Academic nature of deal makes hospital sale complex

2014-07-27T00:00:00Z 2014-07-29T09:23:46Z Academic nature of deal makes hospital sale complexBy Stephanie Innes Arizona Daily Star Arizona Daily Star

The close-knit academic and private interests that govern the University of Arizona Health Network have made a planned purchase by Banner Health the most complicated in Banner’s 15-year history.

The deal, announced last month, includes two local hospitals — the University of Arizona Medical Center’s university and south-side campuses. It is expected to close by the end of the year if all goes as planned.

The University of Arizona Medical Center, 1501 N. Campbell Ave., houses the region’s only top-level trauma center, offers specialized treatments that aren’t available at other local hospitals and has research doctors with dual faculty appointments at the university. It was built with taxpayer money and its name fuels a sense of public ownership.

Yet the UA Health Network is a private, nonprofit organization. The UA, which had previously owned and operated the hospital, decided to privatize it in 1984. At that time, the University Medical Center Corp. agreed to assume existing liabilities of $11.7 million and to pay a base rental fee of $10 per year.

Despite its status as a private company, the network is closely intertwined with the UA, a public university. In addition to its real estate partnership with the UA, it has a real estate and funding partnership with Pima County. Also, the governing body for Arizona’s public universities — the Arizona Board of Regents — has some oversight.

“I think there has been some confusion about what the UA Health Network is and how it has evolved over the years. It is a sophisticated entity,” Arizona Board of Regents President Eileen Klein said. “We currently have a private nonprofit operating the hospital and we are going to have a different private, nonprofit operating the hospital.”

A DEAL THAT BENEFITS ALL

Banner, which is one of the country’s largest health systems, can purchase the network because it is private. The $1.2 billion network is an umbrella that includes two hospitals, three health insurance plans, numerous clinics and University Physicians Healthcare, which staffs the hospitals with doctors from the UA.

Some public aspects of the organization will change if the deal goes through as planned. The regents will lose the oversight they have of the UA Health Network board and UA Medical Center bylaws. But Klein says the important thing is that the regents will retain jurisdiction over both the UA College of Medicine in Tucson and the UA College of Medicine in Phoenix, which are separately accredited medical schools.

She noted that both the medical centers and the university operate in the public interest and that the clinical operations of the hospitals support the research at both medical schools. In other words, it’s in the hospital’s best interest to support the medical school.

“We want to make sure everything about this works to benefit the community, the university and the state,” she said of the deal.

The UA Health Network’s ownership structure is not unusual. A 2011 Association of American Medical Colleges study found that, of the 117 nonfederal academic medical centers in the country, 58 percent are owned by nonprofit organizations. That does not include government or church owners.

And a 2014 report from the association says academic medical centers of the future will be system-based, which is what the Banner deal seeks to create.

Some medical centers choose to take the lead in regional consolidation, buying other organizations and putting them under their own brand. But UA Health Network leaders decided selling to Banner was the better option.

While the number of hospital mergers and acquisitions declined in the past year, a May report from Irving Levin Associates says the number of hospitals and hospital beds involved in those transactions hit a five-year high. The number was bolstered by the acquisition of Health Management Associates by Community Health Systems for $7 billion and the sale of Vanguard Health Systems to Tenet Healthcare for $4 billion, the year’s two largest deals.

Tenet, a for-profit company, announced last week it would enter the Tucson market as the majority partner in a joint venture to purchase the struggling Carondelet Health Network, a chain of local Catholic hospitals.

Consolidations are usually positive for patients, said Christopher Kerns, managing director for The Advisory Board, a research, technology and consulting firm that serves hospitals and universities.

“One of the big side effects is more efficient care, getting patients in and out of the hospitals faster,” he said. “There is one area that can be a loss for patients — if a provider sees a service is not profitable and can be provided by others in the community, they may not offer it anymore.”

Regents losing oversight

The Banner deal removes the regents from oversight of the way the UA Health Network is governed, though it ensures the board retains some involvement with its hospitals and health-care delivery.

“There wasn’t much oversight anyway,” UA Health Network board chairman Steve Lynn said. “The thing to remember is that, with Banner, there will be no change in the academic enterprise. That is not changing whatsoever.”

The regents and the UA will be responsible for enforcing Banner’s post-closing agreement, including a $500 million capital commitment to clinical services in Tucson, Board of Regents spokeswoman Katie Paquet wrote in an email.

They’ll also enforce Banner’s 10-year commitment not to sell or close the UA Medical Center hospitals and to maintain key clinical services and programs in Tucson for five years, Paquet said.

Board of directors dissolving

The UA network’s 17-member board, which has a mandated number of leaders from the UA College of Medicine, will dissolve once the deal is final.

One member of the network board gets a spot on the Banner Health Board for a minimum of three years, under terms of the draft agreement.

Post-closing, Banner will continue to consider individuals from the Tucson community and individuals with university-level academic experience for board membership.

Current board chairman Lynn said the purpose of the UA Health Network is not only to deliver health care but to support the UA College of Medicine. And he’s certain Banner will continue to do that. He does not see dissolving the board having any effect on patient care, either.

“Nothing changes for patients except an infusion of capital into Tucson, which will allow the university to attract and retain more and better physician scientists,” Lynn said. “There is nothing negative.”

Academic support

A new entity called the “Academic Management Council” will be created if the deal is finalized.

Klein says that while Banner will operate the hospitals, the council that is part of the agreement should help ensure the hospital and university are supporting one another.

The deal calls for the vice president of the Arizona Health Sciences Center — currently Dr. Joe G.N. “Skip” Garcia — to be chair of that “Academic Management Council,” which will include three Banner appointees and three UA appointees, including the chair.

The terms of the agreement say the council’s specific power and authority will be subject to “certain reserved powers of Banner.” More specifics about the council role are likely to be part of a finalized agreement, officials said.

Klein and the other parties in the deal stress that there are mechanisms to ensure academic medicine remains a priority.

“It has a very strong, defining academic element,” Banner Health spokesman Bill Byron said of the deal. “The scale of this is vastly different for us.”

Land deal

The UA Medical Center — University Campus at 1501 N. Campbell Ave., with 479 beds, is on UA property. The university, through the Board of Regents, is selling that property to Banner for $21 million. The UA built the original hospital, too, but hospital leaders say it has no book value.

There have been a lot of enhancements, additions and renovations since the hospital was built in 1971, including a $200 million expansion that included a new emergency room and the 116-bed Diamond Children’s Medical Center.

“Diamond Children’s, and any other facility and/or upgrades since the lease and conveyance, are UAHN (UA Health Network) assets and are part of the overall proposed deal,” UA Health Network spokeswoman Katie Riley wrote in an email.

The UA Medical Center — South Campus, 2800 E. Ajo Way, is owned by Pima County — both the hospital and land. Banner will continue a lease with the county, and the county will honor an agreement to provide the hospital with $30.8 million over the next two years.

The total financial commitment from Banner outlined in the principles of agreement is more than $1 billion, including among other things, $140 million to pay off the UA Health Network’s debt, and $300 million to a restricted UA account for annual payments of $20 million to both UA medical schools — guaranteed for the 30-year term of the deal’s academic affiliation agreement.

Contact reporter Stephanie Innes at sinnes@tucson.com or 573-4134. On Twitter: @stephanieinnes

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