Much remains to be worked out. University of Louisville Hospital Profitable but CHI and KentuckyOne Health suffering major financial losses.
Claimed to be effective as of Dec 14, an initial document initiating the separation and anticipated divorce of the University of Louisville and KentuckyOne Health became available today, December 22. Given the complexity of the existing contractual partnership and some earlier hints of marital conflict, the 3-page document submitted as an amendment to the original Joint Operating Agreement (JOA) is surprisingly both short and bland. The principal function of the amendment is to change the term length of the original agreement from 20 years to an ending date 6 months away on June 30, 2017 at which time University Medical Center, Inc. (UMC) resumes its pre-marital control of the entirety of University of Louisville Hospital and the James Graham Brown Cancer. It is obvious that many consequent details remain to be revealed or worked out. Indeed, the document anticipates that additional counterparts to the amendment will be added.
A 6-month wind-down period for one spouse to leave the house in an orderly manner is specified by the conflict resolution agreements of the JOA. Although not specifically mentioned in the amendment, the change of termination date triggers a cascade of other important actions of which the most important is that the complex interlocking operational Academic Affiliation Agreement (AAA) also becomes void on June 30. A new AAA has been prepared well ahead of schedule. It has reverted to a traditional Affiliation Agreement used between UofL and its hospital partners and returns control of all academic, clinical, educational, research, financial, and hopefully ethical matters back to the University where such belongs. Hooray!
The longest (and most confusing to me) paragraph in the amendment deals with how much money UMC will owe (or not) to KentuckyOne to pay for capital investments in Integrated Operation made after November 1, 2016; and in certain other investments that are part of what is called “Undepreciated Capital.” At this point I have no idea what is being referred to or how much money is involved, but target valuations in the of tens of millions of dollars are mentioned. This clause remains to be explained. In other financial agreements, UMC control of assets related to its woman’s services and associated partnerships is confirmed. As I understand it, UMC now no longer needs the permission of KentuckyOne to use its $15 million Capital Fund for other purposes including supplementing a $17 million UMC Reserve Fund that exists to offset operational losses. Who will end up owing what to whom remains completely obscure to me, but it could be expensive. The UofL Board of Trustees has approved the dissolution of the partnership. That’s the new JOA agreement in a nutshell. Any insights or corrections from readers would be welcome. The original JOA, AAA, and supporting agreements are available on a University website.
Additional details come from an unexpected source.
As it happens, Catholic Health Initiatives, the parent corporation of KentuckyOne, just released its quarterly Financial Report for the three months ending September 30, 2016. It was not pretty. Recent modest profits slid sharply to an operating loss of $217.8 million. This will not reverse the declining bond ratings of this heavily indebted hospital company, nor give it much clout in its discussions of merger with Dignity Health whose own recent losses have been reversed. Mr. Michael Rowan, CHI’s second-in-command Chief Operating Officer, just left the company and was replaced by Anthony Jones, a hospital turnaround consultant. I believe things are going to be even more difficult for CHI in the very near future. Its survival is not, in my opinion, a given. Those troubles will trickle down to KentuckyOne which also suffered operating losses. For this last quarter, KentuckyOne had an operating loss of $5.4 million in EBIDA before restructuring , impairment, and other losses; while providing CHI 16.1% of its total operating revenues. In its report, CHI provided additional new details about what has been happening in Louisville which I summarize below.
Although I am unaware that UofL has used the term “breach” of contract in documents that have become public, CHI states that “in October 2016, the University alleged various breaches of the Agreements with an unspecified claim for damages against KentuckyOne.” Those would be fighting words indeed! CHI notes that during the dispute resolution process, the parties agreed to a revision of their agreements and a move to a more beneficial relationship. Ongoing discussions, including a new Academic Affiliation Agreement and a resolution of all outstanding claims, will be completed on or before by April 15, 2017. By July 1, 2017, “the financial obligations of KentuckyOne [to UofL] will be decreased in an amount to be determined.”
CHI expects a big loss as a result of the divorce.
“For the three months ended September 30, 2016 UMC reported total operating revenues of $125.4 million and excess of revenues over expenses of $0.3 million. The CHI consolidated balance sheets also included UMC total assets of $517.2 million as of September 30, 2016. Upon disposition, CHI expects to incur a loss of approximately $260 million.” Wow!
Layoffs came back to bite.
Also in Kentucky, it was noted that labor costs as a percentage of revenues rose, “most notably in Kentucky and Texas.” This observation is consistent with KentuckyOne’s being required to increase its staffing in response to concerns about staffing-related declines in quality at University Hospital. Staff shortages “have resulted in increases to overall labor costs including increases to contract labor costs as well as overtime and premium pay.”
A plus for CHI’s balance sheet, but not so much for UofL.
“Operations for the three months ended September 30, 2016 were favorably impacted by a $4.3 million decrease in a contingent consideration liability as a result of changes in payment assumptions related to the University of Louisville affiliation with KentuckyOne Health.” This would be in addition to decreases in payments reported in an earlier quarterly report.
Lots of debt to go around.
If I read the report correctly, CHI has debt attributed to Kentucky of at least $218 million. How much of this UofL is liable for is not known to me, but UofL agreed to participate in CHI’s pooled debt obligations. I encourage the University to help us all understand how much if any of CHI/Kentucky One’s debt it or the Commonwealth is responsible for.
New Academic Affiliation Agreement: Ahead of schedule.
As suggested above, the new Agreement which takes effect July 1, 2017 looks to me like just other UofL agreements with teaching hospitals. The Governor and Commonwealth are signatories to the Agreement. It completely replaces the current agreement of 2012 and terminates all obligations therein. Its term is for one year only with no mention of renewal. [Who knows what is going to happen before then.] The big-ticket item for UofL is that a total of at least $23.8 million in academic support payments will be made during the one-year term of the AAA in addition to payments for any new contracts agreed to before July 1, 2017. Surprising to me and perhaps indicative of a new age of transparency, considerable details are given about what departments and faculty are the beneficiaries of the academic support. Not surprisingly, cardiology services lead the pack.
It seems to me that considerable effort is made to try to keep much information secret. I can agree that there is such a thing as proprietary business information, but I see no alignment of the contractural prohibitions with Kentucky’s Open Meeting and Open Record laws. Presumably they must be followed. There is no hint of KentuckyOne transferring bricks and mortar to UofL at this time. Because the old AAA is moot as of now, by July there will be no “do-not-compete” prohibitions that would limit who UofL could do other business with or who it might partner with to run its hospital if so desired.
Trainees or employees?
I was surprised to see a frank admission in the document that “Residents shall be employees of the University.” In the past, medical schools and teaching hospitals have fought tooth-and-nail to define interns and residents as “trainees or students” and not employees. If they are employees, they can form and join unions! There are other consequences of what residents are called but that is a big one. In some states, teaching hospitals are losing court cases over this matter. Anyone know what is happening in Kentucky?
The former Joint Operating Agreement and Academic Affiliation Agreements were complicated and confusing – at least to me – and perhaps even to the two contracting parties. During and after their divorce, the former couple will live in the same neighborhood, share many children, and need to be able to work with each other in a civil manner. It appears to me that both sides are attempting to work out an amicable separation. Good for them! We must all wish them luck – as I do. Jewish and Sts’. Mary & Elizabeth Hospital, and University Hospital are among the four Kentucky hospitals serving the largest volumes of Medicaid– and by inference– uninsured patients. Should the plans of Governor Bevin and President-elect Trump come to fruition, the challenges facing these healthcare providers will be worse than stupendous. It is doubtful that either hospital provider would be able to continue to serve their publics without outside help. Where that help comes from and who pays for it is a challenge not just for the two hospital parties, but for the Louisville and Kentucky communities as a whole. In a real sense, we are all signatories to these new documents.
If I have made any errors of fact, or interpretation [always possible] please help me correct the same. If the links are not working or documents not available, let me know that too.
Peter Hasselbacher, MD
Emeritus Professor of Medicine, UofL.
Dec 23, 2016
Addendum: This article was updated Dec 23d to include information from the new Academic Affiliation Agreement that will take effect July 1, 2016, traditionally the first day for new interns and now a new day for the KentuckyOne/UofL relationship.
Links to the original JOA and AAA of 2012, together with my analysis at the time can be found at the end of this article.
Here is a useful summary of the University’s summary of the relationship as described in its financial audit of 2016 presented at a recent Board of Trustees meeting.