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Switch To For-Profit Hospitals A Boon For Tax Collectors

GREG BORDONARO

February 11, 2013

As Connecticut hospitals increasingly flirt with the for-profit model of health care, the pros and cons of such conversions are weighing heavily on the minds of city and state officials.

Concerns about the effects on care are paramount but municipal officials can't help but look forward to a possible property tax windfall.

The for-profit concept didn't exist in Connecticut until 2002 when Sharon Hospital was purchased by Tennessee-based Essent Healthcare after being on financial life support for years.

Now at least three prominent hospitals in the state are moving in that same direction, raising questions about what the conversion will mean in terms of quality and access to care in the state.

Quinnipiac University management professor Angela Mattie said patients and practitioners in Connecticut and the Northeast have had a lukewarm reception to for-profit health care in the past, but the changing health care landscape is making the shift inevitable.

And it's not necessarily a bad thing either.

Mattie said nonprofit hospitals converting to a for-profit corporate structure should help bring economies of scale by allowing hospitals to consolidate administrative functions, which should free up more capital to invest in health care services.

It could also allow smaller, independent hospitals to tap into the knowledge base and best practices used by much larger health care networks.

"It is not about whether it is a for-profit or nonprofit hospital, it's about how we increase the value of our health care system," Mattie said. "We are aiming for the lowest cost and highest quality care and right now we are doing poorly on that."

St. Francis Hospital and Medical Center is the most recent Connecticut hospital to consider the for profit model. It announced earlier this month that it is exploring a merger with St. Louis' Ascension Health Care Network, the largest for-profit Catholic hospital operator in the country.

Meanwhile, Bristol and Waterbury hospital are exploring mergers with Nashville for-profit hospital operator Vanguard Health Systems Inc., a Fortune 500 company that generates $6 billion in annual revenue.

And Eastern Connecticut Health Network is considering four different merger or affiliation partners, including at least one for-profit organization.

Besides economies of scale, another key benefit of converting is access to capital. St. Francis CEO and President Christopher Dadlez said continuing to build an integrated delivery system that provides more efficient and cost effective care is expensive and requires significant investment, particularly in doctors and technology. But access to capital for nonprofits is difficult.

That is why partnering with a for-profit entity that has the backing of a private equity firm makes sense for St. Francis at this time.

"To bring ourselves to the next level we will need more capital," Dadlez said.

Cities and towns will also benefit from a cash infusion of property tax revenue. Nonprofit status allows hospitals to skip out on paying property taxes, but by converting to for-profit organizations, hospitals lose that tax exempt status.

St. Francis' conversion could be a windfall for the city of Hartford. According to the city assessor St. Francis Care owns 41 buildings in Hartford with an assessed value of $269.3 million.

That would generate about $11.3 million in new property tax revenue for the city at a time when its budget has faced slim margins in recent years.

If ECHN chooses a for-profit partner, the city of Manchester would see a revenue boost from Manchester Memorial Hospital. ECHN owns 30 buildings in Manchester and about 10 of them are exempt from property taxes, according to city assessor John Rainaldi. If those buildings, which have an assessed value of $71.5 million, lose that exemption, it would generate $2.5 million to $3 million in new tax revenue for Manchester.

Where concerns come into play, Mattie said, is whether for-profit hospitals, which are ultimately responsible to shareholders and investors, will continue to uphold their commitment to the community.

"Nonprofit hospitals in Connecticut have been good community citizens," Mattie said. "The question is whether for-profit hospitals will continue to do that. Administrative costs are less with large systems, but the jury is still out on access and quality of care."