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In-depth: North Kansas City hospital legal battle pairs unlikely duo 

April 09, 2013 / by / 0 Comment

JEFFERSON CITY, Mo. — It all started with a meeting.

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The North Kansas City Hospital

It was a meeting between representatives from the City of North Kansas City and North Kansas City Hospital. Both sides say the meeting was to discuss the city’s largest asset, the hospital, in a long-term way. Now, they are embroiled in a legal battle — with the hospital challenging the city’s assertion of ownership — spurring legislative action in the state Capitol.

Sen. Ryan Silvey, a Republican, and Rep. Jay Swearingen, a Democrat, both of whom represent parts of North Kansas City, have filed identical pieces of legislation aimed at keeping the issue out of court.

North Kansas City Hospital is a stand-alone hospital operating under Chapter 96. Representatives of NKCH say that during the meeting, they were placed on notice. Elizabeth Short, the former mayor of North Kansas City, as well as members of the hospital board claim that the city voiced intentions to sell the hospital to a for-profit entity.

To Sell or Not To Sell? 

Matt Shatto, city manager for North Kansas City, emphatically denied any intentions to sell the hospital. Shatto said that the city, working with Merrill Lynch financial services, requested information from the board of the hospital to “assess their ability to compete long term.”

“There was never a conversation about ‘this is what selling looks like’,” Shatto said. “That’s simply not true.”

Documents presented to the hospital’s board on June 20 obtained by The Missouri Times, however, appear to address the possibility of a potential sale. A Power Point presentation assembled by the city from the meeting states: “Responsible stewardship compels the City to reassess its ownership of NKCH.”

Yet another slide reads: “The City recently engaged professional advisors to evaluate options regarding ownership of NKCH. All options have been carefully considered with significant time for reflection. As a result, it is the intent of NKC to exit the health care business while preserving NKCH’s mission.”

The presentation includes a chart, “Select Precedent Situations,” which shows the sale of institutions similar to NKCH across the country, detailing the purchase price and use of the proceeds resulting from the sale.

According to the documents, changes in the health care industry will likely “erode” the value of NKCH over time. The presentation states: “By acting now, NKC and NKCH are able to negotiate from a position of strength,” and mentions on the same slide a “national trend away from public ownership of hospitals.”

According to Shatto, no intention to sell the hospital was conveyed verbally at the meeting, and the presentation was not intended to convey the city’s desire to sell NKCH. He also said that some terms in the presentation might have been a “poor choice of verbiage,” and that many options, not only a sale, could be covered under the reassessment of the hospital’s relationship with the city.

Shatto said the city does have concerns about the ability of the hospital to compete in the “ever changing” landscape of healthcare, particularly because NKCH is a stand-alone healthcare facility.

“I think if you focus on the idea of a sale, I’m sympathetic to how you could read (the presentation) and come to that conclusion,” Shatto said. “But this is the first step in a long and complex process of evaluating the hospital’s financial stability and long term ability to compete, and that evaluation can include many things. There are options for the city to no longer retain ownership that do not constitute the sale of the hospital to a for-profit entity, such as strategic partnerships.”

According to Shatto, an evaluation could “yield all sorts of outcomes,” and the conclusion that the city was decided on selling the hospital by June 20 is simply incorrect.

“As the owners and operators of this hospital, the city has the right to ask these questions, they have a responsibility to do it,” Shatto said. He said the city has never intended to sell the hospital to a for-profit entity, and that no plan of sale has ever been formulated.

Merrill Lynch 

The role of Merrill Lynch led many — including Swearingen and Silvey — to believe the city intended to sell the NKCH. According to the contract between the city and Merrill Lynch, obtained by The Missouri Times, the majority of Merrill Lynch’s compensation in working with the city would be contingent on the sale of NKCH.

Merrill Lynch received compensation from the city only under specific circumstances, according to the contract. If the city requires an official “opinion” letter of Merrill Lynch on a particular transaction, they receive 1 million dollars per opinion, should the city request such an opinion for legal reasons.  images

However, should any transaction take place with Merrill Lynch overseeing, the contract calls for 0.95 percent of the value of the sale, a “transaction fee,” to be paid “immediately prior to or upon closing of a transaction.” Other than reimbursement for expenses up to $50,000, these are the only two mechanisms in the contract designed to compensate Merrill Lynch.

“What’s the point in putting together that part of the contract if not to have Merrill Lynch oversee the sale?” Swearingen said. “It’s absolutely clear to me, based on all the information I’ve got, that (the city) was intending to sell. If they weren’t, then why bring in Merrill Lynch if all they wanted was to evaluate?”

Shatto told The Missouri Times that the transaction fee portion of the Merrill Lynch contract was designed to save the taxpayers money, not sell the hospital.

“They were asking for hundreds of thousands of dollars to come and be apart of an advisory team to work on this issue,” Shatto said. “We brought to them an option where, instead of paying this huge fee on the front end, we would allow them to collect a fee on a possible transaction of some kind on the backend, which ultimately would save the taxpayers of this city a great deal of money, as the fee would come from the sale of an asset and not from the coiffeurs of the city.”

Swearingen confirmed this was the position taken by Shatto during their discussion, but said he does not necessarily believe it.

“(Shatto) told us in our meeting that he knew the city wasn’t going to sell when they signed the contract (with Merrill Lynch),” Swearingen said. “And we left that meeting under the impression that not selling was the position of the city. But that impression didn’t remain as we began to get more information.”

Constituent Concerns

Swearingen repeatedly told The Missouri Times that he would not have filed the bill if his constituents did not overwhelmingly support retaining the hospital as a community facility. Swearingen said the recent municipal elections, in which a Don Stielow was elected the new Mayor of NKC on a strong platform of opposing the sale of NKCH, is yet another example of the community’s attitude.

Rep. Jay Swearingen, D-North Kansas City

Rep. Jay Swearingen, D-North Kansas City

“Just look at the elections,” Swearingen said. “Everybody running on a position other than strong support for retaining the hospital and opposing a sale was defeated. I haven’t gotten one phone call, not one, from a constituent opposing my bill.”

Shatto said the reason citizens are so opposed to the sale is that they’ve been led to believe a sale is imminent, which is untrue. Furthermore, Shatto said the city council was acting on behalf of the citizens in beginning the evaluation process, and that any outcome for the hospital would be an outcome with the best interests of the city and the citizens in mind.

“The context should be a view that is based on an idea: first and foremost, how is the hospital situated today, how is the situation affected by the coming headwinds in the healthcare industry?” Shatto said. “What’s the outcome for service levels, and it’s long-term viability. Are there things to be considered that would address those concerns properly?”

Silvey said the city sent a letter to the entire town urging residents to call Swearingen and Silvey and oppose their bills. The letter said the hospital had exaggerated the city’s position and called on the citizens to reject legislative over reach into a local issue. Silvey said he hasn’t received a single call in opposition.

Sen. Ryan Silvey, R-North Kansas City

Sen. Ryan Silvey, R-North Kansas City

“It’s pretty obvious where the people stand,” Silvey said. “If they didn’t oppose the sale of this hospital, I wouldn’t oppose it either, but I think the law is supposed to work for the people, and as their representative in the senate it’s my job to make sure the statute is serving them, so (Swearingen and I) are going to exercise our power to change statute so that is continues to work for the people of North Kansas City.”

Legislative Response 

Three weeks after the June 20 meeting, the hospital filed a lawsuit against the city, challenging the authority of the city to sell the hospital on the grounds that the citizens of North Kansas City must approve the sale through a vote, just as they approved the measure to construct the hospital more than 50 years ago with taxpayer money.

Whether the city, the hospital board, or the citizens have a right to sell the hospital is the subject of the current lawsuit. During a hearing on Silvey’s bill earlier this week, NKCH President and CEO Peggy Schmitt said the battle could take “years.”

Silvey and Swearingen’s bills would allow the hospital, by a vote of the board, to change their charter and become a non-profit institution, effectively ending any authority or oversight of the city.

Shatto said this legislation would be “catastrophic” to the city, and that it simply wasn’t sound policy for Jefferson City to step in and take a publicly owned asset.

“Why does [the] hospital have to go to Jefferson City and request they take away an asset they’ve had for decades, specifically because they are arguing we don’t own them to begin with?” Shatto said.

“The people of North Kansas City, they feel this hospital belongs to them, because they put it on the ballot to create it in the first place,” Silvey said during testimony. “This bill simply forbids the sale of this hospital by the city, and provides a path for them to become a non-profit entity, which the people support.”

Silvey said the city moved recently to nearly double the size of the hospital board to appoint members more favorable to selling the facility.

Neither Silvey nor Swearingen intended to file legislation on the issue immediately after meeting with representatives from the city. While discussing hospital concerns with city hall, Silvey and Swearingen both told The Missouri Times they left the meeting sympathizing with the city’s position and under the impression that sale was not immediate. But that changed for both of them upon receiving copies of materials presented to the hospital at the June 20 meeting.

“We both left, standing out in the parking lot, thinking we probably wouldn’t get involved, that there was just some miscommunication and that the city wasn’t seriously pursuing this,” Silvey said. “But once we saw what we saw and spoke with more board members that were there, we realized that what they told us that day was not an accurate presentation of their position.”

The consensus is that the court battle will be a long one if the legislation dies in Jefferson City. Silvey and Swearingen maintain that the sale of the hospital was imminent as of the June 20 meeting, and that the lawsuit and legislation have slowed the process significantly.

Shatto said the city will continue to explore evaluations of NKCH as they attempt to address the “headwinds,” in the changing healthcare industry, and that no sale would take place without the input of the people.

To contact Collin Reischman, email collin@themissouritimes.com, or via Twitter at @Collin_MOTimes.


ABOUT THE AUTHOR

Collin Reischman is the lead reporter for The Missouri Times, and a graduate of Webster University with a Bachelor of Arts in Journalism. To contact Collin, email collin@themissouritimes, or via Twitter at @Collin_MOTimes.