kh 110815 union county work session v7
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TRANSCRIPT
Union County
Copyright 2011 Kaufman, Hall & Associates, Inc. All rights reserved. 1
Union County Work SessionOverview of Long Term Lease of CMC-Union
Monroe, North Carolina / August 15, 2011
Copyright 2011 Kaufman, Hall & Associates, Inc. All rights reserved.
Union County
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Topics for Discussion
• Healthcare Industry Update
• Overview of Current Lease
• Development of CMC-Union During Current Lease
• Review of County’s Stated Goals and Objectives
• Summary of Proposed Lease Terms
• Observations
Union County
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Healthcare Industry Update
Union County
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We Are in a Period of Tremendous Challenge
for Healthcare Providers
• Declining volumes
• Deteriorating payor mix
• Compromised financial performance and position
• Increased competitive pressures
• A physician market “free for all”
• A large capital appetite, but more limited/ difficult capital access
• Uncertain impact of reform
Union County
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Pension funding
Investment losses
Increasingly competitive markets
Reimbursement Pressures and RAC/
Short Stay Issues
Equipment replacement/ new
technologyAging Infrastructure
Impact on operating cash flow and balance sheet stability?
Information technology needs
Physician shortages/ recruitment/ retention/
employmentCapital access/ cost and the need to fund
growth strategies
Specialty hospital/ ambulatory niche
competition
Payor mix deterioration with rising
bad debt and charity
Bond covenants
Feeling Squeezed Even Before the Impact of Healthcare Reform
Union County
Copyright 2011 Kaufman, Hall & Associates, Inc. All rights reserved.
National Healthcare Point of View
1. Healthcare is rapidly moving from a post-Medicare business model to a post-reform business model
2. Reimbursement will decline over time either on a “relative”or a “real” basis
3. Reimbursement mechanisms will migrate away from activity-based approaches towards those that reward quality and cost effectiveness
4. The hospital sector will consolidate significantly and size and scale matter
5. The basic relationships and care model between hospitals, doctors, and patients will change dramatically
6. Technology will become a major disruptive change agent in healthcare as it has been in other industries
6
Union County
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Integration Attributes Key Characteristics of the Best Prepared
Physician/ Hospital IntegrationA highly aligned medical staff characterized by shared goals, outcomes-based contractual arrangements, significant planning input, and adequately represented in organizational governance
Care Coordination/ Management Capability
Use of care coordination tools and processes by an empowered and integrated workforce to meet performance goals that are regularly measured and reported
Information Systems Sophistication
An IT platform that supports clinical decision making, information management, facile communications, and access by all stakeholders (physicians, patients, administration) to proper treatment and strategic decision making
Cost ManagementA right-sized organization-wide cost structure, highlighted by appropriate levels of staffing, capital spending, overhead support, and supply chain costs; constantly reviewed based on comparative peer group studies and benchmarks
Service Distribution System Effectiveness
A rational service distribution system that has accessible primary care and easy access (both physically and through referrals) across the care continuum, delivered in contemporary facilities with contemporary equipment
Scale and Market EssentialitySufficient scale to attract competitive clinical and administrative talent, realize economies, drive marketplace innovation, and be an essential provider to health plans and patients
Brand Identification Well recognized and respected, associated with high-quality and service excellence.
Payor Relationships/ ContractsMaintaining strong relationships with payors and the ability to negotiate support for “new era” business practices
Financial Strength/ Capital Capacity
Strong appeal to capital markets through sustained operations, revenue growth, and balance sheet strength
New Core Competencies Will Be Required
7
Union County
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The Emerging Success Model in the New Era Will Likely Require…
• Compelling, market-based and physician driven strategy
• Scale and size to leverage fixed costs
• A strong position in the geographies served
• A solid, highly aligned physician platform
• A care, cost, and quality management culture
• Sophisticated IT and care management infrastructures
• Acute attention to operations, cost structure and business portfolio management
• A well-managed balance sheet to weather volatility
Union County
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• Community hospitals that are unable to compete (financial distress or lack of access to capital) are consolidating with regional and national not-for-profit systems and for-profit entities
• Strong stand-alone community hospitals are partnering with regional not-for-profit health systems
• Strong community hospitals are forming new not-for-profit health systems with other strong community hospitals
• Regional not-for-profit systems are consolidating with other regional not-for-profit systems
• National not-for-profit systems are consolidating with regional and other national not-for-profit systems
• Large for-profit hospital management companies have repositioned their portfolios and are poised for further acquisitions
• New private equity financing is entering the market
The Expected Consolidation Trajectory: The Outlook Is for Increased Consolidation Activity in the Hospital Industry
Union County
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Number of M&A transactions, 1995-2010
Primary drivers of hospital consolidation in
the past decade
• Financially distressed community hospitals
• Community hospitals requiring significant capital for investments, but unable to access the capital necessary to fund those projects
52%
58%
50%
52%
54%
56%
58%
60%
2000 2010
System hospitals – percentage
Industry Pressures Have Led to Hospital Consolidation Trends
Sources: The Health Care M&A Deal Search, Irving Levin Associates, Inc., 1995-11 and American Hospital Association 2011.
Union County
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Note: 2011 annualized data based on 46 total deals as of June 9, 2011.Source: The Health Care M&A Deal Search Online, Irving Levin Associates, Inc.
Recent Consolidation Activity Supportive of Expected Trajectory
Quarterly Number of M&A Transactions, 2009 to Date
50
74
105
0
20
40
60
80
100
120
2009 2010 2011
Annualized*
12
16
18
4
8
18
24 24 24
0
5
10
15
20
25
30
2009
Q1
2009
Q2
2009
Q3
2009
Q4
2010
Q1
2010
Q2
2010
Q3
2010
Q4
2011
Q1
Union County
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Why Are Many Stand-Alone Community Hospitals Considering Partners in Today’s Market?
1. Preservation of Access to Capital – The market is rewarding large providers through access to low cost capital under flexible terms to those that deliver on the promise of size and scale.
2. Insufficient Balance Sheets – Many independent hospital’s balance sheets have been impaired due to the economic crisis –and in tandem with limited capital access – these organizations are no longer able to maintain their credit rating and fund competitive capital needs.
3. Mitigation of Risk – Leaders of stand-alone community hospitals are becoming increasingly concerned with industry risks, including those related to healthcare reform, and their hospital’s ability to maintain consistently high operating cash flow.
12
Union County
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Why Are Strong Stand-Alone Community Hospitals Considering Partners in Today’s Market? (continued)
4. Opportunity to Improve Quality – Larger organizations can afford the significant investment of time, manpower, infrastructure, and capital to truly drive improvement in the delivery of healthcare.
5. Expansion of the Platform for Physician Integration – Larger organizations established successful physician employment models, advanced information technology systems, and competitive physical plants are generally better positioned realize the full potential of highly integrated physician strategies.
6. Counter Payer Consolidation – The very strong position of major insurers has, in some markets, aversely impacted independent hospitals relative to larger systems which typically are in a better position to negotiate fair compensation by virtue of their size and market leverage.
13
Union County
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Why Are Strong Stand-Alone Community Hospitals Considering Partners in Today’s Market? (continued)
7. More Expansive Market Presence and Competitive Position –Increasing access points and service area availability typicallyleads to better branding and reputation within a service area
8. Service/ Program Development – The sharing of best practices among multiple delivery sites enables organizations to learn quickly from others successes
9. Information Technology – Larger organizations are better positioned to leverage the fixed costs and infrastructure required for sophisticated information technology platforms
Union County
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• Community hospitals that are unable to compete (financial distress or lack of access to capital) are consolidating with regional and national not-for-profit systems and for-profit entities
• Strong stand-alone community hospitals are partnering with regional not-for-profit health systems
• Strong community hospitals are forming new not-for-profit health systems with other strong community hospitals
• Regional not-for-profit systems are consolidating with other regional not-for-profit systems
• National not-for-profit systems are consolidating with regional and other national not-for-profit systems
• Large for-profit hospital management companies have repositioned their portfolios and are poised for further acquisitions
• New private equity financing is entering the market
The Outlook Is for Increased Consolidation Activity in the Hospital Industry
Union County
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Overview of Current Lease
Union County
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• The current hospital lease began on August 27, 1995 and is set to expire on August 26, 2020 (25 years from commencement date)
• Union Memorial Regional Medical Center, Inc. (currently doing business as “CMC-Union”), a subsidiary of the Charlotte-Mecklenburg Hospital Authority (d.b.a. “Carolinas HealthCare System” or “CHS”) and Union County may renew for up to 9 years upon mutual written agreement 180 days prior to lease expiration
• Union County receives an annual lease payment equal to the greater of:
– $1.4 million; or
– 10% of operating cash flow plus 7.5% of investment income
• The annual rent payment is paid to the County in January of eachyear and any additional funds due are paid after the close of that fiscal year’s books
Lease Term and Financial Considerations to Union County
Union County
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Recent Historical Lease Payments to Union County
2006 2007 2008 2009 2010
Minimum Payment - - 1,400,000$ - -
10% of Operating Cash Flow 2,341,518$ 2,134,777$ - 2,809,175$ 2,677,166$
7.5% of Investment Income 490,954$ 294,955$ - 486,514$ 479,164$
Total 2,832,472$ 2,429,732$ 1,400,000$ 3,295,689$ 3,156,330$
Union County
Historical Lease Payments
Union County
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• CHS receives an annual Network Development Fee equal to the greater of:
– $1.2 million; or
– 10% of operating cash flow plus 7.5% of investment income
• Should the Network Development Fee payable to CHS reasonably pose a material financial risk to the hospital, CHS may agree to abate the payment equal to an amount the County agrees to abate its annual rental payment
Financial Considerations to CHS
Union County
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• CMC-Union is required to invest the hospital’s net operating surplus in the facility for the provision of healthcare to the citizens of Union County
– CHS cannot consolidate CMC-Union’s operating results
– CMC-Union borrows on it own credit
• CMC-Union is responsible for maintenance and any improvements and additions to the hospital
– County maintains approval rights for any capital expenditure exceeding $500,000
• A five-member Board of Directors governs the hospital; two members are appointed by the Union County Commissioners and three members are appointed by CHS.
• At lease termination, the County receives all hospital property, improvements, long-term debt and monies
Operating Surplus, Capital Approval and Governance
Union County
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Development of CMC-Union During Current Lease
Union County
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• Cardiac rehabilitation
• Diabetes center
• Sleep center
• Cancer center
• Family Practice rural residency
• Wound Care center
• Pain Management center
• Urgent care clinics
Development of CMC-Union During Current Lease
Service Lines and Clinical Services
• Advancements in diagnostic and treatment technologies
• Palliative care
• Waxhaw Health Pavilion (pending)
• Union West Ambulatory Surgery Center (pending)
• Hospice of Union County acquisition by CHS
The following service lines and clinical services have been added at CMC-Union since 1995
Union County
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Development of CMC-Union During Current LeaseFacility Investments
• Outpatient Treatment Pavilion
• Women and children’s center
• Coronary care and intensive care units
• 24/7 emergency department
• Emergency department expansion and renovation
• Day surgery and surgery department expansion
• Endoscopy department
• Cardiac diagnostic services
• Oncology services
• Materials management renovation and expansion
• Wound care center
• New Medical Office building
• Therapies expansion
• Information Technology upgrades
• Jesse Helms Nursing Center
• Union EMS base station
• First Step renovation
During the current lease term, the facility improvements and additions noted below have been completed at CMC-Union
Union County
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Development of CMC-Union During Current LeaseMedical Staff Advancement
• The CMC-Union Medical Staff has increased from 75 in 1995 to 475 as of the second quarter of 2011
• Growth has occurred in both specialists and primary care physicians
• Specialties not currently represented include:
– Neurosurgery
– Endocrinology
– Psychiatry
– Thoracic surgery
Union County
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Development of CMC-Union During Current LeaseMedical Staff Advancement (continued)
3557 56 65 71
40
103
275
393 404
0
50
100
150
200
250
300
350
400
450
1995 1998 2008 2010 2Q 2011
Primary Care Specialists
75 160 331 458 475
Union County
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CMC-Union Capital Spending Ratio as Percent of Total Operating Revenue
$66M+
26
Union County
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Future and Continued Development of CMC-Union
• Over the past 15+ years CMC-Union has noted significant growth in its operations, medical staff and facilities
• In order to build on the momentum and growth created during the current lease and transition towards a facility that provides higher acuity treatments and tertiary-like services, CMC-Union will likely need access to capital beyond what it can generate independently
• As noted in the industry update section, many community hospitals faced with similar capital (and other operational) decisions aredetermining to become member hospitals of larger health systems to access the capital required to expand and the expertise needed to navigate the healthcare industry’s uncertain future
Union County
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Review of County’s Stated Goals and Objectives
Union County
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Union County Goals and Objectives
29
At our work session in February, the County Commissioners articulated the following as their primary goals and objectives for a “new” lease regarding CMC-Union:
• Continuity in the delivery of healthcare within Union County
• Preservation of the existing clinical services in the County
• Additional services/ programs made available in the future in the County, as clinically appropriate
• Continued high quality of care delivered to the hospital’s patients
• County should maintain ownership of the hospital
• Financial terms and conditions should benefit the County
• Term of lease should be long in nature and should not initially exceed 50 years
29
Union County
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Summary of Proposed Lease Amendment Terms
Union County
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Financial Considerations
• On the following slides we have outlined our understanding to the key terms under which CHS and Union County would extend the existing lease agreement.
• If the County and CHS elect to move forward, these terms will be incorporated into an Amended and Restated Lease Agreement between the parties, which will be submitted to the County Commissioners to consider.
• This agreement will further define these terms as well as others that are typical in these agreements.
• It should be understood that these terms may change in the Amended and Restated Lease Agreement as the document is negotiated
Union County
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Financial Considerations
• CHS will deliver to County, at closing, the amount of $54 million, which represents the agreed upon cash net of outstanding indebtedness of the operating entity
– CHS will assume or extinguish the outstanding indebtedness of the hospital
• The County will receive a total lease payment of $6.1 million per annum for the initial 50-year lease extension (the Extended Term), growing by 3% every five years should the lease be renewed
Union County
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Historical and Projected Lease Payments to Union County
2006 2007 2008 2009 2010 2012 & Beyond
Minimum Payment - - 1,400,000$ - - -
10% of Operating Cash Flow 2,341,518$ 2,134,777$ - 2,809,175$ 2,677,166$ -
7.5% of Investment Income 490,954$ 294,955$ - 486,514$ 479,164$ -
Total Proposed Payment -- Operating Rent and Premium Payment - - - - - 6,100,000$
Total 2,832,472$ 2,429,732$ 1,400,000$ 3,295,689$ 3,156,330$ 6,100,000$
Union County
Historical and Projected Lease Payments
Union County
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Financial Considerations
• All of such funds – rent and the cash delivered at closing –can be used by County in its sole discretion provided that such payments cannot be used to compete with CHS
• The annual Operating Rent and Premium Payments will be paid in full within the first 90 days of each calendar year during the Extended Term
Union County
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Put Option
• County will have the unilateral right within the first nine months of each calendar year during the Extended Term to require that CHS purchase CMC-Union for a purchase price to be determined as of December 31 of such year (the Put Price)
• The initial Put Price will be an amount equal to $133 million (the Initial Price) minus a portion of the lease payments that have been paid by CHS according to a formula that will be contained in the lease agreement.
– So long as North Carolina Certificate of Need laws regulate in-patient beds (“CON laws”), the Initial Price will be increased annually by 2%; upon the repeal of the CON laws, the Initial Price will not be further increased
• The Put Price varies by year and will be included as a schedule to the lease agreement
– From the Initial Price of $133 million the net Put Price declines to as low as $128 million before increasing to $218 million by the end of the Extended Term
Union County
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Expiration
• Upon the expiration of the Extended Term of 50 years, CHS will have the right to renew the Amended and Restated Lease Agreement for an additional period of 25 years (the Renewal Period)
• During the Renewal Period, the rights and obligations of the parties will continue as set described except that the total lease payment will increase to $6.283 million for the first year of the first renewal period and will be increased by 3% every 5 years thereafter during the Renewal Period
Union County
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Expiration (continued)
If CHS does not elect to renew the Amended and Restated Lease Agreement upon the expiration of the Extended Term, County will have the following two options:
1.Termination of Amended and Restated Lease Agreement
– Terminate the Amended and Restated Lease Agreement and require CHS to transfer all CHS health-related operations and assets located in Union County (the UnionHealthCare Enterprise) to County and pay to CHS an amount equal to the Fair Value of the Union HealthCare Enterprise on the termination date, minus the net Put Price as of the termination date
– If County elects to require CHS to make this transfer to County, County would not accept any direct or indirect financing assistance from a health system in terms of loan guarantees, direct loans or other means to facilitate the transfer of the Union HealthCare Enterprise to County
– In addition, County would agree, in writing, to operate all such assets for a transition period of at least 5 years after the termination date with no indirect or direct involvement in operations of such assets by another healthcare provider or operator that is a competitor of CHS
– CHS agrees to provide any requested transition services at fair market value during the transition period
– County may engage or hire a manager who is not a competitor of CHS to operate Union County HealthCare Enterprise; or
2.Put Option – Exercise Put Option as previously outlined
Union County
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Expiration (continued)
• Upon the expiration of the first 25-year Renewal Period, the County and CHS will have the option to mutually agree to renew the Amended and Restated Lease Agreement for one term of 25 years followed by successive 10-year terms at the then current Operating Rent Rate to be increased by 3% every 5 years thereafter
• If County and CHS do not mutually agree to any extension of the Amended and Restated Lease Agreement, County will have the following two options:
1. Termination of Amended and Restated Lease Agreement
– Upon at least 12 months prior written notice to CHS, terminate the Amended and Restated Lease Agreement and require CHS to transfer all Union HealthCare Enterprise to County and pay to CHS an amount equal to the Fair Value of such assets on the termination date minus the net Put Price as of the termination date
2. Put Option – exercise Put Option as previously outlined
Union County
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Capital Investment
• During each 15-year period, CHS’s capital investments in the Union HealthCare Enterprise will be no less than 75% of the capital spend at other CHS facilities.
– This will be measured as the percentage of revenue spent at the Union HealthCare Enterprise as compared to the percentage of revenue CHS spends on capital for the entire system.
– However, the minimum capital spend will be limited to 75% of operating margin of the Union HealthCare Enterprise
• Within 90 days after the end of each 15-year period during the extended Term, CHS will submit a report to County summarizing the investments made by CHS during the prior 15-year period
– CHS will have 5 years to make up its investment obligation if it is not met for the 15 year periods.
Union County
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Capital Investment (continued)
• CHS will use reasonable efforts to complete the CON approved bed tower project and the deferred capital expenditures including, but not limited to:
– PET/ CT scanners
– Second ambulatory surgery suite
– Waxhaw emergency department
– Will endeavor to determine the unmet needs and determine the feasibility of providing new and improved healthcare services
Union County
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Assumption of Liabilities
• CHS will assume all of the liabilities of Hospital, known and
unknown, fixed and contingent, accrued or pending, including, but not limited to:
– The existing long-term debt, arising out of the ownership or operation of CMC-Union, including outstanding bond debt. CHS will take all steps necessary to permanently remove the County from the outstanding bond debt.
– Professional liability
– Compliance related issues from prior years, if any.
– Medicare and Medicaid RAC arising during the term of the Lease
Union County
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Employee Commitments
• CHS will offer to employ each existing staff employee at CMC-Union who meets CHS’s criteria for hiring comparable employees and who CMC-Union recommends for hire at CHS’s current compensation rates and benefits
• Within a reasonable time depending on benefit plan years and third party approvals, if any, CHS will provide to all CMC-Union employees the full array of CHS benefits at the same levels of all other CHS employees of the CHS
• CHS commits to maintain staffing levels at levels comparable to similar CHS facilities
Union County
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Governance
• The existing Community Trustee Council will be converted to an Advisory Council
– The Advisory Council will include one sitting member of the Union County Commission and at least two Medical Staff representatives
– The Advisory Council will regularly advise CHS concerning policymatters and the operation of CMC-Union
• CHS also commits to nominate and support approval of a resident of Union County to the CHS Board of Commissioners
• During the first six years of the extended Term, CHS will nominate, as the Union County member on the Board, one of the three Union County residents who have been recommended to CHS by the Advisory Council
– In addition, for the purposes of maintaining community involvement and further integrating the strategic planning process in a unified manner between CMC-Union and CHS, during the first six (6) years of the extended Term, the Union County member of the Board will have a seat on the CHS Strategic Planning Committee
Union County
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Other Key Terms
• Financial Assistance: CMC-Union will continue to provide financial assistance to patients consistent with CHS policies inoffering discounted and free care to patients
• Prisoner Care: CHS will provide care to patients from the Union County Jail at a discount equal to the discount given by CMC-Union to patients who do not have insurance
• Medical Staff: The Medical Staff President of CMC-Union will have the same rights to attend all CHS Board of Commissioners meetings as other CHS Medical Staff Presidents
– CHS will continue to complete Medical Staff needs assessments and will use reasonable efforts to recruit and retain needed physicians, including specialists, to Union County
• IT: CHS will ensure that CMC-Union will be on the overall system IT platform
Union County
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Other Key Terms (continued)
• Quality and Safety: CHS will ensure that CMC-Union and Union Physicians Network, Inc. are included in all CHS system wide quality, safety and clinical integration initiatives, clinical integration including, but not limited to, accountable care organizations
• Commitment to Maintain Services: For a period of not less than five years of the Extended Term, CHS will continue to provide all the material clinical services and programs currently being provided by CMC-Union so long as appropriate levels of clinical quality and patient safety can be maintained with respect to each of such services
– Any deletion of such services and programs within such time period will be based upon clinical quality and patient safety factors and will require the approval of the CMC-Union Advisory Board
– The final lease document will define how the services offered atCMC-Union will be determined after the initial 5-year period.
Union County
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Other Key Terms (continued)
• Partnership Relations: County recognizes the importance of supporting CHS as a lessee of County owned assets. As such, County will:
• Ensure CHS is not excluded from any bidding of health related services for County employees
• Make reasonable efforts to ensure that County employees are encouraged to access to CMC-Union facilities and programs
• Support the investment and expansion of health facilities and programs by CHS in Union County
Union County
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Observations
Union County
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Advantages of Proposed Lease Amendment
• While we recognize there are key terms that must be negotiated, Kaufman Hall believes that there could be significant advantages to the proposed Lease Amendment
– Perhaps chief among them is that it eliminates the going forward challenges facing standalone hospitals
– Further, it should enhance the level of healthcare services available to the citizens of Union County through a more complete and comprehensive clinical and operational integration of CMC-Union with other healthcare providers in the CHS healthcare system
– Finally, a robust healthcare system in Union County should provide relatively high-paying jobs and also assist in attracting other employers to the county
• In addition, the proposed lease:
– Compels CHS to invest in the hospital and in Union County as incentives between CHS and the County are aligned and CHS will consolidate the hospital’s operations into its overall system financials
– Removes the County’s financial obligations relative to operating a hospital
– Provides a meaningful capital source to the County at the inception of the lease as well as in years to come while allowing future Union County Commissioners to monetize the asset at a predetermined price
Union County
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Other Considerations
• While we believe there are substantial benefits to Union County in proposed Lease Amendment, there are other factors that should becarefully considered
• We believe the most significant issues relate to control
– Amending the existing lease will extend the period during which Union County has little operating control of CMC Union
– If Union County decides not to renew the lease in the future, the amount required to reimburse CHS for the value it has added during the term of the lease is uncertain
• However, we believe these considerations should be balanced by the fact that many counties across the country are seeking to separate themselves from the burdens of operating a hospital and Union County currently has little operating control over CMC Union in the current lease