Hospital Deal Gets Financing From D.C.
Despite Warning, $79 Million Backed

By Nikita Stewart and Susan Levine
Washington Post Staff Writers
Wednesday, October 24, 2007

The D.C. Council unanimously approved a final agreement yesterday to spend $79 million to help a for-profit company purchase the troubled Greater Southeast Community Hospital, despite a warning from the city's chief financial officer that the buyer is financially unstable.

Natwar M. Gandhi released his disapproving four-page report yesterday morning, contending that New England-based Specialty Hospitals of America "is not in strong financial condition" and that its five-year operating plan does not show that the hospital will be viable under the company's ownership.

"Should the business plan fail, it is likely that additional funds of substantial amounts will be needed to keep the hospital running," Gandhi wrote in his financial impact statement.

Although at least half of the council members expressed concern over Gandhi's warning, the prospect of Greater Southeast's imminent demise if the sale collapses prodded the unanimous vote. Greater Southeast is the city's only hospital east of the Anacostia River, an area where residents suffer from high rates of cancer and diabetes and other chronic diseases.

"I do not like this deal," council member Marion Barry (D-Ward 8) said bluntly. He supported it, he said, "only because the lives of 140,000 people are in jeopardy."

Council Chairman Vincent C. Gray (D) said the city's only two options were to go with Specialty or watch the institution shut under its current owner, Envision Hospital Corp. of Arizona. "To allow this hospital to close would be absolutely unconscionable," he said.

Specialty, which had said it would walk away from the deal without city assistance, anticipates completing its purchase by Nov. 7. It would move quickly to renovate the facility, said George Lowe, a lobbyist representing Specialty. He said there will be spruced-up landscaping and parking lots, as well as cosmetic changes on floors and improvements in care. "We really do look forward to being a good neighbor," Lowe said yesterday afternoon.

A small group of hospital employees witnessed the council discussion and vote, breaking into smiles as the outcome was announced. Several have worked at Greater Southeast for decades, remaining even as it deteriorated because of two bankruptcies, decreased services and obsolete and broken equipment.

"We just hope big things come out of it," Thomas Tobias, an anesthesia technician with 30 years' tenure, said of the funding plan.

Council member David A. Catania (I-At Large) called the deal, which was negotiated for the last month and completed Friday, "a tightly worded public-private partnership agreement" between the city and Specialty. It gives the city veto power over "a host of actions" the company might take at the hospital and requires Specialty to meet medical performance measures and provide health benefits to the community.

Under the agreement, the city will provide $30 million in grants for renovations and equipment, a $20 million loan in working capital and $29 million to acquire the hospital and settle long-standing debts. Specialty will be required to use savings from a real estate tax exemption to repay the $29 million. After that, the exemption lapses.

The company plans to restore services that Greater Southeast has cut in recent years and operate about 150 beds for short-term acute care. An additional 350 beds will be added for psychiatric and long-term care, according to executives.

One of Gandhi's main points of contention involved Specialty's claim of $34 million in "goodwill" assets, which the company expected the city to accept as proof that it could cover its liabilities.

"Goodwill" is an accounting term used to characterize assets that are not tangible -- the value of a company's name or its customer base, for example. In Specialty's case, the goodwill referred to the value of its two other D.C. hospitals, which provide skilled nursing and long-term acute care. The company maintains that the facilities are worth more than the simple value of their medical equipment.

But Gandhi decided that goodwill represents "intangible assets" that should not count toward Specialty's ability to meet its liabilities, government sources said.

Lowe disputed Gandhi's analysis. He said Specialty had $84 million in gross receipts and turned a profit of $14 million this past year. He noted that its hospital in Southeast sits on 66 acres appraised at $35 million, and its Capitol Hill facility is worth $15 million for its business operations alone.

"The company is not insolvent," Lowe said. "The company is performing very well."

Audited financial statements back up its claims, he said.

Gandhi's report was delivered to council members' offices, in some cases slipped under doors, several hours before the council began discussing Greater Southeast.

Catania, who was instrumental in pulling together the deal, called the report "bizarre" and "inaccurate." His relationship with Gandhi has been strained in recent years because of the public financing of the new $611 million baseball stadium for the Washington Nationals. Catania opposed using taxpayer dollars for the stadium and criticized Gandhi's cost estimates as flawed.

Catania said yesterday that Gandhi's report on the hospital was payback.

"I personally think there's some score-settling going on," he said. "The only forewarning I had of this was [Monday] morning when he came to talk to me out of the blue. . . . I walked out."

Gray asked why Gandhi waited until yesterday morning to release a negative financial impact statement, adding that Gandhi's staff participated in meetings and negotiations. "We were all surprised to get this at the eleventh hour," he said. "It's not going to change my mind."

But Gandhi said in an interview that he had alerted Peter Nickles, general counsel to Mayor Adrian M. Fenty (D), to the potential problems Oct. 5 in a confidential letter that contained much of the same language as his fiscal impact statement did yesterday.

A copy of that letter, obtained yesterday by The Washington Post through a Freedom of Information Act request, shows that Gandhi asked Nickles to require that Specialty submit an audited financial statement.

But Specialty did not submit such a report, and Gandhi was left with vague financial documents that failed to allay his concerns, according to government sources who spoke on condition of anonymity because the financial statements were confidential.

Gandhi said: "We sent a confidential letter to Nickles about what we saw at that point and where this whole thing was going. We alerted them to the issues [later] raised in the fiscal impact statement. They should not have been surprised. This is months of deliberation. For them to say, 'Gandhi came in with this letter at 8:45 this morning,' that's rubbish."

Gray and Catania said they had not seen the letter. In an unusual move for a legislative meeting, Gray called Nickles and Frank Willich Jr., chief development officer for Specialty, to address Gandhi's points.

Willich said he agreed with Catania's assessment. Nickles said many of the issues cited by Gandhi were discussed during negotiations and, he thought, satisfactorily resolved.

But he told the council, "I can't sit here today and tell you that this is a risk-free transaction."

Staff writer David Nakamura contributed to this report.

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