Connecticut laws/regulations;

OLR Research Report

October 29, 2001





By: John Kasprak, Senior Attorney

You asked for information on the state law concerning the sale of nonprofit hospitals to for-profit entities, specifically the Office of Health Care Access' involvement, and its application in the Sharon Hospital case.


In the first application of Connecticut's 1997 law on the conversion of a nonprofit hospital to a for-profit, the state Office of Health Care Access (OHCA) and the Attorney General's Office have been reviewing the proposed purchase of Sharon Hospital by Essent Healthcare. On October 17, 2001, OHCA issued its final decision on the proposed purchase, approving the sale contingent on Essent meeting a list of 17 stipulations primarily concerning its operations and finances. By law, OHCA's review and approval of the proposed purchase application must address three criteria: (1) the community's continued access to affordable health care, (2) a commitment to provide health care to uninsured and underinsured people, and (3) safeguard procedures to avoid conflicts of interest.

The 1997 conversion law requires the attorney general to also grant his approval before the purchase can go forward. His decision is expected in November.

After a general discussion of the conversion law, this report focuses on OCHA's review of the proposed purchase of Sharon Hospital.



A 1997 state law (PA 97-188) requires the attorney general and the OHCA commissioner to review and approve a nonprofit hospital's agreement to sell or otherwise transfer a material amount of its assets or operations or to change the control of its operations to a for-profit entity (see CGS 19a-486 to 486h). Any agreement without such approval is void. The nonprofit hospital must notify the attorney general and OHCA of the proposed agreement.

The attorney general must determine if the agreement involves a material amount of the nonprofit's assets or operations or a change in control of a hospital's operations. If he determines that it does, he must review the proposed agreement and approve it, approve it with modifications, or disapprove it. The law sets out the criteria and time periods for review. The attorney general may subpoena individuals, issue written interrogatories, and contract with experts or consultants in his review.

The OHCA commissioner must also approve any proposed agreement. The law sets out the standards for the OHCA's commissioner's review and gives him subpoena authority.

The attorney general and OHCA commissioner must hold at least one joint public hearing in the primary service area of the nonprofit entity before approving or disapproving a proposed agreement.

OHCA's Review

If the attorney general determines that the proposed agreement involves a material amount of the assets or operations or a change in control of the hospital's operations, the law requires the OHCA commissioner to review the agreement and approve it, with or without modifications, or disapprove it ( 19a-486d(a)). In order to approve the agreement, the commissioner must find that:

1. the affected community is assured of continued access to affordable care,

2. the purchaser has committed to providing health care to uninsured and underinsured people, and

3. safeguards are in place to avoid a conflict of interest in patient referral if health care providers or insurers are offered investment or ownership opportunities in the purchaser or a related entity (see CGS 19a-486d(b)).

The OHCA commissioner, in reviewing the agreement, can issue written subpoenas and interrogatories under the same procedures and conditions as for the attorney general's review. The commissioner, through the attorney general, can apply to Superior Court to enforce compliance with a subpoena.



On April 25, 2001, OHCA received notice (under CGS 19a-486a) from Sharon Corporation, Sharon Hospital Inc., West Sharon Corporation and Essent Healthcare, Inc. and an application concerning an agreement for the purchase of Sharon Hospital, a nonprofit facility, by Essent, a for-profit entity, at a total capital expenditure of $16,390,000 subject to adjustments. The application sought approval of an asset purchase agreement, which included the transfer of a material amount of the assets or operations, or a change of control of operations of a nonprofit hospital to a for-profit entity.

The attorney general and OHCA held a joint public hearing in Lakeville on June 12, 2001. OHCA held a separate technical session of the public hearing on July 10, 2001, which was continued on August 29. The attorney general held separate technical sessions on August 14, 15, and 30, 2001. The record of the proceeding was closed on September 7, 2001. On July 16 and July 26, 2001, the applicants consented to extending OHCA's application review period from August 23, 2001 to September 15, 2001. Later, the applicants consented to extending OHCA's review period from September 15 to the same ending date as the attorney general's.

In reviewing the proposed sale of Sharon Hospital, OHCA made the findings required under CGS 19a-46d(b) (see above).

OHCA issued its final decision on October 17, 2001. It approved the proposed sale with a number of stipulations related to each of the above criteria. Essent must agree to these before any transfer of assets can occur.

Criteria 1: The Affected Community Will Be Assured of Continued Access to Affordable Health Care

The OHCA decision states that “Although OHCA has determined that the application should be approved, there are serious and numerous concerns about the submission of contradictory and inconsistent information and the skill of Essent in effectively managing health care facilities. This agency will only approve the proposal with very specific modifications and legally binding stipulations to the Applicants' proposal” (p. 25 of decision). The following stipulations are relevant to Criteria 1:

1. The purchase price paid by Essent must be a cash contribution to Sharon Hospital, Inc. and not result in Sharon Hospital's issuing any additional debt or any preferred stock with debt-like features to the purchaser, Essent, or any third party as part of the transaction. This cash capital transaction must be used to retire the entire $11.4 million debt with Fleet Bank and fund the escrow account as described in the Asset Purchase Agreement.

2. Sharon Hospital, Inc., upon retiring the hospitals' debt, must dissolve as a legal entity.

3. Essent must invest $ 8 million in the hospital for the renovations, clinical equipment acquisitions, and programs it promised. A facilities improvement plan for the entire $ 8 million must be submitted to OHCA for review and approval within 90 days of the official date of the document. If Essent cannot document the $ 8 million investment at the end of five years, the difference between what was spent and the $ 8 million must be turned over to the Sharon Area Community Healthcare Foundation (SACHF) to spend on the hospital or programs and services to benefit the citizens in the area.

4. An advisory board must be established to consult with Essent and the hospital on a variety of subjects, including financial management, policy, programs and services, clinical quality monitoring, and community outreach. Essent must submit a list of proposed board members to OHCA for approval within 30 days of the OHCA final decision document's official date (hereafter known as the “document”).

5. Essent must develop an RFP (request for proposal) and put out to bid an independent auditing functioning for the hospital within 180 days of the document's official date. OHCA must pre-approve the RFP and review the bids with Essent. OHCA reserves the right to make the final decision on the vendor.

6. Essent will be assessed $100,000 annually, for a minimum of five years, for the costs of ongoing monitoring and compliance by OHCA.

7. Within 180 days of the document's official date, Essent must establish a tertiary care contract with a hospital or health system that provides the full range of health care services legally permissible and clinically available in Connecticut, taking into consideration traditional referral patterns. (Generally, “tertiary care” means a level of care available only in larger healthcare institutions.) The Essent-Saint Francis affiliation is invalidated until such a contract is in place. (On July 27, 2001, Essent and Saint Francis Hospital executed a Tertiary Support Agreement – see p. 21 of decision.)

8. Essent must provide OHCA with a detailed business plan within 90 days of the document's official date. The plan must have both an immediate (24 month) and longer term (60 month) component. OHCA must review and approve the plan.

9. Essent cannot reduce the size or qualifications of the hospital's work force, or reduce any services or service availability without OHCA's review and approval.

10. Essent must get OHCA's approval to sell, transfer, or liquidate any of the assets transferred to it from the hospital sale, including real estate.

11. SACHF must be given the right of first refusal to buy the hospital for at least the next 10 years if Essent decides to sell it.

12. Essent and the hospital will continue to be subject to the same laws as all other acute care hospitals in the state, including all financial and statistical reporting.

13. Essent must agree to pay 50% of any judgment, beyond the $2.6 million already escrowed, arising from a pollution remediation project involving the Amenia Landfill.

14. If Essent sells the hospital during the next five years, the unexpired terms of the order are binding on the purchaser.

15. Essent must provide evidence at the time of purchase that it has executed a $10 million irrevocable letter of credit to serve to enforce the conditions of this order.

Criteria 2: The Purchaser Has Made a Commitment to Provide Healthcare to Uninsured and Underinsured People

OHCA's decision notes that “in evaluating the commitment of the purchaser to provide health care to the uninsured and underinsured, the following factors were considered: the existing uncompensated care policies and past practices of Sharon Hospital, Inc. and the proposed policies and projections of Essent Healthcare, Inc.” (p. 31). OHCA stated that it was “unable to conclude whether or not the Applicants are committed to provide health care to the uninsured and underinsured based on conflicting documentation and testimony” (p. 32). Thus, OHCA ordered the following modification:

1. Under Essent's ownership, Sharon Hospital must provide appropriate care to any person or patient presenting for such care regardless of the individual's ability to pay, to the extent that the hospital offers those services. Within 90 days of the document's official date, Essent must give OHCA its free and charity care and bad debt policies for the hospital, which are subject to OHCA's approval.

Criteria 3: Safeguard Procedures Are in Place to Avoid a Conflict of Interest in Patient Referral, if Health Care Providers or Insurers Will Be Offered the Opportunity to Invest or Own an Interest in the Purchaser or an Entity Related to the Purchaser

To evaluate the procedural safeguards to avoid a conflict of interest, OHCA examined the ownership structure of Essent Healthcare, Inc. and Essent Healthcare of Connecticut, Inc. and the investment opportunities afforded to providers and insurers in the Sharon Hospital service area. According to the OHCA decision, the applicants testified that no health care providers, physicians, insurers, or board members in the region or on the staff at the hospital have been or will be offered investment opportunities concerning the proposed sale and transfer of ownership of the hospital. Additionally, the applicants asserted that no provider or insurer had or would be offered the chance to invest in the hospital, Essent Healthcare Inc., Essent Healthcare of Connecticut Inc., or any Thoma Cressey (the principal investor in Essent) entity. If Thoma Cressey sells Essent, the new owner may subsequently give providers and insurers investment opportunities in Essent or any of its affiliates, according to the OHCA decision. The decision continues, “absent such documentation, OHCA is unable to conclude if such required safeguards currently exist” (p. 33). Thus, OHCA modified the application as follows so that “the public can be assured that no conflict of interest will occur” (p. 33):

1. No healthcare provider or employee in any way connected to Sharon Hospital, including a physician, no member of the current Sharon Hospital Board of Trustees, or any person indemnified by said Board will be offered the opportunity to invest in or own an interest in Essent Healthcare of Connecticut, Inc., Essent Healthcare Inc., Thoma Cressey Equity Partners Inc. or any of the entities currently owned, operated or controlled by these three entities, or any entities they may own, operate, control or create in the future.