Details of Capella/MUSC Deal for Kershawhealth Revealed

Details of Capella/MUSC deal for KershawHealth revealed

$45 million, 40-year lease
Martin L. Cahn

803-432-6157 ext. 115
December 24, 2014

$45 million is the price for a collaboration of Capella Healthcare of Franklin, Tenn., and the Medical University of South Carolina’s (MUSC) patient care arm, known as MUSC Health, to take over KershawHealth.

Capella/MUSC and KershawHealth plan to close the deal by March 31, 2015. Capella is listed as the actual purchase/lease holder, while MUSC Health is listed as a collaborative partner. Capella is agreeing to hire all KershawHealth employees in good standing at their current wage and salary levels, with benefits “generally consistent” to those offered to other Capella employees.

Capella will lease KershawHealth’s real estate assets for 40 years and purchase its remaining assets, referred to as furniture, fixtures and equipment.

Proposed details of the deal are revealed in transaction terms attached to a copy of a letter of intent provided to the Chronicle-Independent at the end of a KershawHealth Board of Trustees meeting Monday night. The letter is signed by Capella CEO Michael Wiechart; KershawHealth Board Chair Karen Eckford; Kershaw County Council Chairman Gene Wise; MUSC Medical Center Executive Director and CEO Patrick J. Cawley, M.D.; interim MUSC Vice President for Medical Affairs Bruce M. Elliott, M.D.; and MUSC University Medical Associates CEO Stephen A. Valerio. The letter is dated Dec. 8, and approved by the general counsels for MUSC and University Medical Associates on Dec. 18.

“This letter of intent comes after many months of careful research and thoughtful deliberation, always focused on what in the end would be the best way forward for our community,” Eckford said in a press release also provided Monday night. “While we still have work to do to finalize this agreement, we feel very positive about this potential relationship with MUSC Health and Capella Healthcare because both are deeply committed to community-based healthcare. Moreover, this partnership can help ensure we have the physicians necessary to care for everyone in our community.”

$9 million credit

The purchased assets will include the furniture, fixtures and equipment; “certain intangibles;” and KershawHealth’s working capital, defined in the document as KershawHealth’s current assets minus liabilities. The KershawHealth Foundation is not part of the transaction and will remain intact. The $45 million price tag could be reduced by as much as $8.96 million if all parties agree to exclude “cash, cash equivalents, marketable securities and … rights to tax debt set off or refunds.”

In effect, Capella may only have to pay approximately $36 million to lease the healthcare organization’s real estate and purchase its other assets.

KershawHealth Attorney David Summer said the nearly $9 million credit is equivalent to the cash on hand required for KershawHealth to operate on a day-to-day basis. Capella will pay the remaining $36 million to KershawHealth, which Summer said will retain its legal status as a hospital service district. The $45 million total, he said, would be used to help pay off bond debt, which he said currently stands at around $20 million. Any remaining funds will be set aside and invested. Summer said the funds would be held in trust in the event KershawHealth needed to repurchase the hospital’s furniture, fixtures and equipment and/or take over hospital operations if Capella chose not to renew its lease after 40 years.

Local board and charity care

Two concerns some people in the community, and even some trustees, had as the idea of selling or leasing KershawHealth began to gel were the possible loss of local control and how the healthcare organization would continue its century-long mission to serve all the people of Kershaw County regardless of socio-economic status. Both are addressed in the letter of intent.

The Capella/MUSC-run organization will have a local board of trustees. The transaction terms call for the future board to be made up “solely of residents” from KershawHealth’s service area, with 50 percent of the trustees representing the medical staff and 50 percent representing the community. The CEO -- whether current KershawHealth CEO Terry Gunn or someone else -- would also be a board member. However, never more than 50 percent of the board could be made up of either Capella or MUSC Health employees. MUSC Health would be allowed to appoint an ex-officio, non-voting member to the board.

Furthermore, the current board of trustees will nominate the first new board after the deal closes, subject to Capella’s approval. Future boards would then nominate replacement members, also subject to Capella’s approval. Capella will propose bylaws, subject to the new board’s approval, which would include term limits.

“Like KershawHealth and MUSC Health, Capella is committed to the delivery of local community-based health care,” Wiechart said in Monday night’s press release. “With more than a century of service, KershawHealth is a significant and well-respected community asset. We do not take likely this trust that has been placed in us by the community’s leaders and healthcare professionals. Our goal in working together is to ensure the continued provision of high quality local healthcare, to expand services and to provide seamless access to the advanced care available through MUSC Health. We look forward to getting to know the organization and the community better as we continue our due diligence research over the next few weeks.”

In regards to charity care, Capella is agreeing to “adopt the charity care policy of (KershawHealth) and provide all necessary medical care to all patients regardless of ability to pay for services received.” KershawHealth, meanwhile, is agreeing to contribute $10 million to an escrow account being established for the benefit of indigent patients. For the first four years after closing, the fund would be used to reimburse contributions to the Community Medical Clinic of Kershaw County (currently $90,000 annually), subsidize operating losses at the Healthcare Place at Bethune and help offset charitable expenses by the hospital.

Another area of concern is emergency services, currently provided by KershawHealth, including the use of two ambulances purchased by the county and operated by KershawHealth as part of an installment purchase agreement. The transaction will “preserve the delivery and, as necessary, provide funding for, EMS in a manner reasonably acceptable to the parties.” It is unclear whether this means Capella/MUSC will continue to operate EMS directly, or merely help fund -- and perhaps only partially -- a county-run EMS program.

In April 2013, Kershaw County Council rejected a request by KershawHealth to take over EMS operations.

Will join new HealthONE Network

As part of the collaboration to operate KershawHealth, Capella will contribute its part of the ownership and lease to the Midlands HealthONE Network, Capella/MUSC’s newly formed “clinically integrated network.” Capella plans to close a deal to purchase Carolina Pines Regional Medical Center in Hartsville on Dec. 31, which will also be part of the network. Capella and MUSC Health are agreeing to “improve and expand access to advanced medical care” by:

● providing for specialist and resident rotations at KershawHealth;

● providing for shared physician recruitment and placement efforts;

● developing and sharing clinical best practices;

● implementing telehealth services including, but not limited to, tele-stroke, tele-neurology and E-ICU services;

● providing for the training of clinical staff through jointly developed and shared educational resources; and

● streamlining referral processes when care cannot be provided at either what is now KershawHealth or Carolina Pines.

Capella and MUSC will also coordinate on care management, technological advancements, quality and “lifelong learning” for employees.

“KershawHealth fits perfectly into MUSC Health’s evolving mission to serve the people of South Carolina through innovative partnerships with local providers,” Cawley said in Monday’s press release. “Our goal is to bring our deep and comprehensive resources in clinical excellence, patient safety, healthcare provider education and physician development to communities throughout South Carolina without those communities having to come to Charleston unless absolutely necessary. We are pleased KershawHealth will be on the leading edge of this initiative, which will transform healthcare delivery and, thus, health outcomes in our state.”

$55 million for capital expenses

In addition to the purchase price, Capella is agreeing to make no less than $55 million in capital expenditures during the first 10 years after closing the deal, with input coming from the new local board of trustees. The transaction terms did not list what those expenditures might entail. KershawHealth recently entered into a strategic partnership with Orthopaedic Associates to establish a total joint (orthopedic) center of excellence. The transaction terms do include that joint center among a number of services Capella/MUSC may look to establish or expand. The list also includes a freestanding outpatient and chemotherapy program in partnership with MUSC’s Hollings Cancer Center in Charleston.

Meanwhile, Capella -- presumably in collaboration with MUSC Health -- agrees for the first three years to maintain all current “core services” offered by KershawHealth. These services include hospice, home health and long-term care.

Physician recruitment, other matters

Capella/MUSC is also agreeing to, after consultation with the local board, identify and recruit physicians. Based on “documented need,” Capella will, during the first three years after closing, initiate recruitment efforts. This section of the transaction terms also states Capella and MUSC Health will enter into certain “supplemental agreements” regarding the placement of MUSC Health-affiliated physicians and resident rotations on KershawHealth’s campuses.

Summer said the transaction does not in any way threaten existing relationships with independent physicians or physicians employed by other groups who are affiliated with or have privileges at KershawHealth. He said Capella views such physicians as valued partners in the medical community.

Also of note from a financial standpoint is how Capella and KershawHealth are handling what would normally be an indemnification clause in the agreement. Indemnification provides for one party in an agreement to bear the costs, either directly or by reimbursement, of losses incurred by the other party. However, as a public hospital, KershawHealth is barred by law from indemnifying Capella. Instead, KershawHealth is agreeing to set aside $4.5 million in another escrow account from which it can pay Capella directly or help defend Capella in the event there are inaccuracies in any representations within or warranties in connection with the agreement, a breach of the agreement on KershawHealth’s part or some type of problem stemming from the hospital’s operation prior to the deal’s closing. Any unused escrow funds would be returned to KershawHealth, over time, beginning three years after the closing.

Finally, what will the healthcare organization be called? The transaction terms call for Capella to adopt certain MUSC Health trademarks, names, logos, designs and symbols. However, all the parties are agreeing to come up with a name which “will reflect the character, history and culture of the current community hospital,” but also incorporate MUSC Health’s name.

http://www.chronicle-independent.com/section/47/article/34985/