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Laird Minor: What Is The Greenville Hospital Lawsuit All About?

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by LAIRD MINOR ||  In 2016, at the direction of its chairman but with the consent of its Board of Trustees, the Greenville Health System (“GHS”) restructured itself from a public non-profit into a private non-profit.  The South Carolina Public Interest Foundation (“SCPIF”), along with several legislators and private citizens, promptly filed suit to challenge the privatization.  That litigation remains ongoing.  So what is this privatization all about, and why are the plaintiffs opposing it?  The purpose of this paper is to answer those questions.

While the legal questions are complex, the fundamental issue is fairly straightforward: we seek to restore public control over this valuable public asset.

Background

GHS was created by act of the state legislature in 1947.  It is the successor to Greenville Memorial Hospital.  Legally, GHS is a political subdivision of the state (technically, it is a “special-purpose district”), and its oversight was entrusted to a Board of Trustees appointed by the Greenville County legislative delegation. Because of this structure it is considered to be a “public non-profit.”

Over the years GHS grew and expanded its operations to include facilities in adjacent counties. This has resulted in several statutory modifications to its delegated powers, and to the manner of selecting its trustees, but through all that time the essential characteristics have remained unchanged.

Privatization

After several years of secret internal deliberations, in 2016 GHS embarked upon a massive restructuring scheme. It created two new private non-profit corporations, one (the Upstate Affiliate Organization, or “UAO”) to take over all of the assets and operations of GHS, and the other (the Strategic Coordinating Organization, or “SCO”) to serve as its parent company. These new entities entered into a Master Affiliation Agreement which defined their respective roles, but basically SCO controls every aspect of UAO including the selection of its senior executives. The Boards of these new companies are self-selecting and self-perpetuating. The legislative delegation has no appointment power over them.

Once these new companies had been created, all of the land and buildings of GHS were “leased” to UAO under a 100-year lease (at $1 per year), and all of GHS’s other assets (personal property, fixtures, equipment, cash, investments, etc.) were transferred to UAO for free. At that time those assets had a combined book value in excess of $1 billion, which is probably substantially less than their actual fair market value. Furthermore, the system generates over $2 billion per year in gross revenues, all of which now goes to UAO. In addition to the rent, UAO is also obligated to pay to GHS $80 million, in annual installments of $4 million for 20 years, as reimbursement for the roughly $80 million invested in the system by the county during the 1960s and 1970s. Essentially UAO acquired everything GHS owned, plus all of the goodwill and going-concern value it had built up over 70 years, for little more than the assumption of its debts, which amount to approximately $650 million.

As a result of these actions all public control over the system has effectively been eliminated. The system is now under the complete control of its management group. The privatization essentially amounted to a management buy-out, except that there was no “buy”; they paid nothing for it, and the assets and cash flow of the system will cover all the costs.

The stated purpose of this privatization was to free GHS from certain impediments caused by its status as a public non-profit. Its management claims that such status hampered its ability to enter into public/private partnerships and other operational structures now gaining popularity among healthcare systems around the country. In addition, the change would facilitate growth outside the Upstate region, which is beneficial (they claim) because increased size is necessary to operate effectively and efficiently given the changing nature of healthcare nationally. Finally, changing itself into a private non-profit would exempt the system from certain state laws, such as the Freedom of Information Act, which executive management found to be increasingly inconvenient.

The Remaining GHS Entity

Despite all of its assets having been transferred to UAO the legal entity known as GHS remains in existence. It has been reduced to a nearly empty shell, however. Its Trustees, although still appointed by the legislative delegation, are functionally impotent and their duties are almost non-existent. Their only remaining job is to distribute the $4 million annual payments received from UAO (in a manner specified in the agreement) and to monitor UAO’s compliance with the terms of the lease. But since UAO has almost no obligations under the lease (beyond paying the $1 annual rent and issuing an annual report), and since GHS lacks any power to terminate the lease or otherwise enforce compliance with its terms even in the unlikely event of a breach, this “power” is meaningless.

A Brief Note on Nomenclature

After implementation of the privatization scheme, certain organizational adjustments were made within the system and the names of the entities have all been changed. This can be confusing. For clarity, throughout this paper the original names (as defined above) will continue to be used even though those are no longer technically accurate.

Palmetto Health

Subsequent to the privatization of GHS, SCO entered into an “affiliation” with Columbia-based Palmetto Health (“PH”). This was not a merger of the hospitals; their operations remain independent. However, they now share a common parent company which employs a “Co-CEO” management arrangement, with the (former) CEOs of SCO and PH sharing the CEO duties.

One of the first actions taken after the affiliation with PH was an attempt to consolidate the two healthcare systems’ debts, which total $1.5 billion. This was to be accomplished by refinancing both institutions’ outstanding bonds into debt at the SCO (parent company) level. In December 2017 SCO sought to have the SC Jobs-Economic Development Authority (a state agency tasked with providing funding for economic development) issue bonds in that amount, the proceeds of which would then be re-lent to SCO and used to pay off the old bonds. The JEDA bonds would be secured by a pledge of the assets and cash flows of UAO and PH.

Financially, UAO is a substantially stronger entity than PH; its bonds are rated AAA whereas PH’s bonds, at Baa-1, are only two grades above “junk” status. The end result of comingling their debt would be to subject UAO to PH’s obligations, exposing it to the debts of a much weaker institution. Fortunately, that transaction required the approval of the County Councils of the four counties in which UAO and PH facilities are located, and both Greenville and Oconee counties rejected the plan. Greenville County voted to table the motion until the lawsuit is resolved.
Nonetheless, SCO is now making another effort at this, by asking the Greenville County Council to re-visit its December decision. SCO claims this will save many millions of dollars in interest costs over the term of the bonds. Whether or not that is true, it will also make “unwinding” the privatization more difficult, if not impossible, if we ultimately win the lawsuit. The more SCO enters into transactions such as this the more difficult it will become to “unscramble the egg,” and any victory achieved could prove to be a hollow one.

SCPIF Lawsuit

Shortly after consummation of the privatization, SCPIF challenged it by filing suit in Greenville County Circuit Court. We are seeking to have that transaction declared illegal and hence void, thus rescinding the lease between GHS and UAO, returning to GHS all of its other assets, restoring public control over the system, and basically unwinding the entire transaction.

Our legal claims include the following:

(1) the privatization was beyond the lawful powers of the Trustees and therefore was in violation of Act 432 (the 1947 statute which created GHS and defines its powers);
(2) the GHS trustees violated their fiduciary duty by permitting the conversion of public property to private use;
(3) the action of the GHS trustees, in entering into a non-cancellable 100-year lease, amounted to the unconstitutional delegation of a non-delegable duty;
(4) entering into a lease of that duration also exceeded the trustees’ authority by effectively tying for a century the hands of their successors, and thus constituted illegal “legislative entrenchment”;
(5) the actions of GHS violated various other provisions of the state constitution; and
(6) consideration of a mere $80 million (to be paid over a period of 20 years) for the transfer of over $1 billion of taxpayer-owned assets was grossly inadequate, and amounts to conversion and unjust enrichment on the part of UAO and SCO.

The Complaint also contains a variety of other claims, including violations of the Freedom of Information Act.

In addition, the Complaint notes that, should GHS be permitted to succeed in this scheme, it will set a precedent for the self-directed privatization of every other public non-profit in the state, from Clemson University to the Ports Authority. For this reason all South Carolinians should be concerned about this case, even if there are no GHS or Palmetto Health facilities in their county.

After more than a year, this case has finally been assigned to a judge (who operates out of Newberry County and so should be relatively insulated from Greenville County politics). Although a few procedural hearings have been held, as of this writing the case is still in its early stages. No trial date has been set.

Pending Legislation

In February 2018, identical bills were introduced in both the SC Senate and House of Representatives which would require the rescission of the GHS lease and affiliation agreement and mandate the sale of GHS to an unrelated entity. The net sale proceeds (after payment of any outstanding debts) would then be distributed proportionately to the County, the State, an endowment fund for a medical school in the Upstate, and a new public charity for the benefit of various social programs. The House bill was referred to the Judiciary Committee; the Senate version followed a different path and was assigned to the county legislative delegation.

The effect of these bills was immediate: it generated intense news coverage in all the local media, public discussions, competing newspaper editorials, numerous letters to the editor, publication of an “Open Letter” by a group of GHS physicians, and intense pressure on elected officials. Overnight, an issue which, although of significant regional and even state-wide importance, had previously gone largely unnoticed by the general public was elevated to great prominence.

However, only one week later, Sen. William Timmons (a principal draftsman of these bills) recanted. He secretly, and unilaterally, entered into negotiations with SCO executive management which ultimately led to an agreement in principle specifying the terms to which SCO would agree in exchange for legislative ratification of the privatization. Sen. Timmons thereupon offered an amendment to his own bill which completely gutted it, amounting to a 180-degree reversal. It converted what had been a call for the sale of GHS into complete legislative approval of its actions. He convinced his peers in the legislative delegation to agree to his changes (although some claim they were misled), after which the amendment was immediately offered to the Senate where it passed on second reading. There it remains.

The House version of the bill is unchanged and remains in the Judiciary Committee, No action on it has yet been taken.

The terms to which Sen. Timmons agreed include: (1) an increase in the amount paid to Greenville County from $80 million over 20 years to $100 million over 25 years; (2) certain limitations on the compensation of SCO board members and executives; (3) the appointment of two members from the GHS board to the SCO board (such persons to be selected by SCO, not by the legislative delegation); (4) the promise of somewhat greater transparency by SCO, including providing annual financial statements to, and holding periodic meetings with, the legislative delegation; and (5) settlement of the pending litigation through reimbursement of the plaintiffs’ attorney’s fees.

SCPIF and the other plaintiffs consider those terms to be grossly inadequate, a bad deal agreed to solely in order to eliminate a politically inconvenient controversy. The additional $20 million (payable in years 21 through 25) is almost meaningless; on a present-value basis it is worth roughly $6 million, which is little more than rounding error for an entity of this size. The promises of increased transparency are also meaningless: financial statements for charitable organizations are public documents, readily available to anyone who cares to look for them, and meetings are useless when the legislative delegation has no power to do anything even if it deems the answers unsatisfactory. And most importantly, there is no hint of any restoration of even partial public control. The two board members to be chosen from GHS will be toadies for SCO management (and if they should turn out to be insufficiently obsequious SCO management has the absolute power to remove and replace them at will).

This is completely unacceptable to SCPIF and the other plaintiffs, and it should be unacceptable to the public once they fully appreciate its inadequacy. Something much better is needed, and at a minimum that must include the restoration of true public control over this valuable public asset, an asset which was created, nurtured and sustained for 70 years by the people of Greenville County. Unless a more equitable solution is reached (or the General Assembly unwisely enacts legislation which ratifies the privatization scheme), our lawsuit will continue until resolved by the courts.

Laird Minor is the president of the South Carolina Public Interest Foundation (SCPIF), the lead plaintiff in the lawsuit referenced above regarding the Greenville Health System.

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