Physicians to buy out partner to save hospital

In spite of a provision in the healthcare reform law seen as a death knell to physician investment in hospitals, a group of Detroit-area doctors has upped its stake to save a struggling hospital in Pontiac, Mich.

A purchase agreement has been signed that has physicians buying out the 35% ownership stake Flint, Mich.-based McLaren Health Care Corp. had in Doctors' Hospital of Michigan, a 106-bed institution formerly known as North Oakland Medical Center.

McLaren had invested about $5 million in the facility since November 2008, according to a hospital news release, and some of the physician shareholders paid McLaren around $3 million to buy out its ownership share.

The Patient Protection and Affordable Care Act prohibits the percentage of physician ownership to increase from the level it was when the law was passed last March, which would appear to put the legality of the deal in question. But attorney Michael Lampert, a Boston-based associate in the healthcare group of law firm Ropes & Gray, noted how the hospital's news release stated that the “a portion of DHM's physician ownership” bought out McLaren.

In its preamble to the final rule amending Stark regulations on self referral, published in the Nov. 24, 2010, Federal Register, the CMS stated nonpracticing and nonreferring physicians do not need to be counted as part of the percentage of a facility's physician ownership. The wording of the release, Lampert said, “suggests that not all of the (physician) owners are acquiring an increased share.”

McLaren acquired its ownership stake for $2 million and loaned the hospital $3.5 million in the form of a promissory note. The medical center had entered into Chapter 11 bankruptcy in 2008 after missing a Jan. 15 payment to bondholders that year. At the time, according to a Standard & Poor's report, the medical center had $35.8 million in bond debt, a $13.4 million operating loss in 2007, and only 18 days of cash on hand.

As part of last week's deal, Clarence Sevillian, a McLaren employee, stepped down from his post as hospital president and CEO on Feb. 8, and the CFO Michael DeRubeis has been named acting CEO.

“The shareholders worked very hard to make this deal happen and to save 600 plus jobs,” Dr. Yatinder Singhal, chairman of the Oakland Physicians Medical Center board of directors, said in the release. “Our business relationship with McLaren did not work out, but we appreciate all they have done to help us start up Doctors Hospital and keep it a viable healthcare provider.”

Neither Singhal nor Sevillian was available for further comment.