State Auditor Report Confirms Cleveland Clinic Paid $9.6 Million, A Fraction Of Hospital Value, For Lakewood Hospital
• The Cleveland Clinic Foundation admits liability to Lakewood of $278 million.
• Clinic records show Clinic will make $11.5 million additional profit each year into the future due to the hospital closure.
• State Auditor Report shows the Clinic paid only $9.6 millionin the purchase of Lakewood Hospital.
• In exchange for only $9.6 million, the Clinic received $108 million or 60% of $180 million fair market value of Lakewood Hospital.
Clinic records prove the Clinic was Liable for $278 million prior to the Master Agreement
Internal planning documents prepared by the Clinic and filed in Court in the pending taxpayer lawsuit on October 5, 2016, prove that the Clinic was liable for required capital improvements and all losses at Lakewood Hospital through 2026. The Clinic’s own documents from 2011 declare the amount of the Clinic’s liability was $278 million beginning in 2017 which would have made Lakewood Hospital a state-of-the-art hospital on par with the Clinic’s other hospitals.
This is at odds with Lakewood Law Director Kevin Butler’s September, 2015 legal opinion in which he stated: “The Cleveland Clinic is not required to cover LHA’s operating losses. And neither LHA nor the Cleveland Clinic is obligated to invest significant capital money into the hospital facility--making major improvements at the hospital is the city’s responsibility.” Butler’s legal opinion was the most important reason cited by City Council when they authorized Butler to negotiate the Master Agreement.
The Clinic will make over $11.5 million per year into the future from the Master Agreement.
Other internal planning documents from 2011 just filed in Court, show that the Clinic planners “calculated the closing of Lakewood Hospital would result in a $11.5 million a year windfall” profit to the Clinic’s other hospitals because “CCF hospitals would capture an additional 5,000 inpatient visits per year with a closed Lakewood Hospital.” The documents show that as far back as 2011, the Clinic wanted to avoid its $278 million obligation by closing the hospital and harvesting the “premium payer mix” of Lakewood patients using the proposed family health center (FHC) to refer patients to the Clinic’s other hospitals.
On January 14, 2015, CCF’s Brian Donley (second in charge to Toby Cosgrove) referred to the FHC as a “specialty referral center.” Lakewood’s low-pay and self-pay patients would be referred out of Lakewood to Metro Hospital and other non-Clinic hospitals. The Master Agreement gives the Clinic a non-compete, or restrictive covenant (terms are interchangeable), that prohibits its competitors from operating at the former Lakewood Hospital site and assures the Clinic’s dominance in Lakewood as a “referral center.” The non-compete also guarantees that the land will be available to developers—which court documents and sworn testimony show that Summers and the Clinic planned since 2011, and earlier.
The State Auditor Report shows the Clinic paid only $9.6 million in the hospital “sale.”
Public records released by Finance Director Jenn Pae on September 29, 2016 to support the City of Lakewood Comprehensive Annual Financial Review (CAFR), clearly demonstrate that the Cleveland Clinic paid only $9.6M to the city to purchase 60% of Lakewood Hospital’s $180 million FMV. The CAFR was prepared by the State Auditor’s office so the $9.6 million number is not subject to debate.
According to the CAFR, which was prepared with the participation of Mayor Summers and his administration: The Master Agreement disposed of "The City-owned Lakewood Hospital" (CAFR, page 47) in a “sale of Lakewood Hospital to the Cleveland Clinic” (CAFR, pages 42 and 44). The full CAFR can be found at https://ohioauditor.gov/auditsearch/Reports/2016/City_Lakewood_15-Cuyahoga.pdf
In his January, 2016 deposition in the taxpayer lawsuit, when Summers (a defendant) was asked why there were no appraisals of hospital assets and why an investment banker was not hired to market the hospital, he testified: "We weren't selling this hospital.” [Summers transcript page 155; line 14.]
In the last issue of the Lakewood Observer, Councilman David Anderson wrote: “...the Lakewood Hospital Association’s net assets were valued at $128 million. The negotiated deal accounts for all of the $128 million.” However, it has been previously established through public records requests that neither the Mayor nor City Council conducted any appraisal of the hospital assets and Mr. Anderson’s $128 million number is the net “book value” of the assets and not a fair market value of the assets.
The Fair Market Value of Lakewood Hospital was $180 million.
Nevertheless, now that it has been established that a “sale of Lakewood Hospital to the Clinic” took place, and that the Clinic paid only $9.6 million, the question remains:
What was the value of hospital assets sold to the Clinic for the $9.6 million the Clinic paid?
Investment bankers and hospital valuation experts generally agree that the fair market value (FMV) for the sale of a hospital, is about 75% of annual “net revenues.” The logic behind this valuation approach is that the purchaser is paying for the revenue stream from existing patient lists as part of a going concern. Using this valuation method would produce a $180 million FMV when Lakewood’s $87 million liquid investment portfolio is included. This valuation is supported by the reported comparable sale price of St. John’s Hospital in Westlake to University Hospitals in 2015.
The Clinic Received $108 million of the Hospital FMV paying only $9.6 million.
The Master Agreement terms and the CAFR together establish that the Clinic received $108 million of hospital FMV in exchange for $9.6 million. The Clinic received:
1.) $63.4 million—Net Value of the Non-Compete/Restrictive covenant, together with all patient records and patient information, equipment, furniture, fixtures, bed licenses and tangible and intangible property. 2.) $30 million--cash portion of the hospitals liquid investments. 3.) $1.6 million--value of 1.8 Acres of cleared land on Belle and Detroit. 4.) $13 million--FMV of Columbia Road surgical center.
Total Cash, Property and Rights to Clinic: $108 million.
Summary of how $180 million hospital value was distributed/sold
So here is the summary of what each party gets from the $180 million city-owned hospital:
1.) $22 million returned to the City (12 %) 2.) $16.5 million (net present value) to new foundation (9%). 3.) $33.5 million released to Lakewood Hospital Foundation for private charitable use. (19%) 4. $108 million to the Clinic. (60%)
Total: $180 million
Issue 64 on November 8th gives voters the chance to vote for or against the Master Agreement.
Lakewood Voters must judge whether the Master Agreement is a good or bad financial deal for Lakewood; and a good or bad deal for their future healthcare.
Note: more detail substantiating the numbers contained in this article can be found in the online version of the Lakewood Observer.