(Not) For Profit 

How St. Al's dealt with competition

Eight months ago, St. Alphonsus Regional Medical Center found itself on the receiving end of a lawsuit requiring it to pay more than $60 million to a business partner jilted in 2004. Now the hospital is appealing the ruling, claiming the jury was misled.

Oral arguments in that case won't likely begin until next winter. The backstory, chronicled in the plaintiffs' 40-page counter-claim, is something to behold. As complicated as Tolstoy and as devious as Machiavelli, it's a tale of greed, betrayal and good old-fashioned hubris that goes back decades. The tale cuts to the core of a larger national debate over how nonprofit hospitals should—or shouldn't—function.

It began in 1986, when a group of health-care professionals pooled their resources to bring the relatively new technology of magnetic resonance imaging to the valley.

The company was called MRI Associates, and one of the founding members was St. Al's itself. It was, at the time, still under management by the Sisters of the Holy Cross (the order of nuns that founded the hospital in 1894). The hospital invested capital worth a quarter of the new business, and housed and marketed the facility, which became as the MRI Center of Idaho.

The center would be housed onsite until 2023. According to court documents filed by the center, there were only four conditions by which the partnership could be dissolved: if the arrangement put the hospital's tax-exempt status at risk; jeopardized its Medicare/Medicaid or insurance reimbursements; was contrary to the ethical principles of the Catholic Church or violated local, state or federal laws.

For the next 18 years, the center provided St. Alphonsus with state-of-the-art MRI services. It eventually expanded to include a mobile lab and coverage at Mercy Medical Center in Nampa, Caldwell Memorial Hospital and Holy Rosary Hospital in Ontario, Ore.

While the center specialized in taking the images (the technical aspect of the process), another company called St. Alphonsus Radiology Group was contracted to interpret them (providing the professional aspect).

By the late 1990s, the MRI business was booming and would only become more lucrative. The gamble in 1986 had paid off. But, as the suit alleges, some members of the professional group wanted a bigger piece of the pie. A few of those physicians had already gone off to form Gem State Radiology and planned to acquire the necessary equipment and personnel to offer the technical side of MRI services—creating a full-service operation that would both create and interpret MRIs.

The middlemen were trying to compete with the supplier.

According to court documents, St. Al's Radiology Group found a ready partner in current St. Alphonsus CEO Sandra Bruce, who came to the hospital shortly after it changed hands from the Sisters of the Holy Cross to Trinity Health—a multi-billion-dollar nonprofit Catholic health system based in Michigan.

Bruce—who had previously served as president and CEO of another Trinity hospital, Mercy General Health Partners, in Muskegon, Mich.—took over with an eye to streamlining efficiency and increasing profits. Combining the technical and professional aspects of the MRI process would fall right in line with her aims.

The hospital's marketing and communications director, Kristen Micheletti, declined to comment to BW.

But according to court documents, Bruce liked the idea and in October 1998, entered into an agreement with St. Al's Radiology Group to create a full-service imaging center called Intermountain Medical Imaging.

From the outset, Bruce and her new business partners realized that because IMI was in competition with the center, the hospital couldn't share in the profits or it would violate the 1986 agreement.

The easiest way to get around that, the suit claims, would be if IMI was merged with the center, and that couldn't happen unless St. Al's Radiology Group bought into the MRI Associates partnership.

When integration attempts failed, the kid gloves came off. The counter-suit filed by the former center claims Bruce and her cohorts at St. Al's made the decision to shift business from the center, prop up IMI and, ultimately, destroy the longstanding MRI partnership.

The first phase of that effort came when St. Al's Radiology Group formed Imaging Center Radiologists and offered St. Al's the option to buy up to 50 percent of IMI. The hospital took the offer.

The problem with this "exchange sale" was that St. Al's only owned about a quarter of MRI Associates. To facilitate the sale they would have to double their stake in the partnership, which meant buying at least one of their partners out. According to the counter-claim, that would have cost St. Al's $27.3 million—far too much to have made a profit on the resale to ICR.

MRI Associates contends it was kept in the dark about the deal. At the same time Bruce went before St. Al's leadership to announce the joint venture with IMI—and assure committee members it was on the up-and-up. She was taking steps to formally wed the hospital with IMI, setting it on a course that would ultimately lead to litigation.

With the execution of the agreement, the hospital was given 50 percent control of the company.

Though the exchange sale and operating agreement were in place, St. Al's still hadn't acquired the necessary 50 percent ownership in the center. Stuck with a partnership it didn't want and another it couldn't profit from, the lawsuit claims the hospital pursued a solution that was as brutal as it was simple: ruin the center's business, drive down its value and buy it up cheap.

According to the suit, St. Al's administrators tried a number of tactics, from reducing the center's hours and refusing to attend to patients at the center's mobile facility, to badmouthing its MRIs.

When that didn't work, they got serious: they gave IMI advantages in the networking system used by referring doctors and voted against the center's growth initiatives at the board level. According to the counter-suit, the hospital appointed St. Al's employees to IMI's management team who were in a position to pass along the center's sensitive business information.

Still, the center limped along. After two years, St. Al's and its IMI business partners were getting frustrated. Things finally came to a head in 2004 when, according to court documents, St. Al's Radiology Group threatened to quit providing services to the center altogether unless St. Al's took care of the problem. The ultimatum prompted one more attempt to purchase the center. When it failed St. Al's broke the contract with MRI Associates—19 years before it was due to expire.

Soon after, IMI was installed on the St. Al's campus and efforts to eliminate the center were ratcheted up. The hospital also wanted to recover the value of its ownership in MRI Associates, so it sued for roughly $4.6 million.

The counter-claim alleges that the hospital tried to drive the center out of business by misleading customers with confusing phone numbers and business names, telling doctors to refer patients to IMI instead of the center and, among other things, falsely telling St. Al's employees that MRI scans performed at the center were not covered by the hospital's insurance.

The final break came in February 2005, when St. Al's Radiology Group suspended services to the center, requiring it to seek the aid of Boise Advanced Radiology. The center was still located at St. Al's but completely marooned from the hospital and the group that had been interpreting its images for nearly 20 years.

That's when the center filed its counter-suit, claiming the hospital had broken its contract and was liable for damages.

According to the center's lawyer, Thomas Banducci, several attempts were made to settle out of court, but the hospital refused. When the matter went before the Fourth District Court, St. Al's dissociation from the MRI partnership was ruled unlawful.

According to Banducci's case, the center asked for either $27.3 million, the amount St. Al's had determined it would have cost to buy MRI Associates outright, or $36.3 million. the amount MRI Associates estimated it had lost in profits due to the wrongful dissociation and the hospital's attempts to destroy its business.

In all, MRI Associates brought 20 claims against the hospital, including breach of contract and libel, restraint of trade and conspiracy to monopolize. The court granted five of them: breach of fiduciary duty, non-compete, civil conspiracy, breach of covenant of good faith and fair dealing and wrongful dissociation.

The trial went on for a month, but it was worth the wait. The jury met for only 30 minutes. When they returned, they agreed to award MRI Associates with the combined total of $63.6 million.

"This was about abandonment of a partnership, it was about betrayal, but it was also about lack of accountability," Banducci said.

"Accountability" in the nonprofit hospital system is something of a buzzword nowadays. This particular imbroglio comes at a time when lawmakers, watchdogs and government agencies are taking a hard look at how nonprofit hospitals across the country are operating.

What they've often found is corruption, manipulation and avarice seemingly more at home in the boardrooms of corporations like Enron and Worldcom than among institutions set up to benefit the poor, uninsured and underserved.

The numbers are telling: the American Hospital Directory­—a clearinghouse for information on hospital finances—reported earlier this year that the top 50 nonprofit hospitals in the United States raked in a combined net income of $4.27 billion.

Meanwhile, the Joint Committee on Taxation released a study showing nonprofit hospitals—and the businesses supporting them—saved $4.3 billion in taxes in 2002.

According to St. Al's tax filings from fiscal year 2006, the corporation enjoyed total revenue of about $348 million, and a profit of more than $39 million—a margin of 11 percent. Tax records show that St. Al's spent $25 million on community benefits during FYE 2006—or about 7.1 percent of its total revenue and $14 million less than its profits.

In the case of St. Al's, longtime trauma surgeon Dr. John Livingston said the change came after Trinity Health took over from the Sisters of the Holy Cross. Over the years, he watched St. Al's and its foundation evolve it became clear to him.

"The spirit of service that the Sisters had was not something that was part of the culture of Trinity Health," he said.

Livingston, who moved to Idaho specifically to work for the Sisters, thinks he knows where the blame lies.

"St. Al's has changed from a community of service to a profit center and that all occurred when Sandra Bruce got here," he said.

Banducci also pointed to profit motive.

"I think what happened was that the hospital made an economic decision, and although they recognized they were breaching their partnership duties, they thought they could get away with it," he said.

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