The Cost of Maintaining the Bricks and Mortar

[Jennifer Pae]

On July 16, 2015 Summa Health System’s president, Dr. Tom Malone, gave a speech to the Akron Roundtable about changes in healthcare: http://www.ohio.com/news/local/summa-ce ... s-1.608740

He said, “People need to understand that looking at the hospitals and the bricks and mortar isn’t where that care is being delivered anymore.”

And this got me thinking about the bricks and mortar aspect of the Lakewood Hospital transition discussion, and Lakewood resident Tom Monahan’s recent question to me about the City’s indebtedness. Yes, it is municipal finance stuff, and it is what I think about.

The 23-member governing board of the Lakewood Hospital Association (LHA) knows that the hospital and the surrounding properties it is responsible for are in need of significant capital investment.

It is one thing to have the financial means to pay your mortgage and keep the lights on, but any property owner knows if you cannot pay for upkeep and maintenance you are going to run into trouble. You might think otherwise, but it is the Lakewood Hospital Association’s responsibility for upkeep and maintenance of the hospital and its surrounding properties, not the Cleveland Clinic or the City of Lakewood. LHA took on this responsibility through its lease with the City of Lakewood, first in 1987, and revised in 1996, when that private, non-profit organization took over all of the hospital’s assets and liabilities from the City.

In the recent Huron Consulting draft report (http://www.onelakewood.com/wp-content/u ... se1Rpt.pdf), it is estimated that Lakewood Hospital needs over $91 million in improvements. And these are not improvements to make it a shiny new hospital. It is to replace existing systems in order for them to continue to operate safely and efficiently. In addition, the parking garage needs about $4 million just to bring it up to code and ADA compliance. That means LHA needs to come up with at least $95 million for capital investments.

That also means if another healthcare system or private physician practice took over the hospital, they would have to take on this liability and future expenses. And this amount is only going to increase over time if it is not addressed in the remaining 10 years of the lease between LHA and the City. The question is who is going to pay for this?

There is a call from some in the community that the City should take back the hospital. That means suddenly the City would now have a $95 million liability. The City definitely does not have that kind of money sitting around. It would have to borrow to cover those expenses, and the City of Lakewood would have to come up with the ability to pay that debt back.

The $95 million in capital investments for the hospital will not necessarily make operations profitable. So if the hospital shut down during those 20 years, the City would still be on the hook for paying back the debt. In my opinion, this magnitude of borrowing would severely limit the City’s ability to undertake any other capital improvements such as streets, parks and routine replacement of its fleet of vehicles during those 20 years. It would definitely hurt its strong bond rating of Aa2 by Moody’s Investor Service, and put at risk the fiscal strength the City has built over the past 8 years.

For starters, the City only has capacity to borrow an additional $30 million in debt as permitted by law. However, if there was a mechanism to issue the $95 million in debt for the needed hospital improvements, I estimate that a 20-year bond will cost the City approximately $5 million a year in annual debt service (principal and interest).

To put an additional $5 million a year in perspective, that is the annual cost of the City’s Parks and Refuse divisions combined. City Council would have to increase your income taxes by 1%, from 1.5% to 2.5% to generate an additional $5 million a year. Or Lakewood voters could levy an additional 5.95 mills of property tax to come up with an additional $5 million a year. For a $100K valued home, that would be an increase of nearly $210 a year for 20 years.

So everyone needs to ask themselves, is it worth the risk and cost? The City of Lakewood voters made that decision in 1985 to shift the liability of Lakewood Hospital capital improvements from the City to LHA. Let’s not go backwards, but instead let City Council deliberate on the issues and begin to negotiate the best deal for Lakewood going forward.

[Bridget Conant]

"Begin to negotiate the best deal for Lakewood"

I thought they already did that. They signed an LOI agreeing to a deal with CCF. Are you saying they are back to square one?

[Jennifer Pae]

"Begin to negotiate the best deal for Lakewood"

I thought they already did that. They signed an LOI agreeing to a deal with CCF. Are you saying they are back to square one?

The LOI is only a proposal from LHA, the Cleveland Clinic, and LHF. Council cannot vote on a proposal. They vote on legislation. The 1996 Lease document between the City and LHA needs to be renegotiated for any changes to be made.

If City Council decides to enter into negotiations to change the lease, they would vote on the final agreed upon legal document.

[Bridget Conant]

Thank you for making that more clear.

[Brian Essi]

Dear Ms. Pae,

I very much respect and admire you coming on the Deck for an open discussion of City finances.

Telemedicine is not quite what it is cracked up to be just yet--so CCF is building bricks and mortar in Avon and estimating $75 million in Fairview to take care of Lakewood if we tear down our hospital--but that number is just an estimate.

1. Essentially there is no mortgage or debt owed by LHA, other that trade debt--wasn't fixed debt just paid off this year? Do you agree that the lack of the need for debt service will increase LHA's cash flow when compared to prior years?

2. Assuming $1 million annual rent at 400K square feet (You can correct my rough estimates) that would be $2.5 per square foot in rent. Pretty cheap as regular medical office space with just sinks and exam rooms goes for $15 the $20 per square foot in the area. Do you know the precise total square footage and rent per square foot being paid for the remaining years of the Lease?

3. The $90 million supposedly needed for improvements to make the Hospital viable for the next 20 years was a CCF estimate--used by Subsidium and Huron Consulting---it included a CCF $15 million estimate buffer. Too bad these two consultants could not come up with a independent assessment to compare to. I am told a more realistic number is around $40 to $50 million, but like CCF's number its just an estimate. I think it is time that Lakewood, LHA and their consultants stop relying of CCF representations and "visions" for or planning purposes--don't you? However, if we use the $5million figure you came up with at 400K square feet that raises the rent to $15 per square foot ($12.5 plus $2.5). Do you think that would still be below market rate for a just improved state of the art improved full service hospital? Do you have any market data for hospital rents or annual costs per square foot?

4. Of Course the Lease requires a minimum$5 million average capital improvement by LHA and essentially CCF--The Lease states that it is a net net lease and that LHA must return the facility to the City is good condition at the end of the Lease. Do you think that there is any possibility that Huron might be mistaken in its interpretation of the Lease that LHA has no responsibility for improvements?

5. Contractual Provisions. Section 2.1.1 of the Definitive Agreement (DA) provides in part, “CCF shall assure that Lakewood shall have a cash to debt ratio of 1:1 on a fiscal year basis…if it is determined that [LHA] does not meet such ratio, CCF shall advance sufficient funds to Lakewood to meet such ratio…any advances not repaid to CCF at such time as the [Lease] terminates shall be forgiven by CCF” In Section 1.8.1 of the DA, CCF agreed “Notwithstanding any provisions in this Agreement to the contrary, CCF acknowledges and agrees that no provisions in this Agreement will cause [LHA] to take action or omit to take any action that could cause [LHA] to fail to perform or observe, or otherwise be in default of, any of its obligations under the Lease...” These provisions taken together mean that CCF must provide cash to Lakewood Hospital to match all debt including trade debt, and when they leave in 2026, we have a debt free facility (or at least enough cash to pay all debt) by the terms of the agreement. Do you agree? If not what part and why not?

6. I am sure that you will agree that despite erosion of services under CCF's watch over the years, LHA made an overall profit in 2014 and for many of the most recent years of operations. If you obtain the LHA booklets from Mayor Summers and Councilmembers Madigan and Bullock from the July 15, 2015 LHA meeting you will see the sharp drop off of revenue and net operating income starting in January, 2015 through June 30, 2015. Shannon Ritchie reported at LHA's May 13, 2015 that these losses are the result of the termination of the cardio intervention program and the "general announcement" that the hospital would be closing. Since they intentionally made such announcement and terminated the cardio program, would you agree that if they did not take such actions, LHA would be in a better financial position that it is now?

7. In terms of City Finances and City assets, how does the LOI compare with CCF staying until 2026? In other words, do you have a side by side analysis of the two options?

[Brian Essi]

Ms. Pae,

I forgot a small, but often overlooked point. LHA is not a "private" non profit corporation. Mike Summers and others have made that claim. It is actually a "public" charity subject to greater regulation than LHF which is a private charity---the Lease, the articles of incorporation and ordinance give the City and citizens rights in relation to LHA. Ms. Broadbent at LHF is a dedicated professional who can set forth the various distinctions between public and private charities.

[cameron karslake]

Ms. Pae,
You mention an increase in income tax from 1.5% to 2.5% as an increase of 1%. Isn't that jump in income taxes 66%? Am I reading that right?

Thanks for your inside perspective on the $ side of things.

[Bill Call]

He said, “People need to understand that looking at the hospitals and the bricks and mortar isn’t where that care is being delivered anymore.”

That's what they call a canard.

If bricks and mortar are no longer needed why are the Cleveland Clinic and University Hospitals investing almost $300 million in Avon, a city of 20,000 people?

Why did the Mayor refuse to respond to Metro's proposal to invest $100 million in Lakewood Hospital?

The parking garage does need $4 million in deferred maintenance. Why was the Clinic allowed to defer that maintenance? Didn't the LHA have a fiduciary duty to the Hospital? If they fail that duty are they liable for damages? Are they insured?

The Cleveland Clinic earned nearly $100 million during the last 4 years from its operations at Lakewood Hospital. Why didn't they invest some of that money in Lakewood?

The Mayor plans to replace the Hospital with a recreation center. Who will pay the construction costs? Who will pay the maintenance cost? Who will pay the operating costs?

[ryan costa]

just get rid of the codes and ADA standards.

That is more efficient than spending 95 million dollars to meet new codes and ADA requirements.

[Jennifer Pae]

Why did the Mayor refuse to respond to Metro's proposal to invest $100 million in Lakewood Hospital?

For starters, the Mayor is only one member of the 23-person Lakewood Hospital Association governing board. He is not the sole decision maker in this process. That responsibility falls primary on LHA, and on City Council if there is going to be any change to the lease between the City and LHA. And neither LHA or City Council ignored MetroHealth.

During its work with Subsidium, LHA issued a request for proposal to healthcare systems and private physician groups to come up with concepts on the future operations of Lakewood Hospital. Only two healthcare systems responded: CCF and MetroHealth. And both signed confidentially agreements regarding their proposals.

LHA explored and considered both proposals. The MetroHealth System submitted a proposal along with Premier Physicians in May 2014 that would have kept Lakewood Hospital open but operating on a significantly reduced footprint. It also called for the City to turn over ownership of the hospital and some related property to Cuyahoga County, with no compensation to the City. CCF submitted a proposal similar to what is in the current non-binding Letter of Intent. LHA explored and considered both proposals. In September, MetroHealth gave a powerpoint presentation to LHA regarding their proposal. On October 3, 2014, Dr. Boutros, MetroHealth's CEO, withdrew Metro's proposal.

Negotiations continued between CCF and LHA, and the current non-binding proposal known as Letter of Intent was developed and presented to City Council via a January 15th press conference and through a communication on the January 20, 2015 council docket.

Mayor Summers wrote Dr. Boutros on May 18, 2015 stating recent comments by MetroHealth in the press "suggest that MetroHealth may still be interested in operating a facility at the current site of Lakewood Hospital." Summers also wrote he has heard comments from citizens wanting to keep Lakewood Hospital open that Metro "may have an updated proposal in process," and he asked MetroHealth to provide him with a further explanation of its position.

Dr. Boutros responded that in a May 20th Letter to Mayor Summers, that MetroHealth was “uncomfortable re-engaging in any discussion about the proposal,” and incorrectly states that there was an agreement between the City of Lakewood and the Cleveland Clinic, and Metro did not want to interfere with that agreement. The LOI was not and is not an agreement, but non-binding proposal.

On May 21st, Mayor Summers responded that the City is not bound to any agreement with the Cleveland Clinic, and “because the city may evaluate other proposals regarding the future of healthcare in Lakewood, the MetroHealth System should in turn feel free to submit a proposal to the city.”

On May 22nd, City Council Vice-President Ryan Nowlin wrote Dr. Boutros’ executive assistant, Kathy Bellflower, thatrecent letters exchanged between Boutros and Mayor Michael Summers leave questions about whether MetroHealth "is truly interested in making a proposal for the operation of a healthcare facility at the site of Lakewood Hospital,” and stated that City Council has not agreed to anything. Nowlin gave Boutros until the end of business on May 27th to agree to attend an upcoming meeting to explain MetroHealth's position in person.

There was no response from Metro until June 18, 2015, when Dr. Boutros affirmed that is it no longer interested in Lakewood Hospital.

[Brian Essi]

The MetroHealth System submitted a proposal along with Premier Physicians in May 2014 that would have kept Lakewood Hospital open but operating on a significantly reduced footprint. It also called for the City to turn over ownership of the hospital and some related property to Cuyahoga County, with no compensation to the City.

Neither the May 2014 nor the September, 2014 called for "no compensation" to the City for the hospital and its properties. That's not a condition of either proposal and never was.

I was involved in the back and forth on Metro this year and what has been written about Metro's positions last year and this year is simply not accurate.