Owners of for-profit North Jersey hospitals cash in on land beneath

Three years after Bayonne Medical Center’s new for-profit owners bought the hospital at bankruptcy for the equivalent of $32 million, they sold its land and buildings for $58 million. Then they leased it back and continued to run the hospital — enhancing their profits through some of the highest hospital charges in the country, according to recent Medicare disclosures.

It was the first example of a trend that has emerged as for-profit companies acquire more New Jersey hospitals. Already, hospital properties in Secaucus, Hoboken and Bayonne are owned by real estate investors, with more deals possible in Passaic and elsewhere.

While state regulators focus on patient care and services for the uninsured, these new owners are employing sophisticated financial strategies to maximize their profits. By selling the land, the buildings, or a share in the hospital’s operating company to out-of-state real estate investors, they are able to generate millions of dollars in cash.

Their business strategy is pulled from the playbook of hotels and shopping malls, but it is new to the hospital world. Its implications for the hospitals’ long-term futures are unclear. What happens, for example, if the hospital operator can’t make the rent? Can the real estate owner evict them and bring in another company, or use the property for condos or a shopping mall?

The proceeds of the Bayonne sale — a stunning $26 million — may have been used to improve hospital facilities or divided among the original investors. Or the money may have been used to buy two other Hudson County hospitals the group subsequently acquired.

No law requires hospital operators to reinvest the proceeds in the facility, or disclose how they are used. Also secret are the terms of the lease agreements, in which the hospitals pay escalating amounts of rent for anywhere from seven to 99 years.

Legislators and public advocates are increasingly concerned that New Jersey may lose control of important community assets when titles are transferred to non-health-care companies that have not been vetted by the state. They fear for-profit operators may strip the hospitals of their value, let the property deteriorate and then walk away when the hospitals fail.

In North Jersey, the situation has already led to a lawsuit in which a real estate investment group has sued for more of a stake in the running of a Hoboken hospital.

“Can we trust the real estate investors?” asked Fred Hyde, a former hospital chief executive who now is a professor at Columbia University’s Mailman School of Public Health. “We suddenly have real estate disconnected from the hospital in terms of long term control. If you’ve given up your real estate interest, do you then have a hospital?”

But executives who run for-profit hospitals said the sale of such properties to real estate investors is “smart business.” Instead of tying up their capital in land, the sales allow them to use it on what they do best — running hospitals.

“There’s nothing wrong with it ethically, legally or any other way,” said Arnie Kimmel, senior vice president for development at Prime Healthcare Services, which has agreements to buy five New Jersey hospitals and has used sale-lease-back agreements at its California hospitals. “In terms of policy, it’s totally transparent. That company has nothing to do with the operation of the hospital — they’re a landlord.”

In the case of Bayonne hospital, for example, the operators have invested $30 million to $40 million in improvements to the heart and cancer programs since taking over, as well as information technology, enabling it to take better care of more patients at lower cost, according to Mark Spektor, the chief executive officer. They’ve also bought Hoboken University Medical Center and Christ Hospital, and set up their own insurance network.

Hospital owners that turn to real estate investors to raise capital usually can’t get it any other way. “They’re scrambling,” said Hyde, a doctor, lawyer and hospital consultant. “They are looking for someone with fast money that doesn’t have a lot of reservations.”

Prime Healthcare Services, for example, the company awaiting state approval to purchase St. Mary’s Hospital in Passaic and four other New Jersey hospitals, is owned by California cardiologist Prem Reddy and his family. A real estate investment trust has invested in all 14 of its California hospitals, which have served as the launching pad for Prime’s expansion to 23 hospitals in five states over the last two years.

The company that owns Bayonne, Hoboken University Medical Center and Christ Hospital in Jersey City is a partnership of three investors led by the owner of a chain of sleep-medicine centers. MHA LLC, owner of Meadowlands Hospital Medical Center in Secaucus, is a group of investors with interests in ambulatory surgery centers.

None of these hospital owners are eligible for tax-exempt bonds, with their low interest rates, because they are for-profit businesses. “This arrangement is a different way of obtaining a loan/mortgage for the real property, like mortgaging a home,” said Edward Barrera, a Prime spokesman. The investors secure their investments with the ultimate guarantee — the title to valuable land in North Jersey.

At Meadowlands Hospital, for-profit owners MHA sold the land underneath its buildings to a Canadian real estate investor last December for $18 million — around the same time MHA paid off the first of two IRS liens totaling $4.4 million. The liens were imposed for failure to submit payroll taxes withheld from employee paychecks.

The new landowner, MHR Investments, is a subsidiary of Rosdev Development of Montreal, one of the largest real estate developers in Quebec and the landlord for many Canadian government offices. A dispute about maintenance of one of its buildings led to an ethics inquiry that reached the Canadian prime minister’s office in 2008, when a press secretary was cleared of trying to seek favorable treatment for Rosdev’s president. In New Jersey, a separate Rosdev subsidiary owns a luxury hotel next to the Secaucus hospital that was fined $75,000 in 2010 for pumping sewage-laced water into the Hackensack River.

Calls to MHR, which has a Lakewood address, were not returned, and Meadowlands declined comment.

State Sen. Joseph Vitale, chairman of the Senate Health Committee, is concerned about these sales. He worries that “many for-profits will view this as a money making scheme to pay themselves back,” he said. Unaudited financial reports from Meadowlands’ first year of operations showed the owners were quick to pay themselves off, without reinvesting their profits, he said.

“We have to be assured the money goes back into the facility,” he added. “It’s altogether appropriate for me to be skeptical and cynical about this process.” His committee is scheduled to hold a hearing today about trends in for-profit hospital ownership.

The practice also concerns Ann Twomey, president of the 12,000-member Health Professionals and Allied Employees union, which represents nurses and others at all three New Jersey hospitals where the deals have been consummated. “These arrangements may be a good way to raise capital,” she said “but they are also a way for a community to lose any stewardship of their hospital.”

Vitale, Twomey and others are worry the sales will result in “asset stripping,” or use of the capital for purposes unrelated to the hospital. A series of such transactions can be like a shell game, with the money raised from the sale of one hospital property used to buy another.

They are also concerned about how the real estate sales are timed. For example, Prime’s deal to purchase the operations and land at St. Mary’s in Passaic will leave the public on the hook for millions in state-backed bonds that kept the hospital alive.

If Prime later sells the hospital’s real estate for more than the $25 million price it plans to pay for the hospital, it may pocket the difference, said Renee Steinhagen of the Appleseed Public Interest Law Group. There is no “claw-back provision” in state law to help pay off the state bonds.

Finally, advocates warn that out-of-state investors, rather than state regulators or a local board of trustees, could decide whether a hospital closes or whether a new operator is chosen.

In northern California, for example, the operator of Shasta Regional Medical Center, whose property was owned by Medical Properties Trust, declared bankruptcy in 2008.

Medical Properties then brought in Prime to run the hospital. The two companies have a close relationship — Medical Properties owns the real estate or mortgages at all of Prime’s California hospitals — with leases that account for 27 percent of the trust’s annual revenue.

Now, Medical Properties Trust has filed suit against the operators of Hoboken medical center, HUMC Holdco. It has asked a Delaware court to declare Holdco “in default,” which could be a first step toward evicting them — and an opening wedge for Prime to come in.

The suit stems from a dispute over $5 million that Medical Properties lent Holdco to buy Hoboken’s operations in 2011. Medical Properties bought the hospital’s real estate separately. In exchange for the loan, Medical Properties was to own a 25 percent interest in the operating company — and receive 25 percent of its profits. But the suit says that Holdco set up the deal so that Medical Properties was given only a 9.9 percent share — skirting the 10 percent threshold that triggers a state review of the track record of prospective hospital owners. The suit says Holdco has delayed getting state approval to increase Medical Properties’ stake.

The lawsuit has broader implications, given the long-standing relationship between Medical Properties and Prime. Holdco and Prime are in a stiff competition, bidding against each other for hospitals around New Jersey and in Rhode Island.

In a counterclaim filed last month, Holdco’s lawyer, Thomas Ajamie, said that relationship gives Medical Properties “a powerful motive” to declare Holdco in default. “Ousting Holdco … would give Prime the opportunity to take over the operations of Hoboken,” the counterclaim said.

Prime’s spokesman, Barrera, said the claim was “totally baseless” and that Prime and Medical Properties have never talked about the lawsuit. “However,” he said, “if an opportunity presents itself in the future, Prime Healthcare has to evaluate the situation.”

Medical Properties Trust, which has market capitalization of more than $2 billion, could end up being a major player in the hospital world in New Jersey.

The leases at Bayonne and Hoboken, which sits on a full city block, provided the trust with $16.2 million in revenues in 2012, according to SEC filings.

The real estate company would likely also be involved in any future sale-lease-backs at hospitals acquired by Prime, including St. Mary’s and St. Michael’s Medical Center in Newark. Earlier this month, Prime also announced an agreement to buy St. Clare’s Health System, which has three hospitals in Morris and Sussex counties.

The conversion of a non-profit hospital to a for-profit business in New Jersey requires the approval of both the state attorney general and commissioner of health, as well as a Superior Court judge and a recommendation by the state Health Planning Board.

But the real estate transactions receive no such scrutiny.

The state Department of Health “does not review real estate transactions,” said Donna Leusner, its spokeswoman, unless they’re brought up in the initial application to convert a non-profit to a for-profit hospital. If a potential new owner doesn’t mention — or denies — future plans to flip the property to a real estate investor, that arrangement won’t be scrutinized.

In the case of the planned purchase of St. Mary’s in Passaic, Prime executives told members of St. Mary’s board last fall that they planned to sell the real estate. On Thursday, Prime’s spokesman said the company “has no intention of selling the real estate of one or more hospitals in New Jersey to Medical Properties Trust.” However, Barrera added that the company “does maintain an option to sell the real estate with a long-term sale-lease-back arrangement.”

The state Health Department also doesn’t monitor details of the leases. “There is no [state] requirement that the proceeds be used at the hospital in question, or for health-related purposes,” Leusner said.

But, she added, “All hospitals are monitored through routine reports reflective of operations.”

That type of monitoring, however, sometimes falls short. Meadowlands has not filed the audited financial report that was required last June, despite two separate fines of $6,000 each. It only recently submitted other documents required by the state when it approved MHA’s takeover in December 2010, said Leusner. She added: “We are reviewing the answers.”

Email: washburn@northjersey.com. This is one of a number of stories by Lindy Washburn on the ownership of health care institutions and the differences in care provided by non-profit and corporate management. Washburn is pursuing the project with the assistance of a fellowship from the Association of Health Care Journalists, supported by The Commonwealth Fund.

From: northjersey.com