Regulatory Oversight 5: Guide to Communities Considering Hospital Conversion in the Carolinas

OTHER FORMS OF REGULATION
Hill-Burton Community Service Obligations
Health facilities that received federal assistance under the Public Health Service Act to build, enlarge, or modernize their facilities under the Hill-Burton program have two obligations. The uncompensated care obligation requires hospitals to provide a certain dollar amount of free or discounted care following the completion of any construction project using Hill-Burton funding. The extent to which hospitals are committed to these obligations varies depending on how the funds were disbursed. While many hospitals in North and South Carolina received Hill-Burton funds, most have completed their uncompensated care obligations and would not be affected by Hill-Burton obligations related to hospital conversion. However, they could still be subject to the recovery provisions of the Public Health Service Act due to the 20-year eligible use period.

The second obligation relates to community services. A Hill-Burton facility must make its services available to anyone who lives within the facility's service area and has some means of payment. (Hill-Burton facilities also are required to make available emergency services regardless of ability to pay, but since 1986, federal law has extended this obligation to all hospitals serving Medicare patients.) A Hill-Burton facility may not exclude Medicare or Medicaid recipients or on grounds of race, color, national origin, religion or creed. There is no time limit on this community services obligation, but it remains in force only so long as the facility is operated by a not-for-profit or public entity.

A hospital that changes control within the 20-year eligibility period following completion of a Hill-Burton assisted facility is subject to the review of the Health Resources and Services Administration (HRSA), the federal agency responsible for administration of the Hill-Burton program. The purpose of this review is to determine whether the government's right to recovery has been triggered, and is required for a transfer of hospital ownership to another entity through a lease, sale, management agreement, foreclosure or any other agreement. Hill-Burton review also is necessary for a conversion changing the use of the hospital from that which was originally approved.67 The government may also determine that no right to recovery exists.

In the event of the sale or other conveyance of a Hill-Burton hospital to a for-profit entity, several options exist for the Hill-Burton obligations to be fulfilled. The acquiring entity typically has the authority to choose which method is most suitable. First, the federal government can make a recovery claim on the outstanding value of the Hill-Burton obligation, in an amount determined through review by the HRSA Field Office. Once the claim amount is paid (by either the acquiring entity or the original grantee of the Hill-Burton funds), the facility no longer has a Hill-Burton uncompensated services or community service obligation.

The federal government may issue good cause waiver of recovery if: 1) the hospital is used for another public or nonprofit purpose in accordance with the purposes of the Public Health Service Act, or 2) another public or non-profit facility in the area agrees to assume the remaining Hill-Burton obligations at its location.

Thus, a second option is for an acquiring entity to seek a waiver of recovery by establishing an irrevocable trust to provide Hill-Burton eligible health services,67 in an amount to be determined by the Secretary of DHHS. The facility must provide uncompensated services until the recovery amount, plus interest and minus expenses, is exhausted. A hospital establishing a Hill-Burton trust must also agree to comply with the community service obligations.

* In its 1984 sale to National Medical Enterprises (NME), Cherokee Memorial Hospital (now Upstate Carolina Medical Center) established a trust in the amount of $537,261, the figure determined to be the recovery amount entitled to the government. The hospital provided uncompensated care according to Hill-Burton standards until the hospital reached the dollar amount of the recovery figure in May of 1992.

For those directing the hospital conversion process, meeting Hill-Burton obligations is a important point to address on the regulatory checklist, especially considering the broad range of control and use changes that trigger Hill-Burton oversight. More information regarding the Hill-Burton program and uncompensated care is available by calling the hospital's designated HRSA field office.

Certificate of Need (CON) Process
An important part of negotiations for the conversion of a hospital may be obtaining guarantees for investment in health care facilities and services following conversion. In many of the cases we studied, agreements specified post-conversion levels of investment for particular hospital services. Realistically, hospitals seeking these improvements must consider the effect of existing Certificate of Need (CON) programs designed to control the expansion of health care technology within the state.

The CON process is a common mechanism for health care regulation applied at the state level to reduce unnecessary duplication of medical facilities, equipment and services and the resulting potential for higher costs. Although no longer in effect, federal regulation once required individual states to adopt CON legislation to regulate the capital expansion of hospitals and other health facilities. Some believe that in the absence of CON, economic discipline will be imposed by market-driven managed care, with its emphasis on lower utilization. As of November 1997, North Carolina and South Carolina were two of 37 states that have retained CON regulation of hospital facilities. However, in both states, consideration is being given to repeal or substantial modification of CON laws.

Through the CON process, individual states determine the necessity of capital expenditures and medical equipment made to health facilities within that state. According to the law, any health facility planning to make capital expenditures (ranging from the addition of hospital beds to the purchase of a sophisticated Magnetic Resonance Imaging (MRI) unit) must apply to the state for permission to proceed with a project. In both North and South Carolina, CON requests must be consistent with the health needs defined in each state's annual health plan.

In the context of a conversion, CON regulations realistically may limit the ability of a community hospital to realize services promised in an agreement. For example, during conversion negotiations, an acquiring hospital may promise to expand certain types of services or purchase new equipment. However, it is important for communities to realize that aspirations about the expansion of facilities and/or services do not circumvent existing CON regulations. Consequently, there is no guarantee that the acquiring hospital will be able to obtain approval for services or technology they seek, particularly those projected for long in the future. For a community that views future expansion of facilities and services as key to a conversion, this may be an important consideration.

CON regulations may also offer protection for selected community benefits by requiring an acquiring entity to comply with any conditions of the converting hospital's existing CON-regulated services, perhaps alleviating fears that unprofitable services might otherwise be reduced or eliminated following conversion. For example, an acquiring entity may have to continue to provide a specified amount of charity care according to a conditional CON approval of an expenditure. CON regulations may also serve to limit the ability of an acquiring hospital to discontinue medical services in the community. To guarantee a stable level of services, North Carolina's Municipal Hospital Act specifies that a for-profit entity purchasing or leasing a public hospital must continue to provide the same range of services as offered prior to conversion. These levels only may be changed through a CON, serving as a post-conversion accountability mechanism.

On the other hand, an acquiring entity also can use CON to effectively transfer services outside a community by using the converting hospital's CON license to shift the equivalent number of beds to a hospital (owned by the same entity) within that region.

* The Cape Fear Memorial Hospital case illustrates how CON laws and the expansion goals of acquiring entities may not coincide. At present, Cape Fear Memorial Hospital (which became a Columbia/HCA facility until recently sold) is attempting to open a cardiac catheterization laboratory a service desired by the hospital in the sale negotiations. However, the hospital has not obtained CON approval to open the facility, and neighboring New Hanover Regional Medical Center is seeking to block its regulatory approval. This points to the reality that, while for-profit hospital chains or other purchasers may state their goals and vision, firm guarantees of fulfilling goals of expansion cannot be made since these services must first be approved through a CON.

In the interest of accurately assessing the potential benefits of conversion, hospital boards or governing bodies may be advised to consult their state CON office before finalizing conversion agreements that include hospital facility expansion or service provisions. In addition to providing technical assistance, the office also may be able to verify the state's CON plans to determine whether those services in question have been identified as a high priority need by the state. Lack of detail regarding the specifics of expansion plans may limit the ability of these bodies to provide a definitive opinion that is not subject to change. However, preliminary evaluation may at least avoid unrealistic expectations for hospital improvement and make aware the potential need to address other issues if a CON is denied.