For the last 15 years Rhode Island has enjoyed the unenviable distinction of having enacted one of, if not the, most formidable barriers to market entry by for-profit hospitals in the nation. Unfortunately, an unintended consequence of the Hospital Conversions Act was a commensurate paralysis of any significant hospital combination involving the state’s non-profit hospitals. The issues were rarely substantive but were most often the result of unduly restrictive interpretations of process features of the statute that caused interminable delay and additional expense, making the economic calculus for any potential combination worthwhile only in situations involving significant financial distress. Even in the latter circumstance, the time and expense involved in the process was largely unwarranted.
Finally, some relief has been provided with the passage of Chapter 258 of the Public Laws of Rhode Island, 2012, as enacted on June 19 of this year (Chapter 259 is identical). The driving force was the proposed acquisition of Landmark Medical Center by Steward Health Care System. As a result of a series of additional changes, however, the law as amended has the potential to be far less unwieldy for in state non profit hospitals.
The changes essentially fall into three categories:
(1) changes affecting for-profit hospitals only;
(2) process changes affecting all transactions; and
(3) an expedited review process for the benefit of in state financially distressed non profit hospitals. This update will summarize the major changes.
Changes Affecting For-Profit Hospitals Only
The primary change for for profit acquirors of non profit hospitals was relief from the three year prohibition on subsequent acquisitions, as well as the elimination of the rather murky discretionary authority of the Director of Health to prevent a for-profit from filing an application for up to 10 years.
While the temporal prohibition was eliminated, the Director of Health is authorized to impose a set of eight semi mandatory conditions on approved for profit acquirors and the Attorney General is authorized to impose a generic one as well. These are semi mandatory in the sense that they can only be avoided if the Director of Health and Attorney General provide a rationale for failing to impose the ones entrusted to their respective authorities.
Once the conditions are imposed, the for profit acquiror must report annually for the succeeding three years on its compliance with them and must pay for the costs of the two agencies’ monitoring of the impact of the conversion on the costs and services within the communities served by the acquired hospital.
Process Changes Affecting All Transactions
In addition to the changes above, there were a number of definitional clarifications and changes that were designed to reduce the informational demands imposed on the transacting parties. These include revised definitions of “acquiror”, “acquiree”, “existing hospital”, “new hospital”, “senior manager” and “transacting parties” that should serve to limit the scope of review to the entities that are actually being acquired; a reduction in the look-back period for uncompensated care and bad debt and for provision of IRS form 990s from 5 years to 3 years; a clarification that conflict of interest forms used for auditing purposes within the year prior to filing would be acceptable; and a limitation on the need to provide board minutes unrelated to the proposed conversion.
There were also streamlining changes, including explicit provision for concurrent conduct of the conversion review by the Director of Health and the Attorney General and of any related federal review (e.g. antitrust review under the Hart-Scott-Rodino Act); exclusion of peer review and confidential medical matters from review; reduction of the review period from 180 days to 120 days; and provision for a uniform appeals process from decisions of the Director of Health and the Attorney General.
Finally, the Department of Health is encouraged to avoid duplication of its various regulatory authorities to the maximum extent possible.
Expedited Review
The final set of changes affects in state non profit hospitals only if the hospital to be acquired is determined to meet one of several criteria for financial distress. If that occurs, the process is further streamlined to reduce the application elements from 42 to 13, to shorten the review process from 120 days to 90 days, and to permit the Office of the Attorney General flexibility to focus its attention on the impact on the charitable assets of the transacting parties.
As the state’s hospitals move to meet the demands of health reform, these changes, many of which have been long overdue, will now enable Rhode Island’s hospitals, long-stymied by the excessive resource consumption of the Hospital Conversions Act process, to seriously consider combinations, restructurings and affiliations that may help achieve the triple aim goals regarding outcomes, cost, and quality of health care.