would thread the needle between those two laws.

In mid-2013, they realized they couldn’t. But they still pushed forward on three fronts:

• They explored whether they could refinance the Build America bonds to get out from that program’s rules. But to be refinanced, Eskenazi would have been forced to repay all remaining interest—about 25 years’ worth—at once, a big financial hit. Harris said Eskenazi even looked at whether it could offset that financial penalty with efficiencies gained by combining functions with Community, but concluded the penalty would still far outweigh the savings.

 Harris“We realized both our organizations are very tightly run organizations,” Harris said.

Eskenazi employs about 4,000 people serving mostly the indigent and uninsured in Indianapolis. In 2013, Eskenazi’s revenue reached $465 million, which allowed it to break even.

Community employs 11,000 people at eight hospitals and hundreds of other health care locations around Indianapolis and in Kokomo. In 2013, revenue was nearly $1.8 billion and profit from operations topped $54 million.

• Eskenazi and Community hired lobbyists to petition the federal government to change the laws or rules governing the Build America bonds. According to the Center for Responsive Politics, Health & Hospital Corp. spent $167,500 last year lobbying the federal government—more than double the amount it typically does—and $60,000 so far in 2014.

Officials at the U.S. Treasury Department listened to the Eskenazi representatives, but said the issue was too small for them to get involved in.

Several members of Congress, from the House and Senate, also listened. The problem was that virtually no bills that change the U.S. tax code are even moving through Congress and any that do get close scrutiny for “earmarks” that help projects in specific localities.

The Community-Eskenazi request was not a typical earmark, in that it was not a petition for federal funding, but members of Congress worried it would be perceived that way, Gutwein said.

“The opportunities for a fix are exceedingly rare,” Gutwein said of the congressional legislative process.

• Community and Eskenazi explored trying to work together in a structure that still kept them legally separate. But what they came up with was a labyrinthine collection of joint ventures reporting to joint ventures that would have made it especially difficult to get teams of nurses, let alone executives, in a room to share data and talk strategy.

“Inefficient doesn’t even begin to describe how unworkable it would have been,” Harris said. And that would have prevented Eskenazi and Community from achieving their overarching goal for the integration—to pool resources in order to serve more patients.

In a last-ditch effort, Community and Eskenazi assembled nearly 20 people in a conference room at a downtown law firm for two all-day meetings. Each side had its top managers there, as well as lawyers in three specialties: tax law, antitrust law and mergers & acquisitions.

At the end of the first day, however, Mills concluded it was hopeless and “called a timeout.”

“We just can’t get it done because of the complexity of trying to deal with a governmental agency,” Mills explained during an internal presentation in February, when for the first time he told Community’s employees the deal was off.

Some Community employees have suggested Community backed out of the deal because it suffered a spike last year in patients who couldn’t pay their bills.

Community spent $25.5 million more last year on charity care than it did the previous year, and $10.3 million more on bad debt.

“Our charity care went through the roof,” Mills acknowledged in an interview, but he said that development played no part in his decision to halt the deal.

Since September, the two sides have kept quiet about the change in plans as they continued their lobbying efforts and had smaller discussions about ways in which they could collaborate.

Community and Eskenazi have for years collaborated on behavioral health care, working through an organization called InteCare. That relationship will continue and is even set to expand soon with the launch of a suicide-prevention program.

In addition, Community has turned to Eskenazi to handle trauma patients, particularly orthopedic traumas.

More broadly, Mills said that he, Harris and Gutwein—as well as many other people in their respective organizations—have become friends through the hours they spent working to integrate the hospitals. And those relationships will help as both organizations try to navigate changes coming from health care reform.

Even though their full-integration deal is not going forward, both Gutwein and Mills stopped short of saying the deal was completely off.

“It’s not actually ended yet,” Gutwein said. “We still would like to get a change in the rules.”•

 

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  • great reporting
    This is why we all need to support good old fashioned investigative journalism. J.K. I am sure there is much more to the story that couldn't share but this insight is wonderful. Interesting that over $2500 per Community employee is charity write offs. I would be interested in total legal fees per Community employee too!

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  1. It appears the police and prosecutors are allowed to change the rules halfway through the game to suit themselves. I am surprised that the congress has not yet eliminated the right to a trial in cases involving any type of forensic evidence. That would suit their foolish law and order police state views. I say we eliminate the statute of limitations for crimes committed by members of congress and other government employees. Of course they would never do that. They are all corrupt cowards!!!

  2. Poor Judge Brown probably thought that by slavishly serving the godz of the age her violations of 18th century concepts like due process and the rule of law would be overlooked. Mayhaps she was merely a Judge ahead of her time?

  3. in a lawyer discipline case Judge Brown, now removed, was presiding over a hearing about a lawyer accused of the supposedly heinous ethical violation of saying the words "Illegal immigrant." (IN re Barker) http://www.in.gov/judiciary/files/order-discipline-2013-55S00-1008-DI-429.pdf .... I wonder if when we compare the egregious violations of due process by Judge Brown, to her chiding of another lawyer for politically incorrectness, if there are any conclusions to be drawn about what kind of person, what kind of judge, what kind of apparatchik, is busy implementing the agenda of political correctness and making off-limits legit advocacy about an adverse party in a suit whose illegal alien status is relevant? I am just asking the question, the reader can make own conclsuion. Oh wait-- did I use the wrong adjective-- let me rephrase that, um undocumented alien?

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  5. You can put your photos anywhere you like... When someone steals it they know it doesn't belong to them. And, a man getting a divorce is automatically not a nice guy...? That's ridiculous. Since when is need of money a conflict of interest? That would mean that no one should have a job unless they are already financially solvent without a job... A photographer is also under no obligation to use a watermark (again, people know when a photo doesn't belong to them) or provide contact information. Hey, he didn't make it easy for me to pay him so I'll just take it! Well heck, might as well walk out of the grocery store with a cart full of food because the lines are too long and you don't find that convenient. "Only in Indiana." Oh, now you're passing judgement on an entire state... What state do you live in? I need to characterize everyone in your state as ignorant and opinionated. And the final bit of ignorance; assuming a photo anyone would want is lucky and then how much does your camera have to cost to make it a good photo, in your obviously relevant opinion?

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