Council Communication

February 19, 2013, Business Meeting

Council consideration of a letter of intent between Ashland Community Hospital, Asante Health Systems, the City of Ashland and the Ashland Community Hospital Foundation
FROM: Dave Kanner, city administrator, dave.kanner@ashland.or.us SUMMARY The board of directors of Ashland Community Hospital (ACH) voted in December to begin a period of exclusive negotiation with Asante Health Systems of Medford on an affiliation agreement under which ACH would become part of the Asante system. The City of Ashland, as the sole shareholder in the ACH corporation, must consent to any affiliation agreement and, as the owner of the hospital property, must agree to terms under which the property is conveyed to Asante. As a first step in those negotiations, ACH, the City and Asante have developed a non-binding letter of intent (LOI) that lays the groundwork for terms of a definitive agreement that will complete the affiliation. The Ashland Community Hospital Foundation is also a signatory to this letter of intent. This LOI spells out the Citys intent to transfer its sole corporate membership in ACH to Asante. Under the definitive agreement that will be based on this LOI, Asante will agree to operate ACH as a general hospital for at least 15 years. If it fails to do so within the first three years of the agreement, corporate membership will revert to the City and the property will revert to the ACH corporation. If it fails to operate ACH as a general hospital in years four through 15 of the agreement, Asante will pay the City $4 million in what is the equivalent of liquidated damages. In addition, should Asante fail to operate ACH as a general hospital in the first three years of the agreement, thus causing reversion to the City, Asante will pay the City $8 million to cover the balance of an outstanding construction loan that is collateralized by the hospital property. This letter of intent was approved by the Ashland Community Hospital Board of Directors at its meeting of February 8, 2013. BACKGROUND AND POLICY IMPLICATIONS: Ashland Community Hospital CEO/President Mark Marchetti and former Board Chair Dr. Doug Diehl met with the City Council in August, 2011, and at that time presented a recommendation which was approved by the Council for seeking an affiliation with a larger hospital group, in order to address ACHs dire financial situation. Following that meeting, the hospital, working with Huron Consulting, sent a request for proposals to 25 hospital systems across the United States and received proposals from five. After reviewing the proposals and hearing presentations, the ACH Board selected Dignity Health, a San Francisco-based
Page 1 of 3

hospital system with 42 hospitals in its portfolio. In April 2012, the hospital and Dignity entered into a due diligence period aimed at developing a merger and affiliation agreement. However, in October, Dignity broke off those negotiations and withdrew its proposal. In November, the ACH Board voted to pursue negotiations on an affiliation agreement with Asante Health Systems of Medford, which owns and operates Rogue Regional Medical Center in Medford and Three Rivers Hospital in Grants Pass. Following two months of discussions that included the City and the Ashland Community Hospital Foundation, the parties have arrived at a non-binding letter of intent that spells out the terms that will now spell out the terms of a to-be-negotiated definitive agreement that will complete the affiliation process. Because the City is the sole shareholder in the ACH corporation and the owner of the hospital property, the City must approve any affiliation agreement and any agreement affecting disposition of the real property. From the Citys perspective, the key provisions of the LOI are as follows: 1. The City agrees to transfer its sole corporate membership in ACH to Asante. (12.1) 2. The City agrees to transfer title in all real property to the ACH corporation. (13.1 ) 3. Asante agrees to operate ACH as a general hospital per Oregon Administrative Rule 333-5000032(2)(a) for a period three years. If Asante fails to do so, sole corporate membership in ACH will revert to the City, along with a payment of $8 million to cover the outstanding balance on a construction loan from Umpqua Bank that is secured by the hospital property. (12.4) 4. Asante agrees to make $10 million in capital improvements in ACH in the first three years, with not less than $2.5 million of that by the end of the first year and $5.5 million by the end of the second year. Should Asante fail to do so, it will pay the difference between those amounts and what it actually invested to the ACH Foundation. (12.4) 5. There is a known pension liability that accrues to the hospital. Should that liability exceed $16 million in the first three years of the agreement or should an unknown liability arise that exceeds $4 million in the first three years, Asante may, at its option, revert sole corporate membership in ACH to the City. (12.5, 12.6) 6. Beginning in year four of the agreement and continuing through year 15, Asante agrees to pay to the City $4 million should it cease to operate ACH as a general hospital. However, the City would have no right of reversion. (13.6) 7. The ACH Board of Directors will dissolve and the Asante Board of Directors will become the sole governing body of the Asante hospital system, including ACH. The ACH Board will become the Asante Ashland Community Hospital Quality Committee. (16) 8. The City and the ACH Foundation agree to not compete with Asante/ACH unless the reversionary interest of one of the parties is invoked. (17) 9. Asante commits every effort to offer but not to guarantee employment to all current ACH employees. (18) Roy Vinyard, CEO of Asante Health Systems, has been personally involved in the development of this LOI and he will attend the February 19 City Council meeting to answer any questions you have. FISCAL IMPLICATIONS: There are many indirect fiscal implications for the City related to the 400 jobs provided in the community by ACH, although there are no direct fiscal implications in this agreement. However, the hospital property, which is owned by the City, is encumbered by the above-referenced construction
Page 2 of 3

loan and it is therefore in the Citys interest to ensure that an agreement is in place to continue debt service payments on that loan or to otherwise provide for payment of the loan. STAFF RECOMMENDATION AND REQUESTED ACTION: Staff recommends approval of this letter of intent. SUGGESTED MOTION: I move approval of letter of intent of affiliation between Asante and Ashland Community Hospital and authorize the mayor and the city administrator to sign the letter as presented. ATTACHMENTS: Letter of Intent

Page 3 of 3