Divided Community
By Conde Texas Medicine May 2012

 Weslaco Battles Over Hospital's Fate 

Law Feature – May 2012 

By Crystal Conde 
Associate Editor 

A bitter dispute over the future of a Weslaco hospital that pits members of the medical staff and local officials against hospital administrators has prompted the Texas Medical Association and the American Medical Association to join physicians in their court battles to obtain financial documents from the hospital.

At first glance, the fight over the attempted sale of the nonprofit Knapp Medical Center to a for-profit hospital chain appears to be only a local matter. But it is one example of Texas physicians' efforts to make their voices heard in an environment where hospital administrators don't always share financial information and the basis for business decisions with physicians. It also represents the difficult balance administrators must strike in doing what's best for patients and physicians while ensuring the economic viability of health care institutions. Attorneys for the physicians believe the outcome of one aspect of the complicated case – financial transparency – could affect the way nonprofit hospitals across Texas do business.

The controversy erupted in November when Knapp's leaders announced they would sell the hospital to South Texas Health System, the local branch of Universal Health Services, Inc. (UHS), a Pennsylvania-based, for-profit health care management company that operates seven facilities in the Rio Grande Valley.

Local surgeon Sandra Esquivel, MD, former president of the Weslaco Hospital Authority Board and former member of the Knapp Board of Directors, describes learning of the proposed sale as "having the rug pulled out from under my feet."

The hospital board says that the sale is essential to ensure the hospital's future economic success. The board posted a news release on the hospital website, www.knappmed.org, saying that UHS would "invest millions of dollars to improve the hospital, retain Knapp's charity care policies, add significant tax revenue to the city's coffers, and put about $140 million in a Weslaco foundation." The board warns Weslaco residents that Knapp could slowly deteriorate as it faces "the impact of health care reform, reduced payments and a fiercely competitive environment."

But some Weslaco physicians, residents, and other health care professionals disagree. They worry selling to a for-profit corporation will lead to loss of local control of the community hospital and routing patients to other UHS hospitals. In late December, city commissioners unanimously approved a resolution opposing the sale of Knapp to a for-profit entity until they could review more information about the sale. The commission also voted to hire an attorney to examine the sale.

"If selling Knapp to a for-profit company is necessary for economic reasons, physicians working at the hospital should have been made aware of Knapp's bleak financial future in the first place," Dr. Esquivel said.

Weslaco City Manager Leo Olivares, JD, MPA, says before Knapp opened in the 1950s, residents had to drive to McAllen or Harlingen for hospital services.

"Weslaco's surrounding communities came together to support the creation of a nonprofit hospital, and the city has been behind Knapp Medical Center from day one," he said.

Knapp planned to close the sale to UHS on Jan. 31, effectively shifting the hospital from nonprofit to for-profit status, but city leaders discovered a 1987 deed agreement that prohibits a for-profit entity from owning the hospital without agreement from the Weslaco Hospital Authority Board and Knapp. City commissioners appoint the hospital authority board, which the city recently revived to examine the proposed sale.

Ramon Vela, JD, attorney for the city of Weslaco, wrote the 1987 contract.

"There is no doubt all the parties understood that Knapp was going to be a nonprofit hospital forever. I was instructed to put those covenants in there for that purpose," he said.

Mr. Olivares says that amid a flood of emotion and raw feelings surrounding Knapp's fate, the hospital authority is "duty bound to enforce those covenants."

At a Dec. 9 city commission meeting, Knapp and UHS executives questioned physicians' motives for opposing the sale because some of them invested in Doctors Hospital at Renaissance (DHR) in Edinburg.

The Knapp news release warned that physicians who own an interest in a competing hospital may determine Knapp's future and encouraged residents who agree with the proposed sale to tell the hospital authority and city commission. The board urged hospital authority members with a conflict of interest to excuse themselves from voting on waiving the deed restriction, allowing the sale of the hospital to UHS.

Dr. Esquivel is a DHR investor but resigned from the authority board in February because she earns more than 10 percent of her income from Knapp. As a local surgeon, she often treats patients in Knapp's emergency room.

"If I had remained on the hospital authority board, I would have had to recuse myself from executive sessions and any discussions at all regarding Knapp. My resignation had nothing to do with my investment at DHR; there was no conflict of interest, as alleged by the Knapp board," she said

Dr. Esquivel adds that in 2011, she performed 343 procedures at Knapp Medical Center, 123 cases at Knapp Surgery Center, and 47 at DHR.

Of the authority board's seven current members, none own an interest in DHR. Thirty-four of the more than 80 active medical staff members at Knapp are DHR investors.

Knapp sued the hospital authority board in March. Knapp had to complete the sale by Feb. 29.

"At this time there has not been an extension of timelines under the contract with UHS, although we would like to keep that door open," said Matthew Jones, JD, a Weslaco attorney who represents Knapp. "We had asked the authority to waive the deed restriction, which they did not act on. So we made several proposals to try to help move this forward. However, since neither the city nor the authority took action on any of our proposals, we were forced to file a petition with the court to request that the deed restriction be modified to allow the hospital to be run as either a nonprofit or a for-profit hospital. We believe it is the spirit and the intention of the deed restriction to try to ensure that the hospital remain viable and able to continue to provide the needed services to our community, no matter if it is not-for-profit or for-profit."

Knapp's lawsuit asks a judge to invalidate the portion of the deed restriction requiring Knapp to continue operating as a nonprofit entity. That would allow it to merge with any health care system, including a for-profit corporation.

Knapp's suit says the competitive business market in the Rio Grande Valley region "has changed drastically" since 1987, with many large for-profit systems now dominating the area.

"These large hospital systems are able to afford the most advanced equipment and technologies necessary to compete in the current environment because they can access capital and spread costs over their entire system," the lawsuit says. "Independent non-profit hospitals, such as Knapp, do not have the same access to capital and cannot spread such costs and thus are at a distinct disadvantage."

The lawsuit also contends that the hospital's quality of care will decline if it cannot become part of a hospital system like UHS, "which in turn will lead to Knapp's ability to remain viable spiraling downward."

In the midst of the battle over Knapp's sale, both the hospital authority board and the Knapp Board of Directors asked the Texas Attorney General's Office to intervene. The hospital authority wants the attorney general to replace Knapp's Board of Directors and investigate the hospital's business operations.

Forty-one Knapp doctors expressed no confidence in the board of directors and asked the attorney general's assistance in naming a new board. Dr. Esquivel says eight doctors refrained from voting, but none opposed the no-confidence motion.

Dr. Esquivel says during her time on the hospital authority board, she and her fellow members viewed two PowerPoint presentations – one on health care trends and the other about the proposed sale of Knapp.

"The financial information shared with us was based on numbers supplied by a consultant. We didn't have any documentation to determine how those numbers were arrived at," she said.

She questions why a 220-bed institution facing future financial ruin pays its chief executive officer what she considers "exorbitant compensation."

According to GuideStar, which provides financial information about nonprofits, Knapp Chief Executive Officer Jim Summersett made more than $1 million in 2009.

Mr. Olivares says the city also has qualms with the compensation.

"The salaries for the management at Knapp are excessive in our opinion and constitute misuse of nonprofit dollars. That's why we want the attorney general to look at and audit the hospital's financial practices," he said.

Knapp, meanwhile, wants the attorney general to investigate the authority's activities. Knapp attorney Jerry Bell, MD, charged in a letter to hospital authority attorney David Mendez in February that the city stacked the hospital authority board with "outspoken critics of Knapp and opponents of the sale" and "squandered a 'once-in-a-lifetime' financial opportunity that, as of February 29, 2012, will never come back again."

Mr. Bell declares DHR the "real winner" and says the physician-owned hospital is Knapp's "principal competitor." He added that Knapp medical staff members with an ownership interest in DHR "will continue to direct their Mid-Valley patients to DHR and away from their local hospital." He congratulates the owners and investors in DHR on a "job well done," adding they "can celebrate their defeat of the Knapp sale with a parade in downtown Edinburg."

Attorney general spokesperson Tom Kelley said the agency can replace nonprofit boards if needed but didn't say if it would consider getting involved in the dispute. He said the attorney general's office is reviewing Knapp's proposed sale "just like any other case in the state of Texas."

TMA hasn't weighed in on Weslaco physicians' concerns regarding the business decisions made by Knapp administrators and the proposed sale. But as Texas Medicine reported in March, it supports efforts by a 26-physician trust to obtain Knapp's financial records. (See "Transparency Triumphs," pages 41-43.)

Thanks in part to TMA's legal arguments, Judge Israel Ramon Jr. in January ordered Knapp to release financial records, including balance sheets, cash flow statements, and IRS forms.

TMA attorneys argued in a brief to Judge Ramon that "transparency promotes quality patient care and accountability. Every employee of and patient treated at a hospital is affected by the financial decisions made by those in charge. Financial mismanagement by hospital leadership is paid for by patients and employees. Patient safety is compromised when hospitals do not use their financial resources to further quality of care."

The physician trust alleged financial improprieties at the medical center and reported quality-of-care concerns such as inadequate coverage by specialists, an insufficient number and high turnover of nurses and support staff.

Knapp appealed Judge Ramon's ruling in February. The AMA Litigation Center plans to join TMA in filing an amicus curiae brief urging the appeals court to uphold Judge Ramon's ruling.

Should the appeals court affirm the district court's ruling, the decision will have significant ramifications on business operations for nonprofit hospitals in Texas, Dallas attorney Jeffrey Grass, who represents the physician trust, told Texas Medicine in January.

"Other Texas hospitals won't be able to hide behind their foundations and avoid disclosing financial information. This decision will spur greater financial accountability at nonprofit hospitals, which will lead to transparency and good governance," he said.

Dr. Esquivel worries about the hospital's future if the sale goes through.

"Once a for-profit institution owns Knapp, physicians will have no input regarding local health care decisions. I'm afraid UHS could close certain departments like obstetrics and force Weslaco patients to drive elsewhere for care. We could also see emergency patients diverted away from Knapp and sent to other UHS area hospitals," she said.

Before making a decision regarding the potential sale of Knapp to UHS, Mr. Olivares says the city and hospital authority hope to review the specifics of the deal.

"Once we have the confidentiality agreement ironed out, we'll take an appropriate amount of time to perform due diligence. We'll review financial information, contracts, and the legal and managerial aspect of the proposed sale and consult with professionals. We want to make sure we do what's right for our community," he said.

Crystal Conde can be reached by telephone at (800) 880-1300, ext. 1385, or (512) 370-1385; by fax at (512) 370-1629; or by email. 

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