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January 25, 2013

HCA ordered to pay $162 million for not making capital expenditures at Kansas City hospitals

By Jay Nawrocki, MA

Hospital Corporation of America (HCA) was required to pay $162 million to the Health Care Foundation of Greater Kansas City (the Foundation) for failing to fulfill its agreement in the Asset Purchase Agreement (APA) to make $450 million in capital expenditure at the hospitals purchased from Health Midwest (Health Care Foundation of Greater Kansas City v HM Acquisition. LLC and HCA, Inc., January 24, 2013, Torrence, J). In addition, a special master was appointed to determine if HCA fulfilled its requirement to provide charity, indigent, and other compensated care for the ten years following the purchase of the Health Midwest's hospitals in an amount for each year of the ten-year period equal to at least the amount provided by Health Midwest's hospitals in the 12 months preceding the sale of the hospitals. Inconsistencies and a lack of detail in HCA's annual reports made to the Foundation as well as inconsistent statements made to the public about the amount spent on improvements to existing hospitals and on charity care led the court to appoint the special master. HCA's annual reports failed to follow their own accounting policies and procedures as required by the APA and failed to follow Generally Accepted Accounting Principles (GAAP) which was required by HCA's code of conduct as well as with a previous settlement with the federal government regarding accounting fraud. The special master is to report her findings back to the court.

Capital expenditures. HCA argued that by building two new hospitals in the Kansas City area it spent nearly $600 million on capital expenditures, or $150 million more than was required by the APA. However, the APA and numerous public statements made by HCA's executives indicated that the $450 million was to be spent on existing facilities. The last sentence of section 5.1 of the APA entitled capital improvements says, "The construction of new facilities by Buyer will not materially detract from the required maintenance and necessary improvements of existing facilities."

HCA argued that it purchased a hospital system which would allow it to spend the $450 million throughout the system. The APA makes it clear that HCA purchased specific hospitals and assets of Health Midwest. Section 1.1 of the APA lists the hospitals HCA agreed to purchase. No mention of a system is made in that section. In addition, several other sections of the APA list required continued operation of the purchased facilities and other obligations HCA had to maintain at each facility, such as community boards and staff requirements that could not be consolidated, providing further evidence that what was purchased was individual hospitals and not a system.

Public statements. Numerous public statements made by HCA executives at community meetings, in depositions for this case, and in other trials regarding the sale indicated that they knew they were committing to spending $450 million in capital expenditures at existing, not new or replacement facilities. In addition, HCA provided no evidence that it ever attempted to correct officials of Health Midwest or other entities when they made statements that there was a $450 million commitment to make capital investments at existing facilities.

Failure to prove expenditures. HCA could not substantiate that it had even spent the required $450 million in capital expenditures. When the amount spent on the new hospitals is removed from the $600 million figure, HCA comes up $112.5 million short of the required $450 million amount. At trial HCA admitted that the new hospitals were not replacement hospitals and as such the amount spent could not be considered as being spent to replace existing facilities in an effort to spend less than would be required to repair or fix existing facilities.

Numerous examples were provided that showed that the annual reports, which were to be submitted to the Foundation to document that the expenditure had occurred, had errors and were inconsistent. HCA testified that it did not use its own accounting principles or the GAAP as required by their own Code of Conduct. In addition, HCA could not provide evidence that it actually spent the amount that it claimed to have spent. Accountants testifying could not find invoices, or evidence of actual payment equal to the amount claimed in HCA's annual reports for a number of items. In some instances the annual report reflects different amounts for line items for the same period of time. In other instance annual reports do not include description or dates of alleged capital expenditure or commitments. In HCA's 2005 business plan it reported $49 million worth of capital expenditures for which there was no evidence of a commitment being made to spend that money, and as such it could not be counted towards the $450 million requirement.

Charity care. HCA reported that its charity care expenditure was $653.3 million during the ten-year period. There was no reasonable detail in HCA's annual reports to support this claim. HCA was asked but never provided financial statements as to the amount spent on charity care at each hospital, and never separated out the amount spent on charity and indigent care. In one annual report HCA reported that charity care at a suburban hospital increased dramatically in one year while during the same year charity care at an urban hospital dropped substantially. During the third year following the sale charity care seemed to double from the base year and in the fourth year it seemed to triple. All of this seemed inconsistent with experience and for which HCA did not provide any detail. HCA made conflicting reports on the amount spent on charity care in public statements as well, in one report saying it spent $48 million in Kansas City in 2009 and in another report saying it spent $87 million in Kansas City during the same time period.

Public benefit. One of the main components of the sale of Health Midwest's hospitals was to benefit the public. The purchased hospitals were accumulated on a tax-free basis by Health Midwest for the benefit of the Kansas City community. The arguments made by the Foundation of the purpose of the capital expenditure requirements seen in light of the inconsistencies of HCA's reports and statements led the court to make its findings regarding the intent of section 5.1 of the APA in such a manner as to support the public interest. This was one of the reasons that led the court to order HCA to pay $162 million to the Foundation and to appoint a special master to determine the actual amount spent on charity and indigent care.

The case number is 0916-CV30692.

Attorneys: Paul D. Seyferth (Seyferth, Blumenthal & Harris, LLC) for Health Care Foundation of Greater Kansas City. Thomas G. Kokoruda (Polsinelli Shughart PC) for HM Acquisition, LLC and HCA, Inc.

Companies: Health Care Foundation of Greater Kansas City; HM Acquisition, LLC; HCA, Inc.

MainStory: TopStory CaseDecisions CorporateNews CharityNews

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