Consultants for Lee Health are recommending the public hospital system continue to explore converting to a private nonprofit entity.
The Chicago-based consultants Kaufman Hall hired last fall included the recommendation in a detailed report that was presented to the publicly-elected Lee Health board of directors during a three-hour workshop Thursday. It assesses the merits and drawbacks of the change.
There are many factors that led Lee Health to consider the change, including a 2019 law change that made it easier for competitors to enter the market.
While board members peppered the consultants with questions, the members were asked to submit questions in writing so answers can be provided in writing. The next workshop is Feb. 29. There was no discussion about the recommendation.
The consultants’ acknowledged more analysis is needed and that nothing is black and white with an ever-changing health care environment, which includes decisions at the state and federal level that impact policy and funding.
“Kaufman Hall’s recommendation is subject to further evaluation of the future governance model, potential conversion structure, and other operating model elements that would be developed at a later stage in this process, but that has not been determined as part of the analysis herein,” the report said.
The report identifies and estimates the costs of a conversion, but many of the benefits are challenging to quantify.
That’s because they are contingent on the “post-conversion structure or the benefits are more intangible in nature, without a direct economic measure,” the report said.
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The consultants’ report was completed ahead of a Feb. 27 deadline that is part of clearly defined guidelines set by the state for Lee Health to conduct an analysis and decide whether to move forward or not.
What’s next in the possible move to privatization?
The board has 120 days to review the analysis and vote on whether to move forward or not. A favorable vote sets in place an Oct. 24 deadline to develop terms of a conversion with the Lee County Commission, which must approve it.
Lee Health is one of the largest public hospital systems in the U.S. and in Florida with a $3 billion operating budget, yet it does not receive direct taxpayer support through a property tax levy.
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As a public system, it gets tax breaks in exchange for providing “community benefits” and is a safety net hospital that cares for all patients regardless of insurance status or ability to pay.
For 2023, Lee Health had $113 million in charity care and $89 million in unpaid Medicaid care and it provided $71 million in community outreach. The net community benefit was $178 million after foregone taxes of $94 million.
What did some board members say?
Dr. Larry Antonucci, president and chief executive officer of Lee Health, said one finding in the report that surprised him is that out of 530 hospitals in the U.S. that are public or government owned, only 14 are similar to Lee Health in having 400 beds or more.
What the consultants’ report did not say, which Lee Health is asking for, is how many of the 14 similar public hospitals nationwide don’t receive direct taxpayer support through a tax levy.
Antonucci said he would expect that most of them receive direct taxpayer support and that Lee Health may be one of the few that does not.
The consultants said 72% of public hospitals in Florida receive tax support.
From 2000 to 2021, the number of public hospitals decreased by 219 nationwide, the report said.
Lee Health operates four acute care hospitals, a regional children’s hospital and a nursing home with a total of 1,977 beds and extensive outpatient services.
The system serves more than one million patients annually: it had 85,000 admissions last year and its emergency rooms saw 276,000 patients. There were 2.6 million outpatient and physician visits.
Board member Therese Everly said Lee Health may be a dinosaur and she is keeping an open mind on a conversion.
She said the community sees Lee Health as an asset and she would like a valuation of all the system’s assets, which was not included in the report.
Long-time board member, Dr. Stephen Brown, who expressed concerns a while ago about a conversion, said he will put his questions in writing.
How did Lee Health get to this point?
The hospital board voted last fall to explore a conversion after the state Legislature passed a bill last year giving it the option.
Key factors that Lee Health faces are increasing competition since state lawmakers made it easier for competitors to enter the market by eliminating in 2019 the certificate-of-need process. That rule required justification for new hospital beds in a market.
In addition, private equity companies that are investing in health care makes it harder for Lee Health to stay competitive with a high share of uninsured patients, Medicaid and Medicare patients with lower reimbursement compared to commercially insured patients.
Sixty-five new hospitals have been built in Florida from 2020 to 2022 since the certificate of need rule was dropped. HCA Healthcare plans to build a 100-bed hospital at 3851 Colonial Blvd. in Fort Myers
Lee Health is moving forward with the first phase of a new hospital in Fort Myers on Challenger Boulevard between Colonial and Winkler Avenue with a price tag that could run to $465 million.
How the consultants conducted the review
Kaufman Hall broke down their analysis to seven categories, which are business and community strategy; operations; human resources; governance and structure; legal; finance; and communications.
The consultants said the system’s enabling legislation, which restricts the system to stay geographically in Lee County, is an issue because the county’s base population does not support the volumes needed to maintain quality and patient-care safety standards for certain services like pediatrics.
A conversion would allow Lee Health to expand outside of the county.
One in five patients served do not live in the county and 58% of fundraising dollars over the last three years has come from people who live outside of the county.
“Substantial demand for the Lee Health brand and reputation, with ample fundraising opportunity, offers the ability to expand into adjacent geographies, developing the population base to support enhanced service offerings within Lee County,” the report said.
As a private nonprofit entity, the system would be “better positioned to invest in partnerships with physicians via joint ventures” and could compete better with for-profit systems, the consultants said.
Another point for consideration is that by converting, Lee Health would no longer be subject to the state’s Sunshine Law of meetings being open to the public and would no longer be subject to public records’ request.
That would mean competitors would no longer have access to strategic plans as they do now.
Expect a financial hit by converting in the early years
On operations, key considerations are the 35 health clinics that receive federal dollars for caring for underserved populations system which Lee Health operates with Lee Community Healthcare.
With a conversion, the consultants said it is likely Lee Health and Lee Community Healthcare would need to transition the federally supported clinics to a new structure.
The financial impact could be a $49 million loss in federal support by a change. The consultants said in the next phase of the evaluation, the two entities would need to determine which way to go.
Another key issue is that a conversion would mean Lee Health would give up its sovereign immunity protection from large medical malpractice payouts.
Lee Health would address the loss of that protection by spending more for insurance protection of roughly $5.4 million a year.
“The loss of sovereign immunity may have a negative impact on recruitment efforts, although Lee Health would recruit providers in a manner consistent with community-focused nonprofit corporations across the state,” the report said.
In terms of how Lee Health would be governed, the analysis said that is a key consideration for long-term sustainability and for Lee Health to sustain its mission of being safety-net system for all patients.
The existing board would likely serve as the initial board for a future nonprofit entity so it remains locally governed. That recommendation was something the Lee board decided last year it would do if a conversion occurs.
The financial aspects of a conversion were easier for the consultants to present based on current financials.
Similar to other health systems, Lee Health has faced industry headwinds of expense inflation that is growing more rapidly than revenues, and it may see its operating margin reduced “but the system has historically navigated these pressures,” the report said.
Converting to a nonprofit private system may cause a loss in supplemental funding from government sources as a safety-net hospital. However, a conversion would allow for some strategic growth initiatives that include new sources of revenue.
A conversion would result in a net loss in operating income ranging from $59 million to $107 million in the first year. That would adjust the 2024 budgeted operating income from $131 million to either $24 million or $72 million, depending on how the federally qualified health clinics would be restructured.
The system’s operating margin budgeted at 4.2% in 2024 would drop to a range of 0.8% to 2.3% the first year of a conversion. Similar impacts would be anticipated in future years.
The operating gain as a public hospital in 2023 was $43 million with a margin of 1.5%.
Another impact from a conversion would be decreased savings from the 340(b) program, a federal program that requires drug manufacturers to provide medications at reduced prices to public hospitals and other qualified entities.
While baseline financials may dip, the system will face more patient demands due to a patient population growth of 23% by 2033.
Hospital admissions will go up 2% while outpatient surgeries would go up 19% and ambulatory surgery care services would go up 167%. The trend is toward more outpatient care, including home based and telemedicine services.
Any option to offset the financial hits?
To help offset some of the supplemental payment hits, Lee Health could qualify for alternative supplemental dollars by gaining a designation as a teaching hospital. That would require investing in five new programs and by having 37 more medical residents.
That could mean more than $28 million in supplemental funding through each Lee Health hospital license that qualifies as a teaching hospital by July 2027.
Lee Health has $770 million in outstanding debt and a conversion would require refinancing the debt through a government insurer or transferring the liability to a successor entity by amending the documents.
With either option, the debt would be issued by a government entity, namely Lee County or the Lee County Industrial Development Authority with the debt proceeds being loaned to the private nonprofit hospital.
What about employees?
In terms of Lee Health’s 15,000 employees, the conversion would have no impact of seniority and there would be no anticipated changes to the current benefits package.
A conversion would require the new nonprofit system to contract with existing vendors to continue the current health care plan offering. In addition retirement plans would have to transition under the new nonprofit system.
When is decision expected?
The Lee Health board has until June 26 to evaluate the findings, weigh community input and vote on whether or not to move forward. A majority vote is required to proceed.
If the decision is to go forward, the board must develop terms of a conversion agreement with the Lee County Commission, which must approve it. That step must be done no later than Oct. 24, 2024.
From there the state must be notified of the transfer of Lee Health’s assets to a new nonprofit entity. The current 10-member Lee Health board would be disbanded but they could serve as the board of the new nonprofit organization.
