The News-Gazette.com: Carle clinic/hospital merger: The sale -- and the tax

Carle clinic/hospital merger: The sale -- and the tax

By Debra Pressey

Sunday, November 1, 2009 8:50 AM CDT

URBANA – The chief executives of Carle Clinic and Carle Foundation Hospital know it's bound to be a touchy subject when they start talking about a merger that could one day take a big chunk of Carle property out of the local tax base.

And, for anyone wondering about how big a financial hit the cities, the schools, the parks and other taxing districts would take if Carle Clinic properties one day become tax-exempt, here's the deal:

If a merger bringing the currently for-profit Carle Clinic under the not-for-profit organization of Carle Foundation Hospital is approved, Carle plans to make payments in lieu of taxes at the current tax level, hospital CEO Dr. James Leonard and clinic CEO Dr. Bruce Wellman said Friday in an interview about a proposed $250 million sale of the clinic to the hospital.

The details – such as how long payments in lieu of taxes would continue – haven't been determined. But Carle has a long track record of doing right by the community, Leonard and Wellman said.

"We recognize this is a BIG issue," Leonard said.

It could be a multimillion dollar issue for local taxing districts.

Carle Foundation Hospital CEO Dr. James Leonard, right, and Carle Clinic CEO Dr. Bruce Wellman talk Friday in Urbana about the possible merger of the two entities. By Robin Scholz / The News-Gazette

Carle Clinic, the Carle Foundation and Carle Foundation Hospital together paid $5.3 million in property taxes this year to all the taxing districts of Champaign County – and more than $400,000 to taxing districts in other counties where Carle has medical facilities.

Of $5.3 million paid in Champaign County, the hospital is appealing about $2.9 million paid on five properties it contends should be tax-exempt based on the charity care the hospital provides to needy patients.

Carle hospital's tax exemption will ultimately be decided by the courts – and not until after the Illinois Supreme Court rules on the taxable status of Provena Covenant Medical Center later this year.

"The Carle Foundation is currently paying property taxes on all properties, including property taxes on properties owned by the foundation but leased by Carle Clinic. Until this issue is clarified by either the courts or legislative action, we don't anticipate any material changes," Carle spokeswoman Gretchen Robbins said.

"While we cannot make future long-term commitments until the rules of charity care and community benefit are more clearly defined, the Carle Foundation has always been an excellent community citizen and steward of community resources, and we will continue to be so under an integrated delivery system model. We certainly acknowledge and appreciate the services provided by the taxing bodies and are sensitive to the value of the property taxes we pay to the community. The Carle Foundation fully intends to work out an arrangement with the taxing bodies to continue payment at the current rate for the properties that could otherwise be taken off the tax rolls if the integration occurs, and if there is a definitive ruling in Carle's favor regarding the overall property tax challenge."

While Carle pays taxes in several Champaign County communities, none of them stand to lose more than Urbana does from a merged and tax-exempt Carle hospital and clinic. The taxing districts of Urbana shared $4.6 million in tax payments from Carle this year, part of which they set aside until the legal issue is resolved.

Most of those taxing districts are under tax caps, so if there were no longer any Carle tax revenue coming in or payments in lieu of taxes, those taxing bodies would continue receiving a good share, maybe all, of their tax money.

The bad news for property owners: They would be making up the difference on their own tax bills.

"It basically takes that burden and spreads it out on the properties remaining," said Carol Baker, business manager for Urbana schools.

Those governments that aren't under tax caps, for example, the cities of Champaign and Urbana, would be faced with the unpopular choices of raising tax rates, cutting services or looking for other ways to make up the money.

Urbana Mayor Laurel Prussing said that's all worst-case scenario.

Carle's total assessed value is about 9 percent of the city's property tax base, and losing that "would be pretty bad," she said. "But I don't know if that's going to happen."

Right now, Prussing said, city officials are taking a closer look at the merger proposal and what it means.

"But I think it's a mistake to assume that it's all gloom and doom for the city. They're a major employer, and we want them to do well," she said.

Why merge?

Things were different a decade ago, when Carle clinic and hospital considered and rejected the idea of a merger, though the idea never really went away, Leonard and Wellman said.

Cost and regulatory pressures have grown. The hospital itself has grown, averaging about 60 patients in beds per day more than it averaged in 2000.

Meanwhile, smaller communities outside C-U and their hospitals have relied increasingly on Carle to be a safety-net hospital, the two CEOs said. Integrated health systems that can offer patients the hospital, the doctors and the health insurer under one organization have grown increasingly viable. And health care reform proposals are casting a veil of uncertainty over everything.

When one of the latest regulatory pressures came along, a change in the federal Stark law that governs physician referrals of patients to services they own, the idea of a merger took on a new urgency. The latest requirement upset a long-standing arrangement under which the clinic's lab and radiology services were provided to patients at Carle hospital, and it forced the transfer of those services from the clinic to the hospital.

Because the hospital and clinic couldn't get a merger accomplished by Oct. 1, when the latest Stark regulations took effect, complying with the law meant extra equipment had to be purchased and scheduling of patients for certain services has become more complicated, Wellman said.

At the end of the day, Leonard said, the merger is all about a new Carle that will be well-positioned for delivering the highest quality care possible in the future.

"We're here to deliver health care, and we think this sets the stage to grow and handle what's coming," he said.

Charity care for the "no-serviced"

Patient rights advocates call it being "no-serviced" when a patient tries to get medical care at a local clinic and can't get an appointment because they have medical debts there they can't pay.

Carle Clinic averages about 1,500 to 2,000 no-serviced patients a year, out of 300,000 served, but about one-fourth of them are unwelcome at the clinic for behavioral issues, Wellman said.

Some of the rest will be eligible to apply for charity care through the clinic if the merger is approved because the sliding-income scale discounts and free care offered to needy patients at Carle hospital would be extended to patients of the clinic.

Claudia Lennhoff, executive director of Champaign County Health Care Consumers, said she supports the hospital-clinic merger because of what it could mean to those patients who can't get medical care from Carle Clinic.

"I think this proposed merger could be the single best thing that could happen to our community in terms of access to care," she said.

Not only would it help patients get that access going forward, she said, the potential exists under the hospital's charity care program for some of those patients to have some of their debt to the clinic written off, she said.

Wellman and Leonard say they have no way of projecting how many clinic patients would line up for charity care.

The clinic already writes off millions of dollars a year in charges on a case-by-case basis for people who can't afford to pay their bills, Wellman said, and he and Leonard speculated that will certainly increase under the hospital's generous charity care program.

Lennhoff said the need for that kind of help from clinic doctors is evident by the fact that two free clinics have sprung up in Champaign and by the growing demands on Frances Nelson Health Center, a Champaign clinic with a federal designation to serve medically underserved patients.

"I have a list of clients who I've already tried to beg and borrow health care for," she said.

Meanwhile, Lennhoff said, take a look at all the medical facilities of Champaign-Urbana: "We have enough health care resources in this community to meet the needs of everybody."

Q&A with Carle executives

Carle Foundation Hospital CEO Dr. James Leonard and Carle Clinic CEO Dr. Bruce Wellman sat down with The News-Gazette's Debra Pressey on Friday and answered some questions about the proposed hospital/clinic merger.

Q: If the for-profit clinic is merged into the not-for-profit hospital, how will that affect the taxable status of clinic properties and the tax money that has been coming to local governments from those properties?

A: Carle clinic and hospital understands the sensitivity of this issue to the local community. Plans are to make payments in lieu of taxes (at the current tax level) to the communities where there are clinic properties. The details, including how long these payments would continue, are undetermined.

Note: The Carle Foundation already owns most of the clinic properties, leases them to the clinic and pays taxes on those properties without protest. Carle continues to contend that the hospital properties should be tax-exempt and any payments in lieu of taxes would involve clinic properties only.

Q: How would the hospital's charity care programs that extend free and reduced cost care to needy patients be put into practice throughout the clinic system?

A: The intention is to offer the hospital's charity care program to all income-eligible clinic patients who apply. The number of people asking for and receiving that help is expected to increase, but the financial impact on the clinic may not be as large as the public imagines because the clinic already writes off or discounts the cost of services to needy patients on a case-by-case basis at the level of $4.5 million to $5 million a year.

Q: Explain the impact of a recent change in the federal Stark regulations (which govern physician referrals of patients to services the referring physicians own) on Carle hospital and clinic, and is that driving the merger?

A: The Oct. 1 enforcement of the latest Stark law changes required the ownership transfer of Carle lab and radiology services from the clinic to the hospital, disrupting what had been an efficient and convenient system for clinic and hospital patients and doctors. Those services were also a significant part of clinic revenue.

But integrating the hospital and clinic has been an ongoing discussion for the past decade. Why do it now? Because regulatory and cost pressures on health care providers have continued to grow in the last decade and current health care reform measures make for uncertainties down the road.

"Stark 4 made it very clear to us that this just another step down a pathway that is going to continue," Leonard said.

Q: Currently the hospital accepts Blue Cross Blue Shield of Illinois insurance and the clinic doesn't. Would the clinic also accept Blue Cross Blue Shield after the merger?

A: That depends on whether Blue Cross Blue Shield is willing to come to the table. Currently their payments don't recognize one-third of the clinic's charges.

Q: What is the expected impact of the merger on Carle hospital and clinic employment?

A: The entire system, including the clinic's insurance subsidiary Health Alliance Medical Plans, employs 4,500 people.

We'll be looking at opportunities for efficiencies, but there aren't any plans for mass lay-offs. Carle has been experiencing significant growth and also serves as a safety net hospital for outlying communities, It will need talented people to carry on the work that needs to be done.

Q: Please explain how a merger of this physician-owned clinic into a not-for-profit organization would help Carle recruit and retain more doctors?

A: Doctor compensation under the integrated system will be activity-related, but beyond that, the clinic has proven to offer an attractive environment to physicians – it offers doctor leadership, a stable environment and transparancy – and that is expected to continue.

Q: How does Health Alliance Medical Plans fit into the future plans of the integrated system?

A: Health Alliance would remain a for-profit business under the not-for-profit Carle health system, and keeping it is essential to long-range plans for necessary cost controls, a high quality of care and value for patients. Keeping Urbana-based Health Alliance under Carle ownership also keeps 450 jobs in the local community.

Q: How can Carle hospital afford $250 million to buy Carle Clinic? Can't the two organizations just merge without a sale?

A: The hospital plans to borrow money and pay the debt off over time, and without Health Alliance involved in the package it would have been a much less expensive transaction. But the fact is, the clinic and Health Alliance are assets and, legally, the hospital is required to pay fair market value.

Q: What hurdles remain before this merger could be finalized?

A: Carle Clinic owners, most of whom are practicing Carle doctors, will vote on the hospital's purchase offer around the end of November, and 75 percent of the clinic shareholders must approve the sale and 80 percent of the doctors must be willing to sign contracts to remain with the clinic. The transaction is also subject to approval by the state Health Facilities and Services Review Board and review by the Department of Justice and the Federal Trade Commmission.

Q: Would this merger insulate Carle from regional competition from larger integrated health systems?

A: Competition among health care providers isn't bad for patients, but the real threat of big regional competitors is the potential for taking resources out of the community.

"Our desire is to stay focused on East Central Illinois," Wellman said.

Public hearing Wednesday on transaction

URBANA – Want to learn more about the proposed Carle Foundation Hospital/Carle Clinic merger?

The Illinois Health Facilities and Services Review Board has scheduled a public hearing on the hospital's proposal to purchase the clinic system and its subsidiary, Health Alliance Medical Plans, for 10 a.m. Wednesday in the Urbana City Council Chambers, 400 S. Vine St., U.

State law requires this board to find a need for this transaction before it can be approved, and a hearing is part of that process.

Some key points of the merger proposal:

-- The hospital would borrow money to buy the clinic and Health Alliance for $250 million.

-- The clinic (including all its main and branch facilities in East Central Illinois) would become part of the hospital's not-for-profit organization and offer the hospital's charity care assistance to needy patients.

-- Health Alliance would remain a for-profit business of the hospital.

-- Clinic owners, most of whom are practicing Carle physicians, haven't approved the purchase offer yet and will vote on it near the end of November.

Paid up

The total property tax bills paid in 2009 by The Carle Foundation, Carle Foundation Hospital and Carle Clinic Association in the following communities. (All numbers have been rounded to the nearest dollar, and the total for each city is divided among the taxing districts –schools, city government, park district, etc. – in that community.)

CITY TAXES PAID

Champaign $360,308

Charleston $16,144

Danville $308,883

Mahomet $46,464

Mattoon $73,980

Monticello 0*

Rantoul $58,940

Urbana $4,667,489

Savoy $194,732

Tuscola $17,487

Sources: Champaign, Coles, Douglas, Piatt and Vermilion county treasurers.