HomeMy WebLinkAbout~Master - Special Meeting of the Ames City Council 05/18/1994MINUTES OF THE SPECIAL MEETING
OF THE AMES CITY COUNCIL
AMES, IOWA MAY 18, 1994
The Ames City Council met in special session at 7:03 p.m., May 18, l994, in the City Council
Chambers in the City Hall, 5l5 Clark Avenue, pursuant to law with Mayor Curtis presiding and the
following Council Members present: Campbell, Parks, Brown, Tedesco, Wirth, and Hoffman.
THIRD MEETING ON THE FUTURE OF THE OWNERSHIP OF MARY GREELEY
MEDICAL CENTER: Mayor Curtis introduced Mary Greeley Medical Center's proposal. The
Board of MGMC is interested in creating a new non-profit hospital. The Board's proposal will
also be discussed at a Citizen's Forum, Thursday, May 19, beginning at 5:30 in the Council
Chambers.
PRESENTATION: Ms. Linda Dasher, Chair of Mary Greeley Board of Trustees, introduced
Sarah Buck and Karl Friederich, Trustees of MGMC, Becky Sarafini and Chris Mollet, legal
counsel, and Steve Farmer of Nuveen, and Dr. Larry Otteman, MGMC Chief of Staff.
Ms. Buck wanted everyone to understand that her role and Mr. Friederich's role, was not that of
a prospect buyer, but they are elected officials responsible for governing MGMC and were here
in that respect. They have listened to the other groups as well as studied the issues and feel that
a not-for-profit hospital is the best alternative for Ames. Progress is critical to the future of
health care in Ames. The reality of today's health care market, however, necessitates a change
now. Status quo is simply not viable for the future. The time has come to bring the legal and
financial experts together to structure the new private not-for-profit MGMC that will be able to
carry forward Captain Greeley's change to the City in today's competitive health care
environment. A request from McFarland's Clinic's physicians to study the potential for
integration of MGMC with its physicians began the debate. During the study of that request
both the physicians and the Hospital Board have concluded that an ownership change must occur
before serious integration discussions can proceed. Unless MGMC can vigorously pursue
market share through partnerships with physicians, it cannot be competitive. Growing
competition is due to the declining demand for in-patient acute care services. Hospitals that are
unwilling or unable to develop partnerships and move quickly with their strategies are unlikely
to survive. Hospitals with the 501(c)3 status are a more complex entity than MGMC. The
501(c)3 hospitals are a not-for-profit, tax-exempt hospital which has been able to do what
MGMC wants to do - pursue and develop partnerships, alliances, and networks which will
enable MGMC to maintain an advantage.
The critical reasons MGMC needs to become a not-for-profit institution are: the access to
managed care contracts; financial risk-sharing on capitated managed care contracts; capital to
build physician workshops; ambulatory care centers; medical office buildings; ambulatory
surgery centers; imaging centers; capital for expansion of physician groups; satellite facilities;
the acquisition the physician's practices; equity for young physician partners; cashing out senior
physicians; capital for infrastructure and support services; information systems; billing and
collections; contract negotiations and access to management.
Mr. Friederich called attention to "access of patients in a market territory" which has to be
staked out by the hospital and primary care physicians. The market territory for MGMC is Ames
and the 17 surrounding counties. Penetration is already being seen in this territory and major
changes are being made for the payment of services. Physicians and hospitals must come
together for payment from HMO's or employer organizations. The not-for-profit option has been
adopted in 23 of the 27 hospitals in Iowa. Local not-for-profit ownership will allow MGMC to
continue cost effectiveness, a high level of responsiveness to Ames and surrounding
communities, to continue indigent care, ambulance service, emergency department, etc., as well
as public programs and will allow MGMC to continue to be a strong employer with 1200
employees. MGMC's medical staff, Dr. Larry Otteman, Dr. Dale Anderson, Dr. Dean Harms,
and Dr. Timothy Leeds and Dr. Robert Doran strongly prefer the not-for-profit option proposed
by the Hospital Board of Trustees.
Ms. Becky Sarafini and Mr. Chris Mollet, attorneys, have worked for the past three years on the
bond issues for the hospital and addressed the legal issues of a not-for-profit hospital. Ms.
Sarafini stated that the transfer of the medical center as a non-profit corporation can be
accomplished under Iowa law consistent with the terms of the Greeley deed and the outstanding
bond resolutions by either leasing the medical center to a non-profit corporation or selling the
medical center whether by out-right sale or installment sale to a non-profit corporation. The
process of accomplishing a Iowa non-profit 504a corporation was presented.
Mr. Farmer, of Nuveen, discussed the ability of the non-profit corporation to finance the transfer
of MGMC to a non-profit corporation. Mr. Farmer's company has provided MGMC's financing
for over 20 years. He feels an independent MGMC non-profit corporation can successfully
finance the acquisition of assets from the City and the process would be simultaneous with
conversion of ownership from the City to non-profit. The new non-profit corporation could
issue bonds for acquisition to defuse the city's debt and that would be an investment grade credit.
Dr. Larry Otteman related that he was speaking for himself, as well as, Chief of the current
MGMC Medical Staff. He announced the physicians at MGMC have made the decision to
support the not-for-profit option. He also indicated that same decision was supported by Dr.
Dale Anderson, Dr. Dean Harms, Dr. Timothy Leeds, Dr. Robert Doran and Dr. Bond.
Ms. Buck wanted to make clear that the Board of Trustees want all medical staff members to
have equal access and equal opportunity under the new structure and there would be no
dominance by McFarland Clinic. As a 504a document is developed they hope provisions would
be made for continuing employment of existing employees at the same status, salary and
benefits. The retirement program would need to be changed and alternatives are being
investigated.
Mr. Friederich indicated that after reading the for-profit options presented to the City Council
there are still concerns about employment, continuing current services, ownership continuity,
etc. If MGMC becomes a not-for-profit organization it will be possible to work with the Board
of Trustees regarding those issues.
Mayor Curtis asked the Council to present their questions.
Council Member Wirth: Would you summarize the disadvantages you see between the local for-
profit corporation and local not-for-profit corporation? Answer: Ms. Buck stated they have not
seen enough of what has been put together to be able to comment reasonably. Mr. Doug Kell
spoke that increased costs of for-profit organizations such as property and income taxes, etc.
increases the cost of health care.
Council Member Wirth: What are the differences in the local control issue between the not-for
and for-profit organizations? Answer: Mr. Kell stated he could not answer at this time.
Council Member Wirth: A lot of focus was put on the local control issue. Answer: Mr. Kell
agreed that the local control issue is crucial, however, what is unknown is what those control
issues would be.
Council Member Brown: Commended the presentation by Dr. Otteman. How does the hospital
plan to take care of the $4M? Answer: Ms. Buck stated that it is mentioned in the proposal that
was submitted. It would negotiated as part of the conversion process.
Council Member Brown: Could you be more specific? Answer: Ms. Buck indicated there is a
willingness to repay the $1.58M which was the principal. They would be willing to entertain
a discussion on interest payments.
Council Member Brown: What happens with the bonds when they are called in terms of
penalties? What is the total liability of the hospital? Answer: Mr. Farmer replied that you
borrow sufficient money to buy a portfolio of U.S. Government securities. They are held by the
bond trustee in trust for the bond holders. Cashflows from the government securities are
sufficient to pay principal and interest until the call date of 2002-2003. On the call date you
would pay the balance of the principal of the bond and pay a l or l-1/2 percent premium for
calling the bond in advance of the 30-year maturity. The $39M number is the cost under today's
market conditions to purchase that escrow to put in place to defuse the City's 1992-93 bond.
Council Member Brown: That includes the principal, penalty and everything: Answer: Mr.
Farmer the principal, penalty and interest payable through the year 2002-03 for those two series
of bonds.
Council Member Brown: What is that total figure? Answer: Mr. Farmer is unable to tell her
at this time.
Council Member Brown: This isn't just $39M. It is $39M plus a lot of other things. Answer:
Mr. Farmer explained that that is what the escrow would cost in today's market including
penalties.
Council Member Brown: I have a letter from Dr. Gartin in terms of all the physicians in Ames
being included. How do you insure participation by all physicians in a 501(c)3? I do not
understand with participation by doctors, often called integration, how that effects the tax status
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of those groups involved with the hospital. Answer: Mr. Farmer replied the 501(c)3 corporation
constituents are the people of the City of Ames and in the service area of the employees and
medical staff. In order to maintain that status and accreditation as a non-profit hospital, the
hospital would have to follow the reimbursement policies of the federal government and would
have to operate in certain ways. One of those ways is continue to be open to all of the people
in their service area and to continue to invite all the medical community members to participate
in there activities at the hospital.
Council Member Brown: What does it mean to integrate medical entities in 501(c)3 and the tax
status of those eminities that integrate? Answer: Mr Farmer stated that the medical staff
actually becomes a non-profit corporation itself. In some situations there is a second step where
the physician non-profit and hospital non-profit corporations merge and all of their operational
and economic interests are then 100 percent in alignment and can compete effectively in a
managed care environment. If you have physicians that do not want to change their form of
ownership they can maintain their form of ownership and merely affiliate with the hospital in
a number of ways to get as close to a perfect alignment of interest as possible. There are clear
guidelines from the Internal Revenue Service, Medicare and Medicaid as to the issue of private
inurement, no revenues from the non-profit corporation can go to specifically benefit private
individuals as owners or shareholders. Medicare fraud and abuse rules are pretty clear about any
form of self-dealing between doctors and hospitals and the services they provide.
Council Member Brown: Is the model used for conversion to a 501(c)3 determined before or
after? Answer: Mr. Farmer stated that conversion to non-profit happens prior to consolidation
with medical staff.
Mayor Larry Curtis: The property tax question is not a "done-deal" just because you are a
501(c)3. The City Assessor has been very aggressive and, in fact, has denied non-taxability to
501(c)3 organizations in the city. The City Council does not determine the tax exempt status
of any entity within the city. If you are planning on that being part of the process you should
not count on that being a foregone conclusion. Secondly, I would prefer you didn't talk about
a 501(c)3 organizations because it is really a 504a corporation we are speaking about. Do you
understand that? Answer: Ms. Buck stated that she understood.
Council Member Tedesco: First, I would like to commend the Board of Trustees, the staff, Dr.
Otteman and your counsel on a very well prepared and presented presentation. You spoke of
expanding services. Do you mean in area or new services added to the facility? Answer: Ms.
Buck related that the potential is there for both to happen.
Council Member Tedesco: Anything in specifics as far as services? Answer: Mr. Kell hopes
to develop a cardiology program. Recently they have implemented a new occupational medicine
program, and will continue to assess the needs of the market and the community.
Council Member Tedesco: You referred to financial aid in helping young physicians buy their
own businesses and cashing out senior partners. Is that an important intent for the hospital?
Answer: Mr. Tom Knox replied because of the capital needs of young doctors and senior
doctors part of the strategic plan for MGMC is to be in a position, within the network,
partnership, or alone, to be able to assemble the capital by itself or in conjunction with the
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physicians to assist.
Council Member Tedesco: How long would you guarantee continuing non-profitable services?
Answer: Ms. Buck can make no guarantees, but the communities and others will make
assessments of what is needed and not needed and the Board would address changes in
technology.
Council Member Tedesco: With regard to the future of medical care - If you had an area of
surgical beds and it ran at 50 percent occupancy and you had to cut staff - would you move those
people around within the organization or would you be subject to the same things as other
businesses such as layoffs, etc.? Answer: Mr. Kell we do not wish to present that we would
keep all staff regardless of circumstances. From that standpoint we are not different from the for-
profit organizations.
Council Member Tedesco: We have heard several references of the cost of borrowing between
the not-for-profit and other structures. Does the cost differential somewhat compromise the
higher leverage? Answer: Mr. Farmer explained the differential depends on the credit quality
of the non-profit corporation and the credit quality of the for-profit corporation.
Council Member Tedesco: If the credit leverage is higher then I assume that the quality of the
debt is less? Answer: Mr. Farmer replied that obviously the more leverage the company has,
either for-profit or not-for-profit, the more of its cash flow has to be dedicated to service that
debt and that means those cash flows are not available to enhance services or provide additional
capital.
Council Member Tedesco: There was other money invested in the hospital by the City and it
was my understanding that those were, in fact, bond issues all prior to l992. Wouldn't they
legally have to be defused? Answer: Mayor Curtis responded that during the l960-70's the City
paid principal and interest on an annual basis for a debt on the hospital bonds, but when they
refinanced they paid them all off.
Council Member Tedesco: In one of your statements you referred to providing service below
cost. Answer: Mr. Friederich explained that Council Member Tedesco misunderstood - he said
at low cost.
Council Member Parks: Would also like to thank everyone involved in the presentation. You
indicated you would see a Board of ll people - 9 citizens and 2 physicians. Why that balance and
how would the initial board be created? Ms. Buck stated there would be a group of individuals
who would be the incorporators of the 504a non-profit corporation. As the legal documents of
that corporation are prepared one of the things set forth would be the structure of the governing
body.
Council Member Parks: Would the procedure by which the Board would be chosen be part of
the initial preparation? Answer: Ms. Buck responded that they would want that board to have
both citizen and physician representation. Incorporators would be encouraged to include both
large and small medical groups from within Ames and outside the City of Ames. Ms. Sarafini
explained that in order to get a tax exempt status the number of physicians on the board would
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not be able to exceed 20 percent of the number of board members.
Council Member Parks: Could the value of services provided over a period of time serve in lieu
of up-front financial consideration? Answer: Ms. Sarafini believes so, but that would be an
important disclosure in the 501(c)3 status.
Mayor Curtis pointed out that is an independent question. That is for the determination of
501(c)3 status and is totally independent of the fiduciary responsibilities of the City. Ms.
Sarafini stated that their are overlapping areas between the 50l(c)3 and the 504a non-profit
corporation that have to be considered.
Council Member Hoffman: Regarding the Board - what about the self-perpetuating issue, and
the control that you have now is local. Are you considering having 2/3 of the members of the
Board come from outside the Ames community? Answer: Ms. Buck stated that the Board has
not defined what percentage should come from what area. That would be part of the
incorporating process. Regarding the self-perpetuating issue it is typical in this type of situation
that the Board would do a self-assessment of needs, abilities, and skills needed to adequately run
the hospital.
Council Member Hoffman: For a non-profit group to borrow money is the rate similar to the
municipal rate or is there a difference? Answer: Mr. Farmer stated generally, municipal entities,
such as the City of Ames, have a higher credit rating than a non-profit hospital corporation.
Council Member Hoffman: How soon will integrating with physicians happen? Answer: Ms.
Buck responded she has no way of knowing the time frame.
Council Member Hoffman: You would not be able to give any kind of an estimate as to when
this would happen? Answer: Ms. Buck explained that discussions would begin immediately.
Mr. Kell added they are anxious to get this started, but has no idea when it would be completed.
Council Member Campbell: Also expresses her thanks for the good presentation by MGMC.
Is it possible for us, as we are making this dramatic move, to get beyond just going to a 504a and
then putting it in someone else's hands? Answer: Mr. Kell responded that the issue of certainty
has been a collision of cultures. There isn't long range certainty in health care.
Mayor Curtis: How would we go about establishing a fair market value? Answer: Ms. Sarafini
did not feel she was the one to answer evaluation questions.
Mayor Curtis: Should we hire someone to do a fair market evaluation and all abide by that
decision? Answer: Mr. Kell said there are a number of companies that provide that service and
they would agree to retain one of them to arrive at a fair market value.
Mayor Curtis: Both of us would abide by whatever that decision is? Answer: Mr. Kell
responded yes.
Mayor Curtis: What if it comes up $20M over and above debts outstanding, what is the 504a
group going to do to come up with the additional monies? Answer: Mr. Kell believes that they
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might be able to borrow up to the $40M amount it would leave them totally without capital.
MGMC cannot afford to go up against the for-profit corporations because their depth of capital
assess is greater. Faced with that option we would simply have to drop out.
Mayor Curtis: Doesn't that leave the City with the dilemma of what our fiduciary duty is to
transfer assets at fair market value? If it is independently determined to be above what you are
going to give us then we have no choice? Answer: Ms. Sarafini felt that Iowa law would not
require the City to take the highest bid if they had an evaluation that said the non-profit could
come within a reasonable approximation of cash and services. The City would be allowed to
take into consideration bids that would accomplish the missions and obligations of the City
officials. Mr. Farmer pointed out that all value doesn't have to be cash that there could be
consideration in value of services over the years that could be considered in the mix.
Mayor Curtis: I have no problem with that, it is just how we put a value on that in terms of
fulfilling our judiciary duty. Answer: Mr. Farmer understands that concern. We feel the cash
flows could be stretched to pay the City so that it could take all the equity out of the institution,
but the MGMC Board does not want to pursue that option. It would compel them to drastically
increase the cost of health care to the community.
Council Member Parks: If that happens, I think we would be back to the point of jeopardy as
far as continuing the services we are concerned about in order for them to maintain cash flow.
It would be the same thing that we are concerned about with the other offers that are on the table.
Mayor Curtis: Raising the issue of market value is a very difficult problem. We may all agree
what the market value is, but there may be others who do not agree and it is our responsibility
as stewards of that asset to get the fair market value. If we don't meet that test we are subject to
accountability. Answer: Mr. Farmer stated he understands those concerns.
Mayor Curtis asked if there were any further questions, or if the public would like to ask any
questions.
Council Member Tedesco: Have you been involved in the change of ownership from a
municipal hospital to some other profit or non-profit structure. Answer: Ms. Sarafini said that
she had not. Mr. Farmer replied that he had.
Council Member Tedesco: Do you have an estimate of how long this process takes? Answer:
Mr. Farmer said the process takes about six months.
Council Member Tedesco: Do you know of any such changes in the State of Iowa. Answer:
Mr. Farmer replied that he was not aware of any recently, but historically a number of 501(c)3
health care companies in Iowa were originally municipal hospitals.
Mayor Curtis asked if anyone from the public wished to speak. No one wishing to come
forward, the meeting was closed.
ADJOURNMENT: The meeting adjourned at 9:33 p.m.
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Jill Ripperger, Acting City Clerk Larry R. Curtis, Mayor
Ginger Jones, Recording Secretary
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