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Hospital merger deal contains legal, policy problems, Jack Conway report states

By Mike Wynn
The Courier-Journal
December 31, 2011

Merging University Hospital with a private, religiously affiliated corporation could compromise the mission of the public-health facility and create “significant” legal and policy concerns, Attorney General Jack Conway said in a report on the blocked hospital deal.

The 16-page opinion — requested by Gov. Steve Beshear as part of a larger review of the proposed consolidation — chides the University of Louisville for negotiating for more than a year without state involvement and disputes claims that University Hospital is not a party to the consolidation.

It also cites risks to state and charitable assets, constitutional issues and raises questions over transparency in its recommendation to reject the merger.

The deal “raises unprecedented and complex legal and policy issues,” Conway said in the report. “While some of the legal and policy issues have been addressed by the parties, many remain unresolved.”

University Hospital, Louisville’s main safety-net hospital for the poor, was seeking to merge with Jewish Hospital & St. Mary’s HealthCare and St. Joseph Health System, which is owned by Denver-based Catholic Health Initiatives and follows Catholic directives on medical care.

Conway said University Hospital’s status as a public asset for indigent health care is a fundamental fact, and he stressed that the governor has an obligation to ensure that public assets are used as intended.

The report also concluded that U of L presumed to negotiate a deal “rife with complexities and permanent implications for the future … without fully or timely engaging or consulting with the appropriate agencies of the commonwealth.”

In a statement Friday, Beshear indicated that issues raised in the report, along with “exhaustive discussion and research,” played a role in his decision to reject the deal. In particular, he pointed to constitutional questions about the influence of religion on reproductive issues and potential costs to taxpayers if the merger partners were to separate. But the most troubling concern is losing control of a public asset, Beshear said

“If this merger were allowed to happen, U of L and the public would have only indirect and minority influence over the new statewide network’s affairs and its use of state assets,” he said.

Conway’s opinion — forwarded to Beshear on Thursday — did not have any legal force in the governor’s decision, but Conway also released a statement Friday saying he supports Beshear’s move and U of L’s mission.

“But it is a public agency with an obligation to inform and work with state government regarding the control of a public asset such as University Hospital,” he said.

Issues raised in the report include:

• The timeline of merger negotiations. Documents indicate that discussions began around November 2009, but U of L did not seek state approval until after June 2011, when issues were raised by Conway and Beshear. The state should have been involved in talks much earlier, the report said.

• Constitutional questions over religion. The report said University Hospital has agreed to abstain from certain procedures under Catholic directives — including tubal ligations and delivery of contraceptives — which represents a material change in the level of service. Such restrictions raise constitutional questions over the relationship between religion and the state, which Conway said would likely set the stage for a lengthy constitutional challenge that would expend state resources.

• Transparency and open records. Transferring control of University Hospital to a private corporation could potentially limit public access to records about a public asset, the report said.

• The disposition of state assets. The report said U of L has not complied with state statutes that establish a framework for the acquisition and disposition of state assets. Furthermore, terminating the affiliation agreement could require U of L to repurchase the hospital, Jewish Hospital and Frazier Rehab Institute, along with assets from the Kentucky network in Jefferson County. The report said the university does not appear to have planned for those contingent liabilities and may seek state assistance, creating a risk for the state and the public.

• Restriction of services
. The report warns that sections of the agreement could restrict other university-related medical services that would compete with the Kentucky network.

• Use of charitable assets. The report points out risks that charitable assets could be paid out for reasons that do not support their original purpose or could be transferred out of the state without resulting in any benefit. Under a merger, U of L and the state would need to “diligently monitor” operations to protect charitable assets.

• Support for the teaching hospital. The report calls for more explanation of the Kentucky network’s relationship with the teaching hospital and raises concerns over maintaining accreditation as a medical school.