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Attorney General Ellen F. Rosenblum

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AG Myers Announces Approval Of Joint Venture Between McKenzie-Willamette Hospital And Triad Hospital

July 18, 2003

Attorney General Hardy Myers today announced his approval, with conditions, of the proposed joint venture between Springfield's McKenzie-Willamette Hospital (MWH) and Triad Hospitals, Inc. (Triad) of Plano, Texas.

"Given the conditions placed on this transaction and the changes agreed to by the parties, I am confident that this proposal meets the statutory requirements for approval," Myers said. "The public interest is well-served by providing a choice of hospitals for the Springfield/Eugene metropolitan area and central Lane County communities. Today's order ensures that the charitable assets of McKenzie-Willamette will continue to serve that area."

Oregon law requires the Attorney General's approval before the transfer of assets of any nonprofit hospital. This is the third such transaction proposed since the law was enacted in 1997 and the first to involve transfer of assets to a for-profit entity.

The MWH/Triad agreements create a joint venture, organized as a for-profit, limited liability company (Company). MWH will contribute the hospital and certain other assets worth $34 million to the Company and Triad will contribute about $85 million in cash. MWH or an affiliate, and a Triad subsidiary will be the two members of the joint venture and each member will appoint half of the Company's Board of Governors.

In exchange for MWH's contribution of assets to the Company, MWH will receive an immediate cash payment of about $13.5 million and the MWH member of the joint venture will have about a 20% interest in the joint venture valued at about $20.5 million.

The agreements also create a 12-member Board of Trustees, responsible for advising the Company as to a variety of issues. Half of the Trustees will be active members of the hospital medical staff, and half will be drawn from the area served by the joint venture.

On June 24, 2003, Myers convened a public hearing in Springfield for the purpose of receiving community feedback on the proposed joint venture. The Department of Justice also received over 50 written submissions. Most testimony and other submissions supported the joint venture, but raised several issues about its details. The primary issues raised, and the response of the Attorney General and the parties, are set forth in the Order and are attached to this media release.

The Order Approving Transaction with Conditions is posted on the Department of Justice website at www.doj.state.or.us.

"It was evident from the comments I received that the community has very high regard for McKenzie-Willamette Hospital," Myers said. "Today's agreement preserves its continued existence in a way that both serves that public interest and maintains health care options in Lane County."

Issues Raised and Responses by Attorney General and Parties

  • Fair valuation of MWH's charitable assets being contributed to the joint venture; protection of the value of MWH's assets - Myers concluded that the transaction did not undervalue the assets MWH will contribute to the Company. That finding is based on a professional appraisal obtained by MWH and a review of that appraisal by an independent consulting group Myers retained as authorized by law.

To strengthen assurance that MWH would receive the fair market value of its Company interest if purchased by Triad Sub, the parties have changed their agreements at Myers' request. The agreements now provide for an independent appraisal to determine that value if Triad Sub makes that purchase, because of a triggering event specified in the agreements, during the period from signing of the Operating Agreement to one year after the replacement hospital's opening.

  • Service to Medicare-Medicaid patients at replacement hospital - At Myers' request the agreements have been changed to require expressly that the replacement hospital serve Medicaid and Medicare patients. Myers' Order also explains other reasons for his conclusion that the transaction would not threaten to reduce health care service to Medicaid and Medicare patients.
  • Provision of adequate charity care - The Company will continue to operate in a manner consistent with MWH's existing indigent care policies. The parties have also agreed the Company will adopt a further charity care policy, detailed in the Order, that provides specific commitments as to informing patients, indigent assistance, loans, and collection practices. The Company will keep these new commitments in place until at least December 31, 2005.
  • Representation of joint venture's service area on parent corporation's board - At Myers' request MWH's parent corporation will amend its bylaws to more specifically describe the service area that is to be fairly represented by nominations for the parent's board of directors: the "Springfield/Eugene metropolitan area and smaller communities in central Lane County."
  • Representation of interests of medically underserved populations - At Myers' request MWH's parent corporation will amend its bylaws to add a person "who has a demonstrated concern about community health care needs" to the nominating committee for the parent's board of directors
  • Public participation in replacement hospital site selection process - The parties have agreed that the Company will follow a public information and comment process detailed in the Order.
  • Termination of existing essential medical services - At Myers' request the parties have agreed that responsibilities of the Trustees will be expanded to include advising the Governors as to "changes in essential medical services."
  • Potential Triad domination of joint venture - Myers concluded that the parties have adequately addressed the issue of allocating authority between the two members' of the joint venture.
  • Dual governance and joint venture stability - Myers concluded that the joint venture dual governance structure was preferable to a total buyout of MWH which would cause community participation in the hospital's governance to disappear.
  • Requirement of Certificate of Need for replacement hospital - Myers concluded that he has no authority under Oregon law to address the issue of a certificate of need as to the replacement hospital; that authority lies with the Oregon Department of Human Services, Health Services.
  • Formation of independent nonprofit foundation - Myers concluded that establishing a new foundation is not necessary.
  • Deferral of transaction pending completion of MWH's antitrust case against PeaceHealth, the Land Use Board of Appeals proceeding relating to PeaceHealth Springfield site, and MWH's obtaining a private letter ruling from the Internal Revenue Service (IRS) stating that MWH's participation as a minority owner of the Company will not jeopardize MWH's tax exempt status - Myers declined to delay acting on the transaction. Each of the proceedings noted could take a significant period of time to complete and MWH's current financial condition may soon threaten it with bankruptcy and undo the proposed transaction.
  • Potential loss of MWH's 501(c)(3) status - Myers' Order notes that, although there is no guarantee the IRS will not seek to revoke MWH's 501(c)(3) status, MWH would have an opportunity to restructure the agreements to preserve tax exempt status. If Triad Sub exercises its right to purchase, arguably MWH may retain its tax exempt status by exiting from the joint venture. If revocation nonetheless occurs, the Order requires that the proceeds of the buy-out ultimately must be transferred to a 501(c)(3) organization. That transfer cannot be made to a non-MWH affiliate without Myers' prior approval.
  • Adequacy of charitable asset settlement - Myers concluded that the transaction represents a fair charitable asset settlement.
  • Improper delegation to Triad Sub - Myers found that the authority granted Triad Sub to operate the Company is proper because it still leaves ultimate operating authority with the Governors.
  • Improper inurement to a private party - Although the issue was not raised in the public review process, the parties assured Myers, in response to his inquiry, that no financial incentives have been offered to any MWH directors or employees to promote or ensure the closing of the transaction.
  • MWH'S collective bargaining agreements - As a condition of the approval, the Order requires that the Company will comply with all final orders/determinations of the National Labor Relations Board as to existing collective bargaining agreements with respect to any event occurring on or after the closing date of the transaction. MWH must comply with any final order/determination with respect to any event occurring before the closing date.
  • MWH's current defined benefits pension plan - The transaction proposes to terminate MWH's defined benefit plan and replace it with a different retirement plan.
    As a condition of the approval, the Order: (1) requires that MWH comply with all final orders/determinations of the federal Pension Benefit Guaranty Corporation (PBGC) as to the intended termination of the current plan; (2) requires that MWH terminate the plan in accord with a "standard termination" under 29 USC 1341, which requires committing sufficient resources to pay all the benefit commitments of the terminated plan; (3) requires that MWH terminate the plan in a manner acceptable to the PBGC if the PBGC determines that the termination does not qualify as a "standard termination"; (4) authorizes a pre-termination plan "freeze" for up to three years on the condition no employee will experience a reduction of plan benefits because of the freeze; and (5) requires MWH to restrict a minimum of $8.2 million from the immediate cash payment to further fund the plan.

Contact:

Victoria Cox, (971) 673-1880
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