Significant changes were made Thursday morning to Magnolia Regional Medical Center (MRMC) after the Magnolia City Council voted unanimously to move forward in converting the hospital from a government entity into a 501(c)(3) nonprofit. The move was made in hopes of gaining an estimated $700,000 annually from government reimbursement payments. It could also open the hospital to grant and loan opportunities previously unavailable.
The hospital was formerly under government nonprofit business status, but now the facility will be reformed into a separate, traditional nonprofit corporation. In the same motion passed unanimously by Aldermen Larry Talley, Tia Wesson, Steve Crowell, Jamie Waller, Kelli Souter, Steve Nipper, and James Jefferson, city elected officials will permanently occupy three of the seven seats on the hospital's newly-formed board of commissioners. Two seats will be preliminarily reserved for sitting city council members and one seat will be reserved for the in-office mayor. The other seats, and how they are appointed, will be decided as the nonprofit conversion moves along.
The change in status, according to MRMC Chief Executive Officer Rex Jones, will greatly increase the hospital's revenues by way of the percentage amounts paid to the facility by Medicaid Upper Payment Limit (UPL) reimbursements. Currently, the payments are limited in their proportion due to the hospital’s government status. The difference in funds could be to the tune of a net $700,000 per year.
“As we understand it today, and if things were the same as they were this last year, that’s what that amount would be,” said Jones while addressing the council Thursday. “I can’t guarantee you what’s going to happen next year.”
501(c)(3) PROCESS
The conversion to a 501(c)(3), though, is not an overnight process. The move to the new nonprofit status must first navigate multiple hurdles to make the change work effectively. Specifically, they are: the Centers for Medicare and Medicaid (CMS) for reimbursements, the Internal Revenue Service (IRS) for the new nonprofit status, the Municipal Health Benefit Program for employee health insurance, and the bondholders who purchased bonds associated with the city-owned hospital.
“We have four channels to navigate,” said Vann.
The employee health insurance factor was one of the major issues facing the proposed conversion to 501(c)(3) status. As a government nonprofit hospital, MRMC staff were technically city workers, thus eligible for municipal benefits. But since the status change would set up the hospital as a traditional nonprofit -- one no longer attached to the city government just as any private charity or nonprofit hospital would be -- employees would no longer have access to those government benefits.
“That’s the [have your] cake and eat it too issue," said Jones.
But a solution may have been found. After much research and legal aid, hospital workers could potentially stay on as city employees, then “leased” to the hospital for work, thus making them eligible to retain their municipal benefits.
“That way, they’re all still city employees,” Jones added. “… Because all you really need is the 501(c)(3) corporate entity that oversees the operation.”
The mayor added that he is set to meet Friday with the executive committee of the Arkansas Municipal League. After that, he may possess an answer to the proposed insurance solution.
In total, the conversion to 501(c)(3) could take anywhere from six weeks to eight months. The key hold-up will likely stem from the federal approval process of the nonprofit status.
“Your big time [consumer] here is going to be that IRS 501(c)(3) designation,” said Michael Boyd, attorney for the City of Magnolia.
Jones later added that he did not think the IRS would reject the status change.
Another issue facing the change is the fragility of MRMC’s financial status during the possible lengthy nonprofit transition time and bond debt repayment. The hospital was funded in 2007 by a voter-passed 1.3-cent sales tax for construction bonds and a 0.25-cent sales tax for the operation and maintenance of the facility. If the worst does befall the hospital, the bond debt will likely still be secured and the tax revenue will still flow, according to city officials.
“God forbid that Rex has to shut the door for a moment, the tax will still come in on both the 1.3-cent and the quarter-cent tax,” the mayor said. “That quarter-cent tax was set up to operate and maintain [the hospital], but it was also set up as insurance against the bond.”
Any excess tax revenues in a worst-case scenario would go to the bond debt.
Alderman Jamie Waller, who also serves as president of Peoples Bank, added: “The bondholders invested in the city knowing that sales tax [is there]. I don’t think they’re not concerned about the building or what happens with the hospital, as long as that sales tax comes through, they’re going to get paid.”
Although MRMC’s nonprofit status was approved for change by the City Council, the hospital’s new bylaws and legalities associated with the conversion process will be handled primarily by Little Rock-based law firm Friday, Eldredge & Clark in conjunction with Boyd. The firm has also advised the city on the bond issue and other matters.
HOSPITAL BOARD
One of the key topics of discussion before the council approved the 501(c)(3) motion on Thursday was the makeup of the hospital’s new board and just how or whom will appoint the members. MRMC’s board of commissioners currently has seven-members. The appointment recommendations are made by the mayor, then approved or disapproved by the city council.
As it is now, there are no parameters or stipulations on the appointees. But with the motion passed Thursday, three of the seven seats will be associated with the city government and the remaining four were left undetermined as 501(c)(3) status changed needed to be addressed with urgency.
It was implied that the practice of the mayor appointing the remainder of the board members remains in place, but Jones, as well as Nipper, a former president of the MRMC board, expressed caution in giving off the impression that the city would essentially still control the board appointments at a non-government nonprofit.
“My concern would be if you have direct appointees that make up three of the seven, and then you have total control over approval for the other four -- is it functioning as a city government board because you totally control it?” Jones said.
He also added: “I think that gives an insulation factor” if the city government board members not possess direct appointment control.
MRMC's CEO added that he felt that the city making up a minority on the board was fine, but suggested that the remaining seats be elected directly from the remaining four board members, then approved by the city council -- a sentiment Nipper also supported and Boyd indicated to handle with precaution and rely on legal counsel due to the 501(c)(3) application process.
“We don’t know if CMS is going to say ‘that’s too much control’ or if someone else is going to say that it’s not enough,” Boyd said.
But the question of who appoints the remaining four seats was also broached. If there are three direct city appointees to begin with, then they, by virtue, could be recommending the remaining board seats anyway, thus the board, at least initially, could be viewed as still “city-controlled.”
“It’s the chicken or the egg,” said Alderman Steve Crowell.
The councilmen later suggested -- and the remaining members agreed in the passage of their motion -- that Friday, Eldredge & Clark guide the city on the board recommendations, as well as any other issues that will pop up during the process.
Boyd stated Thursday that the board slots were not final and that the motion passed by the council was made to give the lawyers “direction on how to put this jigsaw puzzle together.”
The decision on the board seats, according to Jones and Waller, may also affect the hospital's employee insurance plan and the UPL reimbursements.
"Regardless of who has the power to do this, I think there needs to be a relationship with Rex about who needs to be on the board anyway," Waller added.
With the change in nonprofit status, MRMC’s CEO says that there will be no major noticeable changes at all in how the hospital operates or the services it can offer.
“It will be totally transparent to the community,” he said. “We could be city [controlled] one day, and 501(c)(3) the next –- and they would not know the difference.”
Navigating the hospital’s financial health through the nonprofit transition until the UPL reimbursement rates can rise will not be easy, but good news was stated Thursday by MRMC Chief Financial Officer Roxanne Stewart. Her projections point to “good things” due positive cash flow from a recent renegotiation with UnitedHealthcare Insurance and the anticipation of a $200,000 settlement on a Medicaid cost report in addition to another $400,000 in UPL funding.
“From now until September, we anticipate [the fiscal year] ending with a positive cash balance in our operating fund,” she said.
MRMC for the past two months has also not been required to dip into its sales tax fund, thus generating more reserve revenues. Currently, its cash-on-hand is $2.8 million.
“It looks like we can hold on,” Jones added.