Fair Market Value: Preventing the Seller from Imposing Restrictions on Health Services
The value of a facility may be depressed when the seller imposes certain conditions on the deal, such as when hospitals affiliated with religious organizations propose to restrict reproductive and end of life services. It may be challenging to locate a buyer willing to abide by these restrictions long after the sale has gone through. Such a scenario could be likened to selling a car, only placing severe restrictions on its use, such as driving only on Monday, Wednesday and Friday.
Understandably, few buyers would be interested in the car because of the limitations and the selling price would accordingly be reduced. Even if someone could agree today that the restrictions would not interfere with their schedule, there is no guarantee that the restrictions will still be workable in a few years. With an issue as important as health care, it is inappropriate to arbitrarily limit the care provided at the facility after a religious hospital has been sold to a secular organization.
Furthermore, as a policy matter, allowing former owners of nonprofit hospitals to restrict future services is inappropriate for several reasons. First, medical services should be determined between a patient and a doctor, not by the previous owner. Second, it is impossible to predict how the delivery of health care services will change in a community. While today there may be a sufficient number of alternatives for women seeking certain reproductive services, there may be closures of clinics or hospitals tomorrow. Third, allowing several potential buyers to compete for the hospital will likely result in a higher purchase price and more money for a nonprofit foundation.
In the sale of the Daniel Freeman Hospitals in Los Angeles in 2001 to Tenet Healthsystem DFH, Inc., a division of Tenet Healthcare Corporation, the seller required that any buyer restrict the types of services to be delivered at the hospital. The Sisters of Carondelet, a religious organization based in St. Louis with hospitals around the country, sought to require the secular buyer to comply with the Catholic Ethical and Religious Directives (ERDs) in the care provided at both sites, one in Inglewood and one in Marina del Rey, California, even though the Sisters would no longer be operating hospitals in the state. In addition, they demanded a deed restriction that the Catholic restrictions would be binding on all future owners in perpetuity. When the Sisters looked for buyers for the two struggling hospitals, they made it clear they would not consider an offer unless the buyer agreed to comply with the Catholic Ethical and Religious Directives. This restriction left many advocates feeling that the purchase price for the two hospitals, which amounted to approximately $50 million, was far less than it should have been, given the size and the locations of the facilities. The Attorney General sued Tenet in a challenge to the deed restriction and the perpetual restrictions. They settled the lawsuit agreeing that the ERDs would be a contractual obligation for Tenet but would not be binding on the next owner. In 2003, the California legislature passed a law making service restrictions as a condition of a hospital sale illegal (PDF). This law prohibits the California Attorney General from approving any conversion that contains any restrictions on the type of medical services to be provided in the future.
Tenet subsequently sold the Daniel Freeman Hospitals to Centinela Freeman Health System, who voluntarily adopted the ERDs at the request of the Sisters of Carondolet, thereby intentionally sidestepping the new law. Over time they closed the OB/Gyn units at Daniel Freeman, moving many, but not all, reproductive health services to the Centinela campus where there are no restrictions on services.
What You Can Do:
- Request to see the seller’s Request for Proposal (commonly called an RFP) that was sent out to obtain bids on the facility.
- Review the RFP carefully for conditions that refer to service restrictions.