Council Communication
June 4, 2013, Business Meeting
A Resolution authorizing Mayor and City Administrator signature of an affiliation
agreement between Ashland Community Hospital, Asante, the City of Ashland and
the Ashland Community Hospital Foundation and authorizing the City
Administrator to sign documents necessary to close the affiliation transaction
FROM:
Dave Kanner, city administrator, [email protected]
SUMMARY
The board of directors of Ashland Community Hospital (ACH) voted in December to begin a period of
exclusive negotiation with Asante on an affiliation agreement under which Asante would become the
sole corporate member of the ACH corporation. The City of Ashland, as the sole shareholder in the
ACH corporation, must consent to any affiliation agreement and, as the owner of the hospital property,
must agree to terms under which the property is conveyed to ACH. On February 19 of this year, ACH,
the ACH Foundation, the City and Asante entered into a non-binding letter of intent (LOI) that laid the
groundwork for an affiliation agreement. The parties have, since that time, been negotiating the
specific terms of that agreement.
Under this affiliation agreement, the City will transfer its sole corporate membership in ACH to
Asante. Asante will agree to operate ACH as a general hospital for at least 15 years. If it fails to do so
within the first three years of the agreement, sole corporate membership will revert to the City. If it
fails to operate ACH as a general hospital in years four through 15 of the agreement, Asante will pay
the City $4 million in what is the equivalent of liquidated damages. In addition, should Asante fail to
operate ACH as a general hospital in the first three years of the agreement, thus causing reversion to
the City, Asante will pay the City $8 million; reduced by an amount equal to payment into the ACH
defined benefit retirement plan in excess of $900,000 averaged annually. Asante has the right to
exercise a reversionary interest in the first three years of the agreement if total pension liability exceeds
$16 million or if previously unknown liabilities arise after closing that exceed $4 million.
This Affiliation Agreement was approved by the Ashland Community Hospital Board of Directors at
its meeting of May 22, 2013 and by the Ashland Community Hospital Foundation Board of Directors
on May 21, 2013. It is scheduled for a vote by the Asante Board of Directors on June 3, 2013.
BACKGROUND AND POLICY IMPLICATIONS:
Former Ashland Community Hospital CEO/President Mark Marchetti and former Board Chair Dr.
Doug Diehl met with the City Council in August, 2011, and at that time presented a recommendation –
which was approved by the Council – for seeking an affiliation with a larger hospital group, in order to
address ACH’s dire financial situation.
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Following that meeting, the hospital, working with Huron Consulting, sent a request for proposals to
25 hospital systems across the United States and received proposals from five. After reviewing the
proposals and hearing presentations, the ACH Board selected Dignity Health, a San Francisco-based
hospital system with 42 hospitals in its portfolio. In April 2012, the hospital and Dignity entered into a
due diligence period aimed at developing a merger and affiliation agreement. However, in October,
Dignity broke off those negotiations and withdrew its proposal.
In November, the ACH Board voted to pursue negotiations on an affiliation agreement with Medfordbased Asante, which owns and operates Rogue Regional Medical Center in Medford and Three Rivers
Hospital in Grants Pass. Following two months of discussions that included the City and the Ashland
Community Hospital Foundation, the parties entered into a non-binding letter of intent that spelled out
the basic terms of a to-be-negotiated affiliation agreement. That affiliation agreement is now before
the Council for its consideration. Because the City is the sole shareholder in the ACH corporation and
the owner of the hospital property, the City must approve any affiliation agreement and any agreement
affecting disposition of the real property.
Approval and signature of this affiliation agreement executes the transaction but does not close the
transaction. There are a variety of real estate conveyances, financial assurances and regulatory filings
that must be completed before the transaction can close. The parties have agreed that the closing will
take place on July 31, with Asante becoming the sole corporate member of the ACH corporation on
August 1. Due diligence will continue during the two-month period between the execution date and
the closing date. It is conceivable, if unlikely, that additional issues could arise as a result of that due
diligence that would cause Asante to terminate this agreement.
From the City’s perspective, the key provisions of the affiliation agreement are as follows:
1. The City agrees to transfer its sole corporate membership in ACH to Asante (§1, §2), however
ACH will remain an independent nonprofit corporation.
2. The City agrees to transfer title in all real property to the ACH corporation. (§9.1 )
3. Asante agrees to operate ACH as a general hospital per Oregon Administrative Rule 333-5000032(2)(a) for a period three years. (§5.1) If Asante fails to do so, sole corporate membership
in ACH will revert to the City, along with a payment to ACH of $8 million, which may be
reduced by the amount of contributions in excess of, on average, $900,000 per year paid by
Asante to the ACH defined benefit pension plan. This reduction shall not exceed $2 million
total. However, if Asante, prior to reversion, satisfies the balance of the Umpqua Bank loan in
full, it shall have no obligation to pay ACH $8 million as adjusted. (§6.1.2)
4. Asante agrees to make $10 million in capital improvements in ACH in the first three years,
with not less than $2.5 million of that by the end of the first year and $5.5 million by the end of
the second year. (§5.2.1) Should Asante fail to do so, it will pay the difference between those
amounts and what it actually invested to the ACH Foundation. (§7 and subsections)
5. During the first three years of the agreement, Asante will not cause any distributions of real
property from ACH to Asante or any other entity. (§5.2.2, §6.3)
6. There is a known pension liability that accrues to the hospital. Should that liability exceed $16
million in the first three years of the agreement or should an unknown liability arise that
exceeds $4 million in the first three years, Asante may, at its option, revert sole corporate
membership in ACH to the City. If Asante exercises its reversionary interest, it must pay to the
ACH Foundation the difference between $10 million and the amount actually spent on capital
improvements at the hospital. (§8 and subsections)
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7. Beginning in year four of the agreement and continuing through year 15, Asante agrees to pay
to the City $4 million should it cease to operate ACH as a general hospital. However, the City
would have no right of reversion. (§9.8)
8. The ACH Board of Directors will dissolve and the Asante Board of Directors will become the
sole governing body of the Asante hospital system, including ACH. (§2.2, §12, et seq.) Asante
will appoint an Ashland Community Hospital Advisory Board (§12.1) which will subsequently
become the Ashland Community Hospital Quality Committee (§12.5).
9. The City and the ACH Foundation agree to not compete with Asante/ACH unless the
reversionary interest of one of the parties is invoked or Asante withdraws all healthcare
services from Ashland. (§13)
10. Asante commits every effort to offer – but not to guarantee – employment to all current ACH
employees. (§14, et seq.)
Roy Vinyard, CEO of Asante, has been personally involved in the development of this agreement and
he will attend the June 4 City Council meeting to answer any questions you have.
FISCAL IMPLICATIONS:
There are many indirect fiscal implications for the City related to the 400 jobs provided in the
community by ACH. The direct fiscal impacts are those that all concerned hope do not come to pass.
These are:
1. In the event of a reversion from Asante to the City in the first three years of the agreement,
caused by Asante’s failure to operate ACH as a general hospital, Asante must pay to ACH $8
million, reduced by no more than $2 million for higher-than-expected contributions to the ACH
defined benefit pension plan.
2. Asante will make a minimum of $10 million in capital improvements in the hospital and will
pay to the ACH Foundation the difference between actual investment and that figure if it fails
to do so.
3. Asante must pay the City $4 million if it ceases to operate ACH as a general hospital in years
four through 15 of the agreement.
STAFF RECOMMENDATION AND REQUESTED ACTION:
Staff recommends approval this resolution and of this affiliation agreement.
SUGGESTED MOTION:
I move approval of a Resolution authorizing Mayor and City Administrator signature of an affiliation
agreement between Ashland Community Hospital, Asante, the City of Ashland and the Ashland
Community Hospital Foundation and authorizing the City Administrator to sign documents necessary
to close the affiliation transaction.
ATTACHMENTS
Resolution
Affiliation Agreement
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