Under the new strong-mayor form of government, Mayor Steve Bach has no oversight authority over Memorial Health System.
Or Colorado Springs Utilities, for that matter.
But when it comes to Memorial, a city-owned enterprise, the mayor seems to be exerting his influence on a proposal to lease the health system and its assets.
Read for yourself.
The mayor recently posed a series of questions about the proposal, which calls for transitioning Memorial to an independent nonprofit with a lease option, to the City Council’s Memorial task force, which worked with hospital staff and Memorial’s Board of Trustees to compile the answers.
Here is the full text of the response that Bach received from council President Pro Tem Jan Martin, who is chairing the task force:
July 15, 2011
Honorable Mayor Steve Bach
City Administrative Building
30 South Nevada, Suite 601
Colorado Springs, CO 80903
Thank you so much for submitting your questions regarding the transition of Memorial Health System, to a new non-profit, tax-exempt organization with a lease option. As you know, Council has convened a Task Force to determine the best course to pursue for Memorial.
Clearly the issue has been extensively studied and we appreciate your questions as a further step in moving our discussions forward. In this letter we will address each question in turn.
Over the 2 months the Task Force has been meeting, we have not been hesitant to ask hard questions and to expect thorough answers. At times, we have relied on healthcare experts to guide us in our discussions and as you’ll see below in the responses, there has already been a lot of work done on the possible language for the lease option.
Below are our responses to your questions. We want you to know we received assistance in responding to some of the more technical aspects of your questions. Please don’t hesitate to let us know if you have any other questions.
1. How can the City be assured that the MHS management lease proposal now on the table is the best one for the community without us having other qualified proposals with which to compare? Why not invite, for example, Poudre Valley and University Hospital to present proposals for consideration? Why not retain control of MHS, ask the voters for a Charter Amendment allowing MHS to operate outside the City?
This is a complex question likely needing an in-person conversation, but let me share some thoughts here.
To begin with, we need to remind ourselves of two of the most significant advantages to constructing a lease with the Independent MHS, as opposed to other parties. First, since the City is negotiating with itself, it can completely dictate the terms of the lease. Items discussed below such as indemnification (especially for all actions prior to the lease), full payment of PERA, significant restrictions upon operations (charity care, public reporting and like) while doable here, would simply not be accepted by an “outside” third party (a conclusion verified by Mr. Stacey, President of Poudre Valley, among others, who indicated that only the model under consideration that would assure the City the guarantees it sought was the lease).
Second, any outside party, whether non-profit or for-profit, will not grant the degree of local control and local decision making envisioned in the lease. A lease to an outside third party, for example, is ultimately a purchase of a revenue stream, not a commitment to fulfill our community mission. Our community voice, our assurance that monies raised in our community stay in our community, our assurance that service and resource allocation decisions would be made by Colorado Springs for Colorado Springs, would be severely limited. A locally-governed Independent MHS is the best way to ensure that MHS’ mission and services continue to be tailored to Colorado Springs’ needs, rather than the business goals of a distant boardroom.
As you know, health care is rapidly changing and it could make sense for MHS to affiliate with Poudre Valley or others in the future. Changing the governance of MHS under the proposed lease structure does not prohibit any such deals in the future; in fact, it will likely strengthen our hand in any such transaction. The best way to protect the community’s interests in any future transactions is to assure that MHS is strong enough to have a seat at the table, not to be managed by another organization. The lease option under consideration will provide MHS with the latitude to effect a strategy best for the health care and economic needs of our community. Our consideration of the financial strength of MHS, as certified by two national advisory firms, gives us comfort that MHS does not need a capital partner and has the financial wherewithal to chart its own future.
Finally, a charter amendment enabling MHS to operate outside City boundaries does not fully address the strategic needs of MHS. For example, it would not overcome the barriers to physician integration currently faced by MHS due to its status as a public, City-owned hospital. Therefore, while perhaps helpful, a charter amendment will not give MHS the degree of freedom and stability necessary to effectively serve patients and compete in a challenging environment.
2. How can the City be assured that it will have no continuing or contingent PERA liability upon the lease of the assets during the term of the lease, any extension of the lease or upon the expiration or cancellation of the lease or uncured default by the Lessee? Such assurance should be in the form of a written release and indemnification not only by the Lessee (and its principals personally), but also from the State of Colorado/PERA/and or other appropriate regulatory authority.
The issue of liabilities/expenses associated with MHS employees leaving PERA must be resolved prior to entering into any lease arrangement. The assurance that you set forth, namely a full release by PERA of any liabilities, coupled with a full indemnification provision from the Independent MHS, is exactly the approach that the City Council Task Force has agreed upon. I would note that indemnification language has already been drafted by the City’s outside legal counsel and approved by the City Attorney for use by the Task Force, and we would expect this same language to be used here.
3. How can the City be assured that it will have no contingent indebtedness or other ongoing liability except for commercially reasonable Lessor’s liability? Such assurance should be in the form of a release and indemnification not only by the Lessee (and its principals personally). As of the effective date of the lease, all current indebtedness should be paid off by MHS with the new entity obtaining its own, stand alone financing without any City contingent liability for that indebtedness currently or in the future. All current holders of MHS indebtedness should provide a release and indemnification directly to the City.
We agree that the City should have absolutely no liability associated with the Independent MHS. The City currently has no legal obligation to pay any of the debt owed by MHS. In order to meet the requirements of the lease model, however, the Independent MHS will pay off all current debt; all new debt will also be without any legal recourse to the City. Beyond this, the Independent MHS will “assume and pay or discharge all claims and liabilities of any kind, whether known or unknown, contingent or otherwise, arising from MHS Operations prior to, on or after the [execution of the lease].” (language from draft agreement) As noted above, the City’s indemnity would include protection against liabilities arising from operations under the City’s ownership prior to the effective date of the lease – a protection the City would not obtain in any arms-length lease with a third party.
4. Notwithstanding the 1949 Charter Amendment, which stated that the City would assume liabilities for MHS in the event MHS defaulted on its liabilities, how can the City be assured that there will be no future liability risk to the City associated with that Amendment?
The Independent MHS will fully indemnify the City for all actions taken pre- and post-lease by the health care system. Also, the lease will require that certain financial benchmarks be maintained by the Independent MHS, both to assure that the system remains financially strong and able to fulfill its lease commitments and also to assure the City that sufficient funds are present to pay any liabilities.
With respect to the 1949 ordinance, the only way to remove this potential exposure to taxpayers is through a ballot proposal. We intend that ballot language to accomplish this will be put before the voters.
5. How can the City be assured that the quality of patient care will continue at, or better than, the current level of care at a market rate of cost to the patient?
The lease will mandate the following: that the Independent MHS will (i) have a Board of Trustees “quality and safety committee charged with monitoring the quality of care and safety of patients seen throughout the Independent MHS;” (ii) “report on a quarterly basis, on its website in a manner readily understandable by the public, information regarding the quality of care it provides, including how its care compares to state and national benchmarks for health care organizations of a similar size and scale;” (iii) on an annual basis the CEO and Chairman of the Board will report orally and in writing to the community on, among many other things, “detailed information, derived from benchmarks, regarding the quality of care provided;” and (iv) report quarterly to City Council on, among other things, the quality of care provided. Failure to fulfill these commitments will constitute an event of default under the lease, ultimately leading to termination of the lease if not corrected.
With respect to a “market rate of cost,” as you know the high degree of health care regulation means that the health system has relatively little ability to disproportionately raise prices passed on to patients. Federal and private initiatives toward “value based purchasing,” whereby government and payors will selectively contract with and reward efficient, cost effective providers are also being expanded. We believe, therefore, that the Independent MHS, in order to be successful (and not trigger default under either the charity care or financial performance benchmarks in the lease) must provide care in a cost effective (“market rate”) manner.
6. How can the City be assured that the quality and amount of care for the needy will continue at, or better than, the current level?
The lease will mandate the following: the Independent MHS will: (i) “maintain the historic charitable purposes of MHS to meet the current and future health care needs of the community;” (ii) “provide care to the indigent, uninsured or underinsured and shall adopt the charity care policies in effect at MHS;” and (iii) “all services offered by MHS as of the execution date of the lease shall be offered or arranged by the Independent MHS…at activity levels no less than those provided immediately before the date of the lease.” Failure to meet these requirements would ultimately result in termination of the lease if not corrected.
7. How can the City be assured that the new entity’s HR policies and practices will be fair for the MHS employees?
The lease will mandate that ”all current MHS employees… in good standing…shall be offered employment by the Independent MHS…under the same job titles, with the same responsibilities, at the same salary level, and with substantially similar employee benefits. The Independent MHS shall assume and pay when due all obligations to pay all MHS Employees’ wages or paid time off accrued but not paid prior to the effective date of the lease].” Further, the Independent MHS will “assure that MHS Employees are treated fairly and not materially disadvantaged by [any] change in retirement benefits” in the movement out of PERA. City Council and legal counsel will review these benefit programs and policies prior to execution of the lease to assure compliance. Deviation from this obligation will constitute an event of default under the lease.
8. How can the City be assured that other City legal protections are answered to the satisfaction of the City Attorney, you and me, including protections against any wasting of the assets by the Lessee, Lessor self help provisions and expedited Lessor lease cancellation rights?
Because this transition of MHS is essentially the City negotiating with itself, the City is free to mandate all protections it deems reasonable and appropriate. We believe that the protections outlined above, and which will be amplified even further in the actual lease documents, accomplish the goal of protecting the City.
Regarding wasting of assets specifically, the lease will mandate preservation of property, requiring the Independent MHS to maintain the facilities and to make appropriate capital investments to keep the facilities and operation — and the quality and safety of patient care — current. Finally, provisions regarding default and termination will be thoroughly set forth and reviewed by the City Attorney and outside legal counsel.
Mayor Bach, we want to thank you once again for the opportunity to respond to your questions. We would welcome the opportunity to meet and further discuss these responses with you, and to address any other questions that you might have.
As you can see from our responses above, negotiating the lease is a key component in the new model for MHS. We would welcome you or someone appointed by you to join us in the negotiations and writing of the lease agreement to ensure it addresses, to your satisfaction, all the questions you raised and to provide the best possible healthcare solutions in our community for years to come.
On behalf of the City Council MHS Task Force, thank you.
Jan Martin, President Pro Tem
Colorado Springs City Council