In Difficult Times Good People gravitate towards Absolute Truth
BRHS / UHS
Publisher's note: This commentary was recently published by the Beaufort Observer as a comment to their most recent article on the BRHS debacle. Warren has a keen understanding of the dynamics surrounding this absolute debacle, and sent this "Dear Commissioners" letter, here below, to the Beaufort County Commissioners back in January, which we published. It is still relevant today so I feel compelled to re-publish it in BCN.
Please remember that "non profit" never implies a lack of financial self interest or a failure to be motivated by the bottom line. UHS is not the "white knight" its supporters suppose them to be.
Even the hoped for final purchase price of $10 million is only the equivalent of $2.3 million in present valued dollars. It is hard to imagine that the hospital property would fetch this little if it were auctioned on the courthouse steps. Now the county is being put on warning that even this token sum is unlikely to be fully paid.
Since the new board was seated and the old administration was replaced the doors of BRHS have remained open and the payroll has been met. More pointedly, both UHS and CHS have submitted proposals to purchase the property which are based on their understanding that the hospital can be run at a profit. Is it beyond Beaufort County's ability to accomplish the same profitable management of the hospital in our own behalf? The county is being forced into a sobering reevaluation of the good we can derive from the current negotiations with UHS.
The following letter was sent to the county commissioners in January, 2011. The benefits of sale versus self management of BRHS have decreased appreciably in just sixty days.
Dear Commissioners,
In the recent BRHS discussions regarding the acceptance of the UHS proposal for running the hospital, an observation was made that the county still had the option of running the hospital with its own management and staff. This is a viable alternative now and has, in fact, been the county's historical method of managing the hospital. It is only the complexity of the last few years of mismanagement which has caused the hospital board to look for other alternatives. Businesses of all types are properly run every day and I am sure good self management is not beyond Beaufort Community Hospital's reach.
I am concerned that Beaufort County taxpayers may be set to sacrifice decades of financial support of the hospital and the corresponding goal of assuring the presence of a strong public health service within the county.
Advocates of UHS's offer to run the hospital seem to have confused UHS's non profit status with the idea that UHS will be blind to costs and opportunities to generate cash flow. As with all business entities non profits need to pay suppliers, employees, debt holders and others. To do so non profit entities need to generate cash through operations and they need to monitor expenses. Once Beaufort County surrenders ownership of the hospital's physical plant we will have no assurance that the best use of the resources available to UHS will be to continue running the facility as we have become accustomed to seeing it run. We will have no control over quality or cost of services nor will we have any assurance that during the next thirty plus years UHS will not find it in their best interest to close the facility or change the mission of the property. They would, in fact, quite logically have the option of selling the lease and/or property to a third party without any requirement to seek Beaufort County's approval.
The recent bidding process has demonstrated the incentives that both profit seeking entities and non profit entities have in husbanding their resources. UHS's initial proposal was an underbid of many millions of dollars compared to what was offered by our other suitors. UHS's managers clearly understood that the value of the property could support a higher bid, but they quite rationally chose to structure their bid to maximize the cash which they could generate from the lease by reducing the expense of acquiring the lease. If we surrender ultimate control of the hospital by virtue of a final sale then we must expect that UHS will again rationally pursue policies which favor the interests and needs of UHS as a cash generating and expense averse entity rather than the interests of Beaufort County residents.
This is not meant to be a slur on UHS. It is merely an observation of the strengths of their position should our county commissioners approve the UHS proposal.
If the county board choses to make this sale then the taxpayers need to be fairly compensated both for the loss of certainty in our future health care service as well as fairly compensated for the market value of the asset we are giving up.
What is the property worth to the county?
As I understand the UHS proposal $30 million will be paid in 2011 for a lease to expire in 2041, at which time, ownership of the hospital land, plant and equipment will pass to UHS for a payment of $10 million dollars. In the current interest rate environment a thirty year annuity for $30 million can be priced at an interest rate of 5%. If the county made such an investment it would yield roughly $2 million annually for the life of the investment. In effect, Beaufort County's leasing of the hospital property for $30 million paid up front would result in a $2 million annual boost to our revenues without any need to maintain roads, patrol neighborhoods, put out fires or provide any other services. If we maintained control of the ownership of the hospital building and property, then this lease and investment strategy could be repeated perpetually. The county's sacrifices and investment in the hospital throughout the last few decades would generate a substantial free cash flow equivalent to the taxes from hundreds of private residences and commercial properties.
What is the tax revenue from even our largest property owner? How much in infrastructure and service does our largest property owner require we provide from those taxes? The BRHS lease option is a great blessing and arises as a benefit from costs already paid by past generations of tax payers who committed themselves to creating the hospital facility. The hospital is a mature investment and can effortlessly produce a secure and valuable stream of income.
However, if the county sells the hospital property for $10 million at the end of the lease, then the trick can not be repeated. The opportunity is lost. Worse the final purchase price is only the equivalent of $2.3 million in present valued dollars. That is a sum slightly greater than the first year's hypothetical annuity payment. It is hard to imagine that the hospital property would fetch this little if it were auctioned on the courthouse steps.
What is this property worth to UHS or CHS? Their actions tell us that it is no less than $30 million simply as a lease and without surrender of the brick and mortar.
UHS can be assumed to anticipate borrowing $30 million at roughly 5% which could correspondingly be paid back as interest and principal at $2 million annually for thirty years. To fund the final buyout payment UHS would need to allow for an annual funding payment of about $150,000. The implication is that UHS or CHS expected their use of the hospital facilities to generate not only the $2.15 million in annual financing but also a fair rate of return above and beyond the expenses of providing health services and complying with the terms of a triple net lease. Judging from CHS's published statements their after tax return on equity is14%. UHS might fairly be expected to earn an equivalent return. By representing the $30 million as UHS's equity stake in the enterprise, this would imply that $4.2 million is the expected annual return from equity. After payment of all financing and principal charges UHS would still be $2 million to the good each and every year. From the thirty first year forward the UHS return is even free from the burden of all financing and principal repayment charges.
If these assumptions regarding the lease and its profitability are wide of the mark, then UHS will have an opportunity to submit correct and verifiable figures as the negotiations move forward. However, at first look, the hospital property seems to be be worth a great deal more than the contemplated present value of $2.3 million. Based solely on the earning power expected by both CHS and UHS the hospital property will generate enough to pay $2 million in the every first year and $2 million in every year after. Both candidates also expected to earn a fair profit in excess of interest and principal payments. We should get more than $10 million paid thirty years hence.
I believe that a simple lease agreement is rich enough to be attractive to UHS even without the final sale of the property. I refer to the CHS offer to lease without purchase as support of this opinion. However, in light of the withdrawal of competitive suitors, and the county's consequent loss of negotiating leverage, continued self management may become our best course of action. Paying to extricate ourselves from the current period of mismanagement is only acceptable at a proper price. Beyond a certain point the best solution is to work our way clear on our own. What others can be paid to do for us we can certainly find a way do on our own.
Go Back
Please remember that "non profit" never implies a lack of financial self interest or a failure to be motivated by the bottom line. UHS is not the "white knight" its supporters suppose them to be.
Even the hoped for final purchase price of $10 million is only the equivalent of $2.3 million in present valued dollars. It is hard to imagine that the hospital property would fetch this little if it were auctioned on the courthouse steps. Now the county is being put on warning that even this token sum is unlikely to be fully paid.
Since the new board was seated and the old administration was replaced the doors of BRHS have remained open and the payroll has been met. More pointedly, both UHS and CHS have submitted proposals to purchase the property which are based on their understanding that the hospital can be run at a profit. Is it beyond Beaufort County's ability to accomplish the same profitable management of the hospital in our own behalf? The county is being forced into a sobering reevaluation of the good we can derive from the current negotiations with UHS.
The following letter was sent to the county commissioners in January, 2011. The benefits of sale versus self management of BRHS have decreased appreciably in just sixty days.
Dear Commissioners,
In the recent BRHS discussions regarding the acceptance of the UHS proposal for running the hospital, an observation was made that the county still had the option of running the hospital with its own management and staff. This is a viable alternative now and has, in fact, been the county's historical method of managing the hospital. It is only the complexity of the last few years of mismanagement which has caused the hospital board to look for other alternatives. Businesses of all types are properly run every day and I am sure good self management is not beyond Beaufort Community Hospital's reach.
I am concerned that Beaufort County taxpayers may be set to sacrifice decades of financial support of the hospital and the corresponding goal of assuring the presence of a strong public health service within the county.
Advocates of UHS's offer to run the hospital seem to have confused UHS's non profit status with the idea that UHS will be blind to costs and opportunities to generate cash flow. As with all business entities non profits need to pay suppliers, employees, debt holders and others. To do so non profit entities need to generate cash through operations and they need to monitor expenses. Once Beaufort County surrenders ownership of the hospital's physical plant we will have no assurance that the best use of the resources available to UHS will be to continue running the facility as we have become accustomed to seeing it run. We will have no control over quality or cost of services nor will we have any assurance that during the next thirty plus years UHS will not find it in their best interest to close the facility or change the mission of the property. They would, in fact, quite logically have the option of selling the lease and/or property to a third party without any requirement to seek Beaufort County's approval.
The recent bidding process has demonstrated the incentives that both profit seeking entities and non profit entities have in husbanding their resources. UHS's initial proposal was an underbid of many millions of dollars compared to what was offered by our other suitors. UHS's managers clearly understood that the value of the property could support a higher bid, but they quite rationally chose to structure their bid to maximize the cash which they could generate from the lease by reducing the expense of acquiring the lease. If we surrender ultimate control of the hospital by virtue of a final sale then we must expect that UHS will again rationally pursue policies which favor the interests and needs of UHS as a cash generating and expense averse entity rather than the interests of Beaufort County residents.
This is not meant to be a slur on UHS. It is merely an observation of the strengths of their position should our county commissioners approve the UHS proposal.
If the county board choses to make this sale then the taxpayers need to be fairly compensated both for the loss of certainty in our future health care service as well as fairly compensated for the market value of the asset we are giving up.
What is the property worth to the county?
As I understand the UHS proposal $30 million will be paid in 2011 for a lease to expire in 2041, at which time, ownership of the hospital land, plant and equipment will pass to UHS for a payment of $10 million dollars. In the current interest rate environment a thirty year annuity for $30 million can be priced at an interest rate of 5%. If the county made such an investment it would yield roughly $2 million annually for the life of the investment. In effect, Beaufort County's leasing of the hospital property for $30 million paid up front would result in a $2 million annual boost to our revenues without any need to maintain roads, patrol neighborhoods, put out fires or provide any other services. If we maintained control of the ownership of the hospital building and property, then this lease and investment strategy could be repeated perpetually. The county's sacrifices and investment in the hospital throughout the last few decades would generate a substantial free cash flow equivalent to the taxes from hundreds of private residences and commercial properties.
What is the tax revenue from even our largest property owner? How much in infrastructure and service does our largest property owner require we provide from those taxes? The BRHS lease option is a great blessing and arises as a benefit from costs already paid by past generations of tax payers who committed themselves to creating the hospital facility. The hospital is a mature investment and can effortlessly produce a secure and valuable stream of income.
However, if the county sells the hospital property for $10 million at the end of the lease, then the trick can not be repeated. The opportunity is lost. Worse the final purchase price is only the equivalent of $2.3 million in present valued dollars. That is a sum slightly greater than the first year's hypothetical annuity payment. It is hard to imagine that the hospital property would fetch this little if it were auctioned on the courthouse steps.
What is this property worth to UHS or CHS? Their actions tell us that it is no less than $30 million simply as a lease and without surrender of the brick and mortar.
UHS can be assumed to anticipate borrowing $30 million at roughly 5% which could correspondingly be paid back as interest and principal at $2 million annually for thirty years. To fund the final buyout payment UHS would need to allow for an annual funding payment of about $150,000. The implication is that UHS or CHS expected their use of the hospital facilities to generate not only the $2.15 million in annual financing but also a fair rate of return above and beyond the expenses of providing health services and complying with the terms of a triple net lease. Judging from CHS's published statements their after tax return on equity is14%. UHS might fairly be expected to earn an equivalent return. By representing the $30 million as UHS's equity stake in the enterprise, this would imply that $4.2 million is the expected annual return from equity. After payment of all financing and principal charges UHS would still be $2 million to the good each and every year. From the thirty first year forward the UHS return is even free from the burden of all financing and principal repayment charges.
If these assumptions regarding the lease and its profitability are wide of the mark, then UHS will have an opportunity to submit correct and verifiable figures as the negotiations move forward. However, at first look, the hospital property seems to be be worth a great deal more than the contemplated present value of $2.3 million. Based solely on the earning power expected by both CHS and UHS the hospital property will generate enough to pay $2 million in the every first year and $2 million in every year after. Both candidates also expected to earn a fair profit in excess of interest and principal payments. We should get more than $10 million paid thirty years hence.
I believe that a simple lease agreement is rich enough to be attractive to UHS even without the final sale of the property. I refer to the CHS offer to lease without purchase as support of this opinion. However, in light of the withdrawal of competitive suitors, and the county's consequent loss of negotiating leverage, continued self management may become our best course of action. Paying to extricate ourselves from the current period of mismanagement is only acceptable at a proper price. Beyond a certain point the best solution is to work our way clear on our own. What others can be paid to do for us we can certainly find a way do on our own.
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