Making a Decision

H ospital decisionmakers heading to the bargaining table should be well-prepared to discuss the realistic conversion possibilities of their hospital, including a through understanding of the hospital's mission, its level of commitment to areas of community benefit, and an understanding of the types of conversion arrangements and their implications for community control.

THE BIDDING PROCESS
With these in mind, the hospital may begin to formulate a decision, based on the various offers at hand. A hospital debating the conversion decision may have developed a strong relationship with another entity (e.g. through a prior contract management arrangement or short-term lease), in which case it may be tempting to enter into a longer-term arrangement with that entity. However, through the use of an open Request For Proposal (RFP) process to obtain multiple bids, a hospital may significantly broaden its potential for community benefit well into the future.

Benefits of Multiple Bids
There may be several compelling reasons for a hospital to broaden its conversion consideration to include multiple offers, including the potential to increase the purchase price beyond that originally offered, as evidenced in several of the case study hospitals. This may be true of a hospital in need of expedient change, in which case, an early lone bid may appear to be a miraculous "fix" to hospital cash flow problems. However, closer inspection and receipt of other proposals may reveal options not initially considered feasible by decision-makers, yet which offer better long-term solutions.

A hospital whose financial and management ills have traditionally been a headache for a community may also find that the multiple bids received through an RFP may spark a renewed interest in a hospital's financial potential. This, in turn, may yield a higher price for the conversion. In addition, knowledge of other competition may sharpen the interest of a potential buyer, resulting in a more generous offer.

* The conversion possibilities of Cleveland Regional Medical Center received a considerably higher level of interest by the county commissioners once it was determined that the hospital was worth a great deal more than the $1.4 million annual lease payment paid to the county. The same has occurred in the pending conversion of Durham Regional Hospital.

Are Multiple Bids Required?
In the interest of protecting the assets of the community hospital, many states have enacted legislation to regulate the bidding process. While to date South Carolina has no such law, North Carolina's Municipal Hospital Act requires that a public (i.e. county) hospital considering a sale or lease with a for-profit entity must receive bids from at least five (5) prospective partners before approving a particular conversion arrangement. However, this law does not apply to county facilities considering conversion to not-for-profit status. Likewise, there are no provisions in either the Nonprofit Corporation Act in North or South Carolina that regulate the minimum numbers of bids that a hospital must consider before converting.

While laws may not require that hospitals obtain multiple offers or an RFP process, the IRS and many experts recommend multiple bids as the best means to ensure a fair price for the hospital. In addition, some have interpreted a hospital board's fiduciary requirement of due care to include adequate consideration of multiple bids. Indeed, the adherence of board members to their duty of due care may be reviewed by a state Attorney General based on the boards' consideration of 'alternative bids, deal structures, partners, and methods of preserving the not-for-profit such as other capital-raising options. From the perspective of obtaining the best value for the hospital in the interest of the community, a conversion proposal with limited or no competition is likely to be held under closer scrutiny by a state Attorney General than if multiple bids had been considered. Where there are no laws, conversion decision-makers must weigh the benefits of dealing with one bidder against those of having multiple offers.

ASSESSING INTANGIBLE ASSETS
There clearly are many reimbursement options that may be combined to offer a strong package for a converting hospital. By identifying the needs and goals of the community early in the conversion process, decision-makers may have a standard against which to judge the importance of the purchase price compared with the inclusion of other intangible assets into a final decision.

Is the Highest Price the Best?
Accepting the highest bid offered for a hospital technically maximizes the investment the community has made in the hospital throughout the facility's lifetime and increases the funding available to carry out a foundation's charitable mission or finance projects through a county general fund. However, a hospital is not legally bound to accepting the highest offer, and may decide that other aspects of an agreement carry more weight than price.

* While price is clearly a desirable point for consideration, two of the ten hospitals studied in the Carolinas (Hilton Head and Cape Fear – both private, not-for-profit hospitals) did not accept the highest bid. In each case, they decided that the long-term stability of the hospital offered more to the community than would a larger sum of money in the short term. In making this decision, each of these hospitals declined the highest bid they received in favor of proposals that offered the greatest likelihood that the hospital would survive to serve the community in the long-term.

Hospital decision-makers must carefully weigh the bids they receive and balance the general presumption of seeking to maximize the purchase price received with the long term viability of purchaser and the implications this has for the community at-large.

Selecting a Partner
The challenge for those making the conversion decision is to examine and weigh the strengths and weaknesses of each proposal according to how the individual community will be affected. This is a decidedly difficult undertaking and one that requires a great deal of thought, especially since each proposal may emphasize different points of considerable merit to the community.

The analysis of competitive offers may be simplified by using an outside consulting firm to help evaluate incoming bids, as was done by the Durham County Commissioners in their conversion deliberations regarding Durham Regional Hospital. The final report of the multiple bid evaluation analyzed the components of each offer, including--among other items--tax payments, debt structure, and annual payments.

While the help of a consulting firm may clarify comparisons among bids, the resulting report may not take into account the many intangible assets that help to clarify the best choice for the hospital. Knowing the needs and goals of the purchaser, as well as understanding the community's intangible needs may make the decision more inclusive.

When the hospital governing board has decided to deal with one particular entity, it may sign a letter of intent that outlines its decision to further negotiations with an acquiring entity, contingent upon certain broad economic terms. Typically drafted by the acquiring entity and signed by the converting hospital, the letter of intent creates a link between entities that fosters a willingness to negotiate at a new level of commitment, including the sharing of previously confidential financial or other records.

The "ground rules" set forth in a letter of intent may include provisions subject to further negotiation, such as those to allocate expenses, determine the extent of publicity, detail the freedom of a party to pursue other transactions, and lay out certain conditions of confidentiality for each hospital. It is a commonly accepted rule in business and legal communities that the letter of intent does not bind the parties to formally enter into a deal. However, some courts have ruled that the components of such a letter (offer, acceptance and consideration) are those typically contained in a binding agreement, and limit the ability of a party to withdraw from that agreement. In addition, some courts have held that a letter of intent, as an "agreement to agree" obligates involved parties to negotiate in good faith towards a final contract.

Confidentiality provisions initially described in a letter of intent may help form an earnest negotiating atmosphere between the converting and acquiring entities, typically by requiring that each party adhere to several matters, including not reproducing or divulging information to others, not disclosing the operational or financial status of that company, not directly contacting the owner or employees of the acquiring entity and specifying the use of any acquired information solely for evaluation of the option to purchase. Thus, for a financially ailing facility, an advantage of a confidentiality agreement may be that the hospital board can disclose its status to a negotiation partner, yet protect itself against potentially harmful public knowledge of this information if the agreement does not materialize. In this way, the information disclosed does not jeopardize the ability of a converting hospital to attract other potential conversion partners.

However, while signing a confidentiality agreement may have merit in maintaining competitive advantage, it may also allow for the rapid sale of a hospital without any community input. Those making the conversion decision must judge the extent to which public knowledge of transactional terms may harm the position of the hospital, versus the potential good of broader community involvement in such a decision.