Carle Foundation Hospital CPA presses for merger delay

Mar 2, 2010 — The News-Gazette

Debra Pressey

Feb. 28, 2010 (McClatchy-Tribune Regional News delivered by Newstex) -- URBANA -- A Champaign accountant has asked a state oversight board to defer action on the $250 million deal that would bring Carle Foundation Hospital and Carle Clinic under common ownership.

Rex Kallembach, a longtime certified public accountant, said he has spent two months reviewing the hospital's plans to buy the clinic and has detailed his concerns about what he says could be an inflated purchase price and consequences for the local community in a Feb. 9 letter to the Illinois Health Facilities and Services Review Board.

The board is set to consider the Carle deal and possibly act on it on Tuesday.

Board approval, which must be based on a finding that there is a need for this transaction, is Carle's first regulatory hurdle to clear before the sale can be finalized.

Nearly all the comments the board has received on the Carle sale, both at a public hearing and in writing, have been positive.

Kallembach who once worked for Carle in the 1980s as director of its medical supply business has urged the board to look closer at the purchase price and how it was determined.

In his letter to the board earlier this month, Kallembach contended 100 percent of the $250 million purchase price would be to acquire Carle Clinic's subsidiary, Health Alliance Medical Plans, which the not-for-profit hospital plans to operate as a for-profit business. The currently for-profit clinic system and its doctors would become not-for-profit.

Kallembach also has questioned why the purchase price wasn't based on a "certified conclusion of value." Carle's outside third-party valuation done by Ernst and Young said the $250 million price "falls within the overall recommended range of fair market value." "I happen to think a 'plus-or-minus' opinion is no substitute for a 'certified conclusion of value,' considering the magnitude of this transaction," Kallembach wrote.

Kallembach also says the public hasn't been given an adequate explanation by Carle hospital why it can't just merge with Carle Clinic and why Health Alliance must be part of the deal. Not only will a not-for-profit hospital be taking on debt to pay the doctor-owners of the clinic, Kallembach said, it will be taking on the potential liability of a health insurer given a downgraded financial outlook earlier this month by A.M. Best.

Gretchen Robbins, public relations director for the hospital, said in an e-mail to The News-Gazette on Friday that Carle would not answer questions about the merger's valuation "at this time."

"We have honestly and accurately responded to questions both by a local citizen in person and have addressed those questions with the Review Board staff," Robbins stated.

In her e-mail, Robbins went on to explain that the hospital wants to avoid giving the review board "the impression that we are 'lobbying' outside of the process by taking our positions and arguments to the media. It doesn't matter to them that you approached us."

At a Nov. 4 public hearing, Carle Foundation CEO Dr. James Leonard said the fair market value of Health Alliance reflects "a significant portion" of the purchase price. He also said including Health Alliance in the deal will keep 450 jobs in the local community and give Carle an integrated health system including the hospital, doctors and health insurer that has become increasingly viable in today's uncertain health care environment.

"The purchase price was based upon an independent valuation using established third-party valuation methodologies. We are confident that this valuation is fair and reasonable and is consistent with federal and state requirements," Leonard said.

Kallembach said he took his concerns to state Sen. Mike Frerichs, D-Champaign, who, in turn, went to see Leonard about them.

In a phone interview earlier this week, Frerichs declined to say what his concerns about the Carle deal were, but he did say he hasn't withdrawn the letter of support for Carle that he sent to the planning board.

"I met with the CEO of the hospital. He has addressed many of my concerns," Frerichs said.

Frerichs said he believes the planning board will question Carle about the purchase price and that Carle will be able to supply board members with the answers.

"Not being an accountant or an attorney or in the health care profession, some things were not clear to me," he said.

Frerichs also said if Health Alliance was sold to an owner outside the community, there could be a "fair number" of jobs lost here and premiums for Health Alliance customers could go up.

"I could see someone else buying this up and increasing the premiums to make a return on their investment," he said.

Illinois Department of Public Health spokeswoman Kelly Jakubek said the board staff has been in communication with a CPA and received letters of opposition from him. The planning board is part of the health department.

Jakubek also said the purchase price is "mainly" for Health Alliance and is being reviewed by the state board because the cost exceeds $11.5 million and there are some clinical services involved.

"We do not have criteria in which to review the Health Alliance Medical Plan (the biggest part of the purchase) because it is not a clinical service as defined by the state board," she said in an e-mailed response to The News-Gazette.

Jakubek also said the board doesn't require a certified valuation, a standard used in the appraisal industry.

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