Attorney General's FAQs Regarding Proposed Sale of DMC

MICHIGAN ATTORNEY GENERAL'S OFFICE

 

Proposed Sale of DMC Hospitals to Vanguard Health Systems

Frequently-Asked Questions (FAQ)

 

This FAQ provides summary information regarding the Attorney General's review of the proposed sale of the hospitals and other assets of Detroit Medical Center (DMC) to Vanguard Health Systems (VHS) under a Purchase Agreement between DMC and VHS dated June 10, 2010. 

 

1.      Where can I read the Purchase Agreement and other documents concerning the proposed sale?

 

In an effort to make as much information about the proposed transaction accessible to the public, the Attorney General's Office has posted the Purchase Agreement and other documents on the Attorney General's website at www.michigan.gov/ag.

 

2.       What exactly is the Detroit Medical Center (DMC)? 

 

The DMC is an eight-hospital system that includes a number of other subsidiaries and affiliates (which are diagrammed in the DMC's organizational chart, posted at the Attorney General's website, www.michigan.gov).   

 

3.       What are the key terms of the proposed sale of DMC to VHS? 

 

What DMC will receive -

  • Relief from outstanding bond debt (about $417,000,000)

  • Relief from net pension liability (about $190,000,000)

  • Warrants for unissued VHS stock to secure performance of VHS promises to invest $850,000,000 in future capital investment in the DMC system, including:

  • Children's Hospital Expansion (about $208,000,000)

  • Detroit Receiving Renovations and Expansion (about $29,000,000)

  • Harper/Hutzel Renovations and Expansion  (about $136,000,000)

  • Sinai-Grace Renovation and Expansion (about $78,000,000)

  • Rehabilitation Institute Renovation (about $3,000,000)

  • Huron Valley (about $11,000,000)

  • Routine additional capital expenditures ($350,000,000)

  • VHS's promise to maintain each hospital as a licensed acute care or rehabilitation hospital (subject to VHS's ability to request approval from DMC to close a hospital in the event of unforeseen reductions in state or federal funding)

  • VHS's promise to meet or exceed DMC's existing charity care policy

  • VHS's promise to provide the following essential core services for a minimum period of 10 years at one or more hospitals:

  • Neonatal Intensive Care Unit

  • Obstetrics

  • Emergency Department Services

  • Trauma-Designated Emergency Department

  • Intensive Care Services General Medical Services

  • Inpatient Rehab Services

  • Inpatient and Outpatient Surgery

  • Radiology and Diagnostic Services

  • Comprehensive Cardiology Services

  • Outpatient Rehab Services

  • General Medical Services

  • VHS's promise to continue health care educational programs and a summer employment program for Detroit public school students

What VHS will receive -

  • VHS will acquire substantially all assets held by DMC and its subsidiaries, including all DMC hospitals and the DMC name.

What DMC will retain (after the transaction) -

  • DMC will continue as a charitable Michigan nonprofit corporation (under a different name) and will retain control of charitable funds that are subject to restrictions imposed by donors of about $140,000,000.  These funds will be safeguarded for their intended charitable uses and subject to oversight on an ongoing basis by the Attorney General's Charitable Trust Section.

4.       After the sale to VHS, will charity care continue at the DMC hospitals?

 

Yes.  VHS is obligated to maintain a charity care policy that is at least as generous as DMC's existing policy.   The Attorney General anticipates, however, the VHS will apply a more generous policy consistent with policies followed in its other hospitals.

 

5.       Why is the Attorney General's Office involved?

 

The Attorney General is the Michigan official authorized to act on behalf of the people of Michigan to protect and preserve charitable property for proper charitable uses.

 

Basic principles guiding the Attorney General's oversight include the following:

  • Generally, all assets held by a charity must be used for charitable purposes.  Assets may be sold for fair market value, but they may not diverted for the benefit of insiders or other private parties.

  • Restricted gifts (such as endowment funds designated for use in cancer research) must be used for the purpose for which they were donated, unless the donor consents to, or a court orders, a different use.   

  • Trustees, directors, officers and others who exercise control over charitable assets are held to high standards of loyalty, care, and obedience to the organization's charitable mission. The Attorney General may hold them accountable for their actions.

  • The Attorney General's Charitable Trust Section maintains a registry of charitable trusts and issues licenses required of organizations that wish to solicit donations in Michigan. The information provided by these organizations must be updated annually and is available to potential donors, the media and other members of the public, so that people can find out who is running a charity and how donations are spent.

  • The Attorney General may take action to prevent or seek redress for improper uses of charitable assets.  This includes investigating transactions and, if necessary, filing civil or criminal actions in court.

More information on the Attorney General's oversight of charities is available on the Charities section [http://www.michigan.gov/ag/0,1607,7-164-17334_18095---,00.html] of the Attorney General's website, www.michigan.gov/ag (Click on "Charities") and in the article, "How and Why the Attorney General Supervises Charitable Trusts" [http://www.michigan.gov/ag/0,1607,7-164-17334_18095-45038--,00.html]

 

6.       What is the Attorney General's role in reviewing the proposed sale of DMC?

 

Charitable hospital assets that are invaluable to the community are proposed for sale to a for-profit company, and the Attorney General has the authority to review the transaction. 

 

In recognition of the Attorney General's authority and interest in this transaction, DMC and VHS made the Attorney General's review and non-objection to this transaction a condition of the sale. In other words, if the Attorney General objects to the transaction, DMC and VHS may cancel the transaction.

 

7.       Who is conducting the Attorney General's review?

 

The review is being conducted by an eight-person team from within the Attorney General's office, including Chief Deputy Attorney General Carol Isaacs, six Assistant Attorneys General, and the Attorney General's Charitable Trust Auditor, with the assistance of law student interns in the Attorney General's office and experts from two consulting firms specializing in health care and hospital finance, operations, and administration. The firms, selected from among a field of qualified applicants, are:

While these consulting firms work for and report exclusively to the Attorney General's Office, DMC is responsible for paying their fees as a cost of the transaction.  Taxpayer funds are not being used.

 

8.      What are the major issues in the Attorney General's review?

  • Valuation of DMC - Because the proposed transaction is not the result of a competitive bidding process, there is no market-based evidence of DMC's fair market value. Therefore, the Attorney General's team is not only reviewing the valuation performed by DMC's experts but is also conducting a thorough, independent valuation of DMC.

  • Financial evaluation of VHS - It is important not only to determine the value of VHS's commitments, but to assess the likelihood that VHS has adequate resources to carry them out, particularly in light of VHS's high level of debt financing (as disclosed in VHS's recent SEC statements).  The Attorney General team is reviewing the evaluation by DMC's expert and also independently reviewing VHS's financial condition.

  • Examination of the process followed by DMC's leadership - The Attorney General will review how DMC's directors determined that the proposed sale to VHS is in DMC's best interest and will examine whether DMC's leaders acted diligently and without improper conflicts of interest. 

  • Examination of restricted charitable gifts - DMC has identified about $140 million in restricted charitable assets that will not be transferred to VHS.  Because charities are obligated to obey donors' restrictions on gifts and endowments, the Attorney General will review DMC's identification of restricted assets to ensure that restricted gifts are not transferred to VHS, a for-profit entity. 

  • Review of post-transaction monitoring of VHS's performance - Because VHS has made many important commitments as part of the transaction, the monitoring, reporting, and, if necessary, enforcement of VHS's promises.

9.      Has VHS's operation of hospitals in other states raised concerns? 

 

Our office has interviewed DMC medical professionals and members of DMC's Board of Trustees and management who visited Baptist Health System in St. Antonio, TX.  VHS has owned this system since 2003.  On the basis of these interviews and other publicly-available information, our office is not currently aware of any significant, negative factors. 

 

Our office has not undertaken an independent review of VHS's performance in other states.

 

10.     Will there be a new management team and board of directors at the DMC? 

 

The management team that has been operating DMC in recent years will remain in place for an indefinite period as VHS employees.

 

Each hospital will have a separate advisory board, to which VHS will be entitled to appoint a majority, and DMC (the surviving charity) a minority, of directors.

 

In addition, there will be an advisory board for VHS's combined Michigan operations of similar composition, which will report to VHS national board. 

 

11.     Who will have decision-making control over the hospital if the sale goes through?   

 

VHS, as the owner of the DMC hospitals, will have ultimate control over the hospitals, subject to local, state, and federal laws and regulations and its contractual obligations under the Purchase Agreement.

 

DMC has the right to appoint a director to the VHS national board of directors. 

 

12.     If the sale is finalized, will the Detroit community have a way to voice its concerns about VHS's operations of the DMC hospitals?

 

Yes. The Attorney General expects DMC (the surviving charity), in carrying out its obligation to monitor VHS's performance, will solicit input from the public, possibly through an online suggestion box, telephone hotline, or combination of methods.

 

13.     What other state agencies will review some aspect of the proposed transaction?

          Michigan Department of Community Health (DCH) - http://www.michigan.gov/mdch - Five aspects of this transaction are

 subject to review by the DCH:

  • Certificate of Need (CON) - CON review/approval is required for any change of ownership (CHOW) of licensed health facilities as well as freestanding facilities with CON covered clinical services owned and operated by DMC entities.  Acquisition of health facilities and freestanding CON clinical services require a nonsubstantive review -- approximately 45 to 75 days upon submission of an application.  The first step in the application process will be for VHS to file CON letters of intent for each distinct and separate site to be acquired.

  • Licensing and Certification (L&C) - L&C review/approval is required for any CHOW of licensed health facilities and laboratories owned and operated by DMC entities.  The L&C review/approval also includes a federal review by the Centers for Medicare & Medicaid Services (CMS), as well as any survey required by Medicaid.  While L&C reviews can run parallel to the CON review process, no change in licensee can be made by L&C until a CON is approved for the licensed health facilities. 

  • Radiation Safety Section (RSS) - RSS review/approval is required for any change in the registrant for all radiation machines owned and operated by DMC entities.  Covered equipment includes general X-ray machines not covered by CON as well as X-ray equipment covered by CON, such as cardiac catheter labs, CT, and PET.  While RSS reviews can run parallel to the CON review process, no change in registrant can be made by RSS for CON covered equipment until a CON is approved.  This includes X-ray machines in both licensed health facilities and freestanding facilities. 

  • Health Facilities Engineering Section (HFES) - If there are initial capital expenditures to improve the physical plant at time of acquisition or later, VHS will need HFES review/approval.  Many of these major types of capital expenditure projects also are likely to require CON review/approval too (e.g., building a heart hospital, expanding operating rooms, etc.).  HFES is part of the Bureau of Health Systems (BHS). 

  • Bureau of Health Professions (BHP) - BHP will review any license held by DMC that was issued by BHP, such as pharmacy licenses for controlled substances.

Michigan Strategic Fund (MSF)  http://www.themedc.org/Boards-Committees/MSF-Board/Default.aspx  - The MSF has approved the application of DMC and VHS for property tax exemption  for DMC's central campus as a Renaissance Zone.  Documents setting forth details on the Renaissance Zone application, agreement, and approval are available on the Attorney General's website.

 

14.     If the transaction goes forward, will the Attorney General have an ongoing role?

 

Yes.  If the sale takes place, several charitable organizations will survive the transaction.  These include three existing charities, including DMC (under a different name), the Dell Harder Foundation, and the Children's Hospital Foundation, as well as one or more new organizations created to hold and administer charitable gifts. 

 

All surviving charities will report to the Attorney General's Charitable Trust Section annually.  Some of the organizations may solicit charitable contributions for education, research and other charitable purposes and will be required to obtain solicitation licenses.  The Attorney General may review the operations and activities of the DMC charities at any time. 

 

15.     When will the Attorney General's review be finalized?

 

The Attorney General's Office is working diligently to complete its thorough review as expeditiously as possible. 

 

16.     Will the results of the Attorney General's review be available to the public?

 

Yes.  When the Attorney General's Office has review is complete, a comprehensive report will be posted at www.michigan.gov/ag

 

17.      How can I communicate concerns or questions to the Attorney General's Office about the DMC or VHS?

 

You may email comments to AG-DMCComments@michigan.gov until August 27, 2010.

 

You may also write to the Attorney General's Charitable Trust Section at:

 

Attorney General's Office

Attn: DMC Review

Charitable Trust Section
P.O. Box 30214
Lansing, MI 48909

517-373-1140
Fax: 517-241-3771

Toll free: 877-765-8388

 

Last updated:  Aug 17, 2010