Selling Florida's Public Hospitals: What Gov. Rick Scott's New Plan Means for the Industry

Nathan A. Adams, IV - Wednesday, September 12th, 2012

For many years, Florida resisted the trend toward national hospital privatization, but there is a new sheriff in town. By Dec. 31, 2012, all governing boards of Florida public hospitals must have commenced a five-month evaluation process of the possible benefits of selling or leasing facilities accounting for more than 20 percent of their revenue using objective criteria related to cost and clinical performance. Several hospital districts such as the North Broward Hospital District have already begun the review. At its conclusion, if they decide in favor of privatization, the boards must determine whether qualified for-profit or non-profit buyers or lessees are interested and rank them. If boards vote against privatization, they must explain why to the community.

Slow train coming

Florida's policy shift was a slow train coming. It began in 1982, when the legislature authorized the leasing of public hospitals to non-profits, subject to continuing district control. In 1995, an appellate court ruled unconstitutional a long-term lease, obligating a hospital district to sell facilities to the managing corporation at the end. In tit-for-tat fashion over the interim, the legislature in response to court rulings, amended statutory law to create safe harbors for hospital leases, exempt management companies from Florida's public meeting and records laws and authorize sales of public hospitals. In 2010, the trend gained momentum when Gov. Rick Scott's transition team recommended an investigation into whether the state needed as many government-owned hospitals.

Commission on Review of Taxpayer Funded Hospital Districts

In March 2011, Gov. Scott, himself a former healthcare executive, appointed a task force to examine hospital tax districts across the state. In December 2011, the Commission on Review of Taxpayer Funded Hospital Districts issued its report. The Commission could not establish that there was any pattern of higher or lower quality of care in Florida hospitals based on ownership type. It recommended 1) sunsetting tax districts unless voters approve them periodically; 2) creating public trust funds which could finance indigent care at private hospitals and incentivize economic development; and 3) establishing a transparent, competitive and independently-verified privatization process. This spring, Gov. Scott signed into law Florida House Bill 711 (HB 711) with similar objectives.

Addressing objections

Like it or not, HB 711 is sure to change the healthcare industry in Florida. Opponents of hospital privatization have usually voiced concerns about the impact on "community benefit," including the continuation of indigent and community care, conflicts of interest, public accountability, transparency and insider profits. Although opponents are certain to question how successful they were, the crafters of the bill tried to account for these pitfalls in a manner consistent with the recommendations of the Commission. To assist with indigent care, half the proceeds from any sale of a hospital pursuant to HB 711 must be placed in a trust fund to be distributed by local hospitals for indigent care.

Transparency

To address concerns about transparency, HB 711 throws sunshine on the process in a variety of ways such as by requiring 1) noticed public hearings where interested persons may speak; 2) use of publicly available cost and quality data; 3) disclosure of all documents considered by the board and the board's findings; 4) a public request for proposals for the sale or lease of hospitals; 5) disclosure of the bids themselves; 6) disclosure of the contracts for health care services that will be void or voidable as a result of the transaction; and 7) notice of and a public comment period for any proposed transaction.

Accountability

For public accountability, HB 711 requires disclosure of any conflicts of interest of board members, management or staff including whether a deal would result in any "special private gain or loss." It also requires hospital boards to contract with professionals to render an independent valuation of the hospital's fair market value and to conduct an operating comparison with similarly-situated hospitals based on public data to evaluate differences in the cost of operation and measurable outcomes. The objective of the comparison is to determine whether 1) it is more beneficial for taxpayers for the hospital to be operated by a public or private entity and 2) there is any net benefit to the community from investing the proceeds from the sale or lease of facilities in trusts.

Any proposed sale or lease must be for FMV or, if a facility is leased for less, the board must find that the terms of the deal accord with the best interests of the community. To pick the winner, the board must rank qualified buyers or lessors against various criteria such as the estimated total value associated with the acquisition, the extent to which acceptance of the proposal will reduce or eliminate ad valorem taxation and how the buyer or lessee will provide quality healthcare to all residents including the indigent. The Secretary of the Florida Agency for Health Care Administration must approve the transaction, unless the hospital district's charter requires a referendum. If a referendum is required, at least a majority in the district must approve the sale and elimination of the district.
Within 30 days of receiving a petition for approval, the AHCA Secretary must issue a final order approving or denying any proposed transaction based upon a series of criteria designed to protect the public interest such as whether the transaction 1) is permitted by law; 2) excludes a potential purchaser or lessee; 3) has met all public disclosure and conflict of interest requirements; 4) is for FMV or anything less is adequately justified; 5) involves an enforceable commitment to provide quality healthcare to all residents including the indigent; and 6) will result in reduced or eliminated taxes. The Secretary's order is subject to appellate review by any "interested party."

Penalties

A contract for sale or lease is voidable in the event of a failure to comply with these requirements and members of the governing board may be subject to public ethics charges.

Incentivizing development

In line with the Gov. Scott's and Commission's priorities, HB 711 also supports local economic development efforts. The other half of proceeds from the sale of a public hospital must be poured into a healthcare economic development trust fund under local control to be distributed, in consultation with the Department of Economic Opportunity, to promote job creation in the healthcare sector. Similarly, ad valorem tax revenue received from the sale of formerly tax-exempt property to a for-profit hospital may be distributed locally, in consultation with the DEO, either for the same purpose or in support of indigent care.

Carve-outs

Carve-outs from the bill include sales of public facilities generating less than 20 percent of a public hospital's net revenue. These sales are subject to much-reduced transparency and accountability requirements. Also exempt are existing public hospital leaseholds until termination of the lease, as well as certain pending deals leading to a letter of intent to sell or lease approved by the board before December 31, 2011, and a completed transaction by December 31, 2012.

Implications

With the enactment of HB 711, Florida has culminated the shift from a state hostile to hospital privatization to one requiring public tax districts to justify continuing to manage hospitals. Assuming private interest in the facilities, we should expect sales or leases of several public hospitals in the next few years, as well as innovation in the delivery of indigent healthcare through capitated trust vehicles. The public character of the process may deter some investors concerned about protecting trade secrets and disclosing financial information, but when the dust settles Florida will almost certainly have fewer public hospitals.

Nathan Adams, PhD, is a member of Holland & Knight's Healthcare & Life Sciences Team and practices in Tallahassee, Fla. He assists with investigations and legal opinions relating to acquisitions, sales and mergers of healthcare institutions, and defends healthcare clients against constitutional claims and adverse licensure actions.

Hospital Transactions & Valuation Issues