Creating community benefit from a merger

When hospitals merge, the focus tends to be on how much will go to pay off debt and how much will be reinvested in capital improvements. But little notice is paid to a by-product of such transactions – the creation of charitable foundations.

A case in point is the joint venture agreement signed last December between LifePoint Hospitals, a hospital company of approximately 60 hospital campuses in 20 states, and Portage Health in Hancock, Mich., a 36-bed acute care hospital with accompanying skilled nursing unit and other healthcare services.

[See also: Michigan hospitals ally with LifePoint.]

The agreement signed between the two resulted in eliminating Portage Health’s debt, $60 million in capital improvements to Portage and approximately $40 million to fund a charitable foundation to support critical needs in the surrounding community.

That $40 million were funds leftover after paying Portage’s debts, said Leif Murphy, executive vice president and CFO of LifePoint. “The proceeds go to the community in the form of a foundation,” he said.

These sorts of joint venture agreements or mergers among for-profit hospitals in which any leftover funds benefit the community in the form of a charity or foundation are not uncommon, especially as the rates of hospital consolidations increase, said Anu Singh, senior vice president at Kaufman, Hall & Associates, an Illinois-based consultant firm. 

“Sometimes with a sale, funds can exceed the amount of debt needed to be paid from the hospital being sold, in which a foundation can be formed from this pool of money,” said Singh. “It’s then determined which kind of benefits the community would receive in terms of healthcare needs.”

That extra funding could be used to create a charitable foundation, but also could be used to create a diabetes awareness center or a community wellness center, Singh said.

For merging non-profit hospitals on the other hand, extra funding created from the sale usually doesn’t go to the community in the form of a charity or foundation, but instead is rolled back into the hospital to improve existing healthcare facilities, said Joe Lupica, chairman at Newpoint Healthcare Advisors.

“They often choose to recirculate their capital within the hospital in order to create a better value of care for the community,” he said. “There can be a bit of a multiplying effect of dollars being invested in the hospital. For example, being able to bring in higher-quality physicians. This brings in more people to the community. Those people shop in the community – it helps the community economically as well.”

But what it really comes down to is the issue of tax exempt debt in mergers, pointed out Singh. Nonprofits merging can generally keep debt outstanding but for-profits cannot assume and keep outstanding debt, Singh said.

“As a result, most for-profits will pay cash for assets and if the cash they pay exceeds the outstanding debt of the acquire, the excess usually is put into a foundation to support local healthcare needs," Singh said. Nonprofits will offer other forms of consideration, like commitments for capital projects.

Merging entities that already have community benefit foundations have to get creative, said Bill McGinley, president and CEO of the Association of Healthcare Philanthropy (AHP).

They will have to decide how the foundations will be handled going forward, and while there’s no set way to handle such situations, frequently hospitals will want to keep the foundations separate so that donors understand where their dollars are going, McGinley said. “It’s like politics. You have to be careful with the way fundraising is approached – especially when branding a new name for a hospital entity.”