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Charitable arm looks to separate from Bayfront Health. Could a sale of the hospital be next?

Bayfront Health St. Petersburg is owned by Nashville-based Community Health Systems and a foundation with a 20 percent stake in the hospital. Now the foundation wants to separate from the hospital, but a vote by the City Council is required. Consolidating ownership could make the hospital more attractive to a potential buyer. [SCOTT KEELER | Times]
Published Sep. 2, 2017

ST. PETERSBURG — The charitable organization that owns a 20 percent stake in Bayfront Health is pushing for city approval to separate from the downtown hospital.

Officials for the group, the Foundation for a Healthy St. Petersburg, say the hospital's owner, Nashville-based Community Health Systems, has offered to pay the foundation $26.5 million for its share of ownership. That money would allow the foundation, which says it already has a large endowment for a city of St. Petersburg's size, to expand its mission and make a larger impact in the community.

It's also a move that could position Bayfront Health to be sold again. But city officials will have the final say — the City Council must approve the sale for it to go forward, and the clock is ticking.

"If the hospital ever sells again, you cannot sell a hospital with a joint venture attached," said Randall Russell, the foundation's president and CEO. "They just don't buy that. It's a rare thing to get bought in this way. The survival of the hospital on one hand is easier for them if they can facilitate owning 100 percent. Knowing that, we were able to negotiate."

Russell said Community Health Systems offered the foundation a price on May 5 and set a deadline of June 30 to close the deal. That set in motion an evaluation of the hospital's market value requested by the city, which leases the land under the facility. The evaluation took weeks, so the CHS agreed to move the deadline to Sept. 30.

"But this is it," Russell said. "We won't get a deal like this again."

In addition to sweetening the foundation's endowment by $26.5 million, the deal would eliminate about $1.5 million in costs it incurs annually from its partial ownership of the hospital, Russell said. It also would free up more time and resources for Russell and his staff to focus less on hospital administration work and more on programs it hopes to bring to southern Pinellas County.

The arrangement at Bayfront Health is not unique. Analysts say there are about 400 "health conversion foundations" in the United States. They must spend at least 5 percent of their assets on charity annually. But these arrangements aren't always attractive to potential buyers.

"Hospitals are largely trying to consolidate. It's a volatile industry right now and governments are looking more closely at these mergers," said Troy Quast, a health care economist at the University of South Florida.

CHS is one of the nation's largest owners and operators of hospitals with 137 of them in 21 states. The company has struggled financially in recent years, posting heavy net losses quarter after quarter and has sold dozens of under-performing hospitals from its portfolio. CHS stock has also plummeted over the last three years.

John McLain, the CEO of Bayfront Health said the hospital supports the deal with the foundation and doesn't believe it would affect the current lease agreement with the city.

"If the City Council approves their exit from the joint venture, Bayfront Health St. Petersburg will continue to fulfill the commitments outlined in the lease agreement, as we have for the past four years," McLain said in a statement.

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"Over time, these private hospitals aren't being incentivised to maintain the community aspects they once were. When preparing for a sale, it would make for a much cleaner transaction not to have to worry about this 20 percent ownership asset," Quast said, referring to the St. Petersburg foundation.

But the fate of the deal rests with city officials, who Russell said seem concerned about severing the foundation from the hospital, even though he says the foundation has little say in the overall decisions made at Bayfront Health.

Russell also said it appears that city officials believe the change in ownership structure opens up the city's lease with CHS and that the city now would like to receive an annual lease payment from the company.

"This is a real estate issue. The tenant is requesting to open the contract and modify its terms in a way that stands to materially change the agreement," said Ben Kirby, a spokesman for Mayor Rick Kriseman's office. "Staff is meeting with the hospital team next week to discuss the requested terms and impact such changes would have on the agreement. We will then brief council members on the requested change and associated considerations, from a landlord's perspective. Council will use that information to help them decide whether the request is granted, or any other changes should be made."

City officials instituted the need for the foundation in 2013 when the hospital was bought by a for-profit chain. The profits from the sale were used to seed the charitable organization that was meant to carry out Bayfront's mission as the city's oldest and largest hospital. But the for-profit chain that bought the hospital, Health Management Associates, was quickly acquired by another chain, CHS, and the foundation drifted into the background.

Today, through grants and other activities, the foundation works to improve the health of people with limited means and little access to health care.

Officials with the foundation and the city plan to discuss the next steps in the coming week.

"My goal is to find the win-win situation where the city maintains its leverage to assist on charity care outcomes and the foundation is free of the burden of the hospital and can manage its own assets," said City Council member Darden Rice. She talked favorably of the potential sale.

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"I'm very open-minded," Rice said in an interview Friday. "We're looking at the fact that the foundation is dealing with unintended consequences of that deal. It's only fair to look at what this opportunity offers us."

The foundation awarded $4 million grants to 19 nonprofit organizations last year, including $161,575 to Family Resources, Inc. for an LGBTQ homeless youth project and $30,000 to the Pinellas County Urban League for a clergy mental health roundtable series.

This year, it offered grants ranging from $10,000 to $15,000 to 29 local organizations for various community health programs. Russell said the foundation is already outlining plans for bigger projects in the year to come.

"This will break my heart" if the deal doesn't go through, Russell said. But he added that the foundation will continue to play a charitable role in St. Petersburg, no matter the outcome.

"It will just take us longer to reach our goals," he said.

Contact Justine Griffin at jgriffin@tampabay.com or (727) 893-8467. Follow @SunBizGriffin.

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