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HomeMy WebLinkAbout~Master - Special Meeting of the Ames City Council 01/05/1995MINUTES OF THE SPECIAL MEETING OF THE AMES CITY COUNCIL AMES, IOWA JANUARY 5, 1995 The Ames City Council met in a special session at 5:00 p.m., January 5, 1995, in the City Council Chambers, 515 Clark, Ames, Iowa, pursuant to law with Mayor Larry Curtis presiding and the following Council Members present: Campbell, Parks, Tedesco, and Wirth. Couns. Brown and Hoffman arrived late. REPORT ON VALUATION ANALYSIS OF MARY GREELEY MEDICAL CENTER: Gary Frantzen, Arthur Andersen & Company, reviewed the document entitled "Valuation Analysis of the Mary Greeley Medical Center, as of August 31, 1994," saying the firm was charged with valuing the owner's equity in Mary Greeley Medical Center. Couns. Brown and Hoffman arrived at 5:10 p.m. Mr. Frantzen said the methodology to compile the report was comprised of the following four approaches: Income Approach, Market Multiple Approach, Market Transaction Approach, and Net Underlying Assets Approach. He said the scope of analysis included discussions with City and Hospital management and others in the medical community; analysis of historical operating results for MGMC; review of economic factors affecting MGMC; review of industry trends, population trends, and payor programs; discussions with major employers in the area; comparative analysis of operating and financial characteristics of MGMC and those of publicly traded hospital companies; consideration of transactions regarding the acquisition of hospitals and other hospital companies; analysis of operations and cash flow available to investors; and appraisal of the tangible assets including land, buildings, and equipment. Mr. Frantzen reviewed key factors of each of the methodological approaches, as contained in the report, noting income taxes were included in all the approaches. Mr. Frantzen described the conclusion of value based upon the four approaches as follows: Approach to ValuationValue Indication Discounted Cash Flow $43,600,000 Market Multiple $46,100,000 Market Transaction $44,900,000 Net Underlying Asset $50,200,000 Concluded Fair Market Value $46,000,000 Mr. Frantzen said the firm concluded the fair market value of the ongoing operations of MGMC, as of August 31, 1994, was $46,000,000. He said that value included all assets and current liabilities required for the continuing ongoing operation of MGMC. He reviewed how the firm then looked at non-operating assets and liabilities to determine that the total net value of the owner's equity in MGMC as of August 31, 1994 was $48,900,000. The Council members asked questions of Mr. Frantzen and Michael Kendzior, MAI, Manager, Real Estates Valuation, also of Arthur Andersen, regarding the Report. Coun. Parks asked whether consideration had been given regarding how a change in MGMC's arrangement with McFarland Clinic might impact valuation. Mr. Frantzen said as there was no integrated system set up as of the August 31, 1994 valuation date, the firm felt it would be speculative to do so at this point. He said it was felt that any such change in operating arrangement might have a significant short-term impact, but not in the long term. He said the firm felt it could use only the facts available as of 8/31/94. Coun. Parks said a geographic area had been used to determine MGMC's market, rather than a network or a referral basis. He said he felt that assumption was narrow, in terms of drawing a definitive valuation. Mayor Curtis noted a memo to the Mayor and Council from the Ames City Assessor, dated January 4, 1995, was critical of some of the techniques used in the valuation analysis. Mayor Curtis asked that the firm prepare a response to those points, because he felt some valid questions were raised, especially in the areas of land evaluation and income taxes. He said he would ask that payment be withheld until the firm had appropriately responded to the questions raised in the Assessor's memorandum. REPORT ON LEGAL SERVICES: Robert Helmick, Dorsey & Whitney, introduced Forrest Burke of the firm's Minneapolis office, and Jeffrey Hurlburt of the Des Moines office, saying both individuals had a great deal of input into the Report on legal services. Mr. Helmick reviewed the City's request that Dorsey & Whitney prepare pro forma buy/sell agreements from four different transactions; a list of the legal steps necessary to effect the disposition of the Hospital; examples of covenants to maintain particular services; analysis of implication on outstanding bonds; and legal ramifications of each disposition. Mr. Helmick provided a brief overview of the Dorsey & Whitney report, saying the firm had conferred with City staff, Hospital staff, Trustees, McFarland Clinic physicians, and "independent" physicians, and had focused on the following major issues: 1. Price and form of payment 2. Complete privatization 3. City relieved of responsibilities 4. Flexibility for future integrations and affiliations 5. Complete indemnity of the City 6. Continuation of employment of existing staff 7. Protection of the City's outstanding tax exempt bonds 8. Assurance of maintaining Hospital services in Ames Mr. Helmick noted the Report contained pro forma disposition contracts for each of the following plans: (1) Sale to a nonprofit corporation, (2) Sale to a for-profit corporation, (3) Lease of assets and sale of operation to a nonprofit corporation, and (4) Lease of assets and sale of operation to a for- profit corporation. He briefly discussed each of the four plans. He said state and federal law required the $45 million in bonds be paid, and that tax exempt status be maintained. He said therefore, a purchaser of MGMC would need $45 million in cash. He said the laws regarding the other incremental part of the MGMC value were not as clear-cut. He said while the State Constitution provided that a city cannot make an appropriation to a private organization except with 2/3 vote of the State Legislature, that incremental compensation need not be in cash, and could be handled in a transaction such as a lease. He noted the Report recommended that any asset other than cash be appraised. The Council members asked questions about covenants and deducts that might be included in any contract document. Mr. Helmick discussed the hierarchy of covenants, from full veto power (anti- sell covenant), to a buy/sell agreement, to contracts entered into simultaneously with a buy/sell agreement. He said one of the major policy decisions in the formation of any new corporation would be whether the City would outline the basic structure of the corporation. He said much policy determination could be written into the articles of a corporation. Mayor Curtis noted this evening's meeting was a worksession, and not a public hearing, but invited the public to ask questions of the consultants. Batista Simpson, 912 Kellogg, asked whether there was a public pronouncement of a margin of error regarding the valuation report, and Mr. Frantzen said there was not. She asked questions regarding how the assessment might be impacted if certain services were eliminated. She asked if the assessment included assumption of tax exemption, and Mr. Frantzen said the valuation assessment assumed a taxable entity. Ms. Simpson asked whether the $45 million required for paying off the debt included the penalty for early defeasement, and Mr. Helmick said it did. She asked whether it would be possible for the Hospital to become a non-profit entity, then merge with for-profit hospitals or clinics. Mr. Burke said State corporate law would prohibit merging a non-profit corporation with a for-profit one. He said it could become a provider in a network, but it could not become one integrated entity. She asked whether an audit of the Hospital at present was recommended, and Mr. Frantzen said it is presently audited. Mr. Helmick said as a part of any sale, every aspect of the Hospital would be audited. Doug Kell, Interim Administrator, Mary Greeley Medical Center, asked whether the terms "fair value" and "fair market value" were interchangeable and Mr. Helmick said they were not, and that "fair market value" had a very specific meaning within the appraisal industry. He said the Supreme Court would stipulate that any association be "fair and reasonable." There was discussion regarding the Hospital's lease of a home to Youth and Shelter Services for $1.00 per year, and how at the time of that transaction, the value may have been based on having the home occupied and the property preserved for the Hospital's later use. There was discussion regarding transactions where there is quid pro quo in the form of development occurring, services to the government, etc., in lieu of cash. City Attorney John Klaus said the theory behind such transactions is that the City is receiving something under the scope of that contract that it would not get otherwise, and that the service is of value to the government. Mr. Kell said he felt the issue of "gifting" was crucial to the nature of this transaction. He said in a recent evaluation, MGMC had calculated that the Hospital's contribution back to the community was roughly $3 million in in-kind services. He said the receipt of high quality, low-cost health care is a value to the community, and needed to be taken into consideration. Dale Anderson, McFarland Clinic, said he questioned two assumptions made in the Valuation Report's cash projections for MGMC: 1) That there would be a slight decrease in the average length of patient stay and 2) That Hospital admissions would remain flat. Mr. Frantzen said both assumptions were based on MGMC's past 5-year history and on industry trends nationwide. Dr. Anderson asked whether the analysis considered the impact of managed care in communities where it had been introduced, and Mr. Frantzen said managed care may be why those trends are occurring. Dr. Anderson said the national trends show a 20-40% reduction in hospital admissions in communities where managed care has been introduced, yet the Valuation Report projected the future of MGMC as if the past five years reflect the future. He said the introduction of managed care is having a profound impact on hospital revenues. He said it was as if the Report were ignoring the realities of what was happening to healthcare. Mr. Frantzen said the Report didn't just project history and in fact, MGMC's admissions have been increasing over the past five years and average length of stay has been declining. He said he agreed that under managed care situations, admissions and average length of stay would decline. He said however, MGMC's average length of stay is already considerably lower than the national average for non-managed care areas and is close to that of managed care areas. He said he understood Dr. Anderson's point about managed care, but said there were also some studies that suggest the population size of Ames cannot support managed care. Dr. Anderson said two Boston consultants previously reported to the City's Health Care Study Committee that capitation would result in a "disastrous" decrease in MGMC revenues. He said if the Arthur Andersen valuation is based on what is going to happen to MGMC's market, more discussion would be needed. He said these assumptions were critical in terms of future cash flow. Batista Simpson asked what percentage of the Hospital was already working under a capitated system or under a Medicaid controlled system, and Mr. Frantzen said while he did not have those figures at-hand, the Medicare portion last year was slightly over 50% Ms. Simpson asked whether ISU was on a managed care system, and Mr. Frantzen said it was not. There was discussion of HMOs, capitated systems, and whether the impact of a capitated system on a community that already had an HMO might be less than that on a community which did not have HMOs. Coun. Tedesco asked the estimated administrative costs for an ownership change. Mr. Helmick said administrative costs for such a transaction could be $250,000 for the City, and $150,000 for the purchaser. At Coun. Tedesco's request, City Attorney John Klaus reviewed Chapter 12 of the Municipal Code, an ordinance he said was adopted in 1973 when the City reconstituted the Board of Trustees. He said that ordinance creates the Trustees, states their qualifications, and puts some restrictions on how they do things in their controlled governance and management of the Hospital. Coun. Tedesco asked if this ordinance was the primary creator of the "two-tier" governmental system, and Mr. Klaus said it was. He said the City was required by State law to create a Board of Hospital Trustees, and said that statute also dictates certain things the trustees can and cannot do. He said the local ordinance has added to those requirements to some degree. Coun. Tedesco asked whether the Council was empowered to enhance or liberalize the responsibilities of the Board of Trustees to enable them to enter into contracts on their own without the Council's consent. He asked whether the Trustees might be able to join in a joint ventureship to create a marketplace or special care group, similar to the ventureship of the University of Iowa Hospitals. City Attorney Klaus said Chapter 12, Sections 12.15 and 12.16 of the Municipal Code, pertained to the Board of Trustees' power and authority to make valid contracts. He said there were areas where the requirement for Council approval could be removed, i.e., construction contracts, ability to buy real estate or to lease space, and entering into joint ventureships such as 28-E agreements. He said the latter could lead into the type of joint venturing that occurred at the University of Iowa Hospitals. He said such a joint ventureship could create a new private entity that would not be subject to the open meetings law. Motion by Parks, Second by Brown, to accept the Dorsey & Whitney Report on Legal Services, and the Arthur Andersen Valuation Analysis, subject to the latter responding to the issues raised by the City Assessor in his January 4, 1995 memo. Vote on Motion: 6-0. Motion declared carried unanimously. COMMENTS: Coun. Parks said he felt the issue of valuation needed to be looked at during the next step the Council took on the Hospital issue. He said it was crucial in defining MGMC's market. Mayor Curtis asked the possibility of getting the State Legislature to approve a transfer by 2/3 vote. Mr. Helmick said while he was not familiar without any act that had been through that process, he felt it was certainly worth investigating. Coun. Campbell asked that Staff provide possible dates for the public input meeting on the Hospital options, for Council to consider at the January 10 meeting. ADJOURNMENT: The meeting adjourned at 7:25 p.m. Sandra L. Ryan, City Clerk Larry R. Curtis, Mayor