Hospitals’ new owner seeks tax break

Hawaii Medical Center, which says the financial situation it inherited at the former St. Francis hospitals is more dire than it initially believed, is seeking an exemption from paying the state's 4.5 percent general excise tax.

House Finance Committee Chairman Marcus Oshiro, in a meeting with Star-Bulletin editors Wednesday, said the GET exemption would save HMC about $8 million to $10 million, without stating a time period.

The new owners of Hawaii Medical Center West in Ewa Beach and Hawaii Medical Center East in Liliha are banking on a Senate bill, SB 11, which would permit tax breaks for any private hospital that meets specific criteria. To win the exemption, a certain percentage of the hospital's annual patient population would have to consist of uninsured, Medicaid and Medicare patients, and the hospital would have to spend not less than a certain dollar amount for capital improvement projects at the hospital by a certain date.

The bill appears tailored for HMC, which has a higher percentage of uninsured, Medicare and Medicaid patients than any other hospital on Oahu.

HMC converted the hospitals into a for-profit business from nonprofit status when it finalized a $68 million deal in January with St. Francis Healthcare System of Hawaii. In doing so, however, the new owners put themselves into a position of having to pay the state excise tax.

"We're just shaking our heads," said House Speaker Calvin Say, adding that he doesn't agree with subsidizing a for-profit. "We don't know how to help St. Francis. A nonprofit that went for-profit, so they're not exempt from the (tax), and they never did crank in that particular cost into the overall sale acquisition. So they're losing big money."

Dr. Danelo Canete, chief executive of HMC, said yesterday that the buyers did know of the general excise tax liability and it was "part of their business plan." But he said the financial health of the former St. Francis hospitals was based on June 2006 information that was filed in December with the State Health Planning & Development Agency (SHPDA). By the time HMC took over, the financial situation had worsened, he said.

In February, HMC laid off about 10 percent of its work force, or 210 full- and part-timers, in citing a deteriorating financial and staffing situation. Those layoffs are under review by SHPDA, which regulates health care projects and acquisitions, and the Attorney General's office, to see whether the buyers violated conditions required for state approval of the hospitals' sale. HMC is 51 percent owned by Wichita, Kan.-based CHA LLC, formerly known as Cardiovascular Hospitals of America, and 49 percent owned by the 130-member Hawaii Physicians Group, headed by Canete.

An early Senate bill called for private hospitals to be exempt only from the half-percent county transportation surcharge, but an amended bill changed that exemption to the full general excise tax. The bill is now expected to go into a House-Senate conference committee for a final decision.

In a statement issued yesterday, Canete addressed only the exemption on the surcharge and said that HMC was seeking a moratorium for two years "while we put our financial health in order."

"The exemption would be revenue-neutral for the state Treasury, because our hospitals were tax-exempt when they were operated by St. Francis," Canete said.

Canete declined to address the full GET exemption and said the legislators needed to be addressed on that issue.

Supporters of the bill, such as Oshiro, say the exemption would benefit HMC.

"They'd be exempt from the GET provided that they infuse about $35 million in improvements to their two physical plants and also that they serve, I think, 60 percent Medicaid-Medicare and indigents at their facilities," Oshiro said.

Oshiro said Canete told him that after the hospital purchase the buyers discovered $10 million in losses on the books.

"Because of that, and in addition to the general excise tax, they wouldn't be able to make ends meet and in six months they would have to close the hospital," Oshiro said.

The layoffs were designed to help alleviate the financial problem, but HMC and Hawaii Teamsters and Allied Workers Local 996 are now in expedited arbitration proceedings.

The two sides held three meetings, and the arbitrator's decision is expected later this month.

Canete said one of the main reasons the former St. Francis hospitals were in serious financial distress was due to their high percentage of uninsured, Medicare and Medicaid patients.

"Nonetheless, we are committed to continuing to serve these patients," he said. "They need, and we believe they deserve, access to high-quality health care. Our challenge is to continue to provide these services while also becoming financially viable."

Oshiro said for purposes of keeping the conversation going and keeping the options available, he took the $35 million improvement requirement out, but added that committee members were "scratching their heads like, 'Hey, this is a $65 million-plus deal (the approximate purchase price). You're getting two major hospitals, two major providers, and how could someone have missed this (GET requirement)?"

He said he was astounded to learn of the layoffs shortly after the company took over but added that "it kind of makes sense" given the debt the new owners discovered.

"They started laying off people, reduction of services, they were sort of bumping out service lines, and then you had some of the nursing staff, RNs, pick up some of the housekeeping chores. We've been hearing that," Oshiro said.

"I've been suggesting (to the attorney general) that maybe we need to re-examine, because some of the representations are questionable and some of the financial (dates) they had submitted may be inaccurate."