January 6, 2012
Last week, Governor Steve Beshear announced that he would not approve a proposed consolidation agreement among University Medical Center, Inc. (“UMC”), Jewish Hospital Healthcare Services, Inc. (“JHHS”), Jewish Hospital & St. Mary’s Healthcare, Inc. (“JHSMH”), St. Joseph Health System, Inc., and Catholic Health Initiatives (“CHI”), citing various constitutional and public policy concerns, including the loss of State control over a public asset and the influence of a religious entity on a publicly-owned institution. The legal issues are addressed in depth in a Report issued by Attorney General Jack Conway on December 29, 2011, which recommended against approval of the merger. While the Report focuses primarily upon issues arising under Kentucky law, the analysis in the Report will be of interest to anyone involved in similar transactions with publicly-owned health care entities.
The proposed transaction involved the consolidation of the participants’ respective hospitals and healthcare operations in Kentucky into a single entity to be referred to as the Kentucky Statewide Network (“KSN”). The combination would have created a statewide network of over 3000 physicians and more than 90 health care facilities. KSN would be controlled by three sponsors in accordance with their respective sponsorship percentages: CHI (70%), the University of Louisville (16%), and JHHS (14%). Among other things, the consolidation would provide KSN with the right to control UMC, which operates the University of Louisville Hospital (“University Hospital”). University Hospital is a state-owned asset that is currently operated by UMC, which in turn is controlled by the University of Louisville. University Hospital serves as the principal teaching hospital of the University and the largest provider of indigent care in the Greater Louisville community. According to the promoters of the consolidation, the combination would ensure the future existence of University Hospital, which the promoters characterized as the smallest and weakest hospital in a highly competitive market.
All of the participants in the consolidation, except for UMC and University Hospital, are currently subject to the Ethical and Religious Directives for Catholic Health Care Services (“ERDs”). While the promoters asserted that UMC would continue to operate University Hospital as a secular teaching hospital that would not be bound by the ERDs, UMC agreed by contract that certain procedures prohibited by the ERDs would not be performed at University Hospital, including elective abortions and euthanasia (prohibited by Kentucky law to be performed on State property), delivery of contraceptives, tubal ligations, and fertility treatments.
The Report describes a number of legal issues that the Attorney General identified as impediments to the proposed consolidation, including:
- Changes in the lease and the academic affiliation agreement between UMC and the University had to comply with the statutory and administrative requirements relating to the disposition of state assets.
- The change in control over UMC from the University to KSN (in which the University would have a minority interest) also would require compliance with the laws and procedures governing the disposition of state assets.
- If the new academic affiliation agreement is terminated or the consolidation is unwound, KSN could force the University to purchase certain assets, including assets currently belonging to JHHS and JHSMH. This would require compliance with the laws and procedures governing public acquisitions. In addition, there are no contingency plans that address how the University would finance a compelled acquisition.
- If the University’s participation in KSN is terminated without its consent, it is possible under some circumstances, that University Hospital would remain a part of KSN.
- The new lease and academic affiliation agreement do not comply with 200 KAR 5:312, which permits the State to terminate any contract if it is in the best interests of the Commonwealth.
- Compliance with the ERDs may constitute excessive entanglement between state and religion in violation of the Establishment Clause of the U.S. Constitution and Section 5 of the Kentucky Constitution.
- The structure of KSN (which is not covered by the Kentucky Open Records Act) may deprive the public of access to documents related to a public asset.
- The proposed arrangement would result in a significant reduction in the control of the University and the Commonwealth over a major public asset.
The participants in the proposed consolidation have indicated that they intend to work with State officials to structure a consolidation or joint venture that would be approved. The Jefferson County Attorney has posted a number of the draft transaction documents relating to the proposed consolidation on his website.
For more information about this matter--or other related merger issues involving health care entities--please contact Rob Craig or any member of Taft's Health & Life Sciences Practice Group.