CERTIFICATE OF NEED Department Staff Project Summary, Analysis & Recommendations Transfer of Ownership

Transcription

1 CERTIFICATE OF NEED Department Staff Project Summary, Analysis & Recommendations Transfer of Ownership Name of Facility: CN# FR Name of Applicant: Prospect Medical Holdings, Inc. Acquisition Cost: $44 million Location: East Orange Equity Contribution: 100% Cash Service Area: Essex County Applicant s Project Description: The Prospect Medical Holdings, Inc. Application (the Application) is for the transfer of ownership of (EOGH) from its current owner, Essex Valley Healthcare, Inc. (EVH) and its subsidiary, Inc. (EOGH, Inc.), a New Jersey non-profit corporation, to Prospect East Orange, Inc. (Prospect East Orange), a newly created New Jersey for-profit indirect subsidiary of Prospect Medical Holdings, Inc. (Prospect or applicant), a Delaware corporation formed in 1996, whose parent is Ivy Holdings, Inc., also a Delaware corporation. The proposed transfer of ownership is in the form of an Asset Purchase Agreement by which Prospect will acquire substantially all the assets and liabilities of EVH and EOGH. Prospect s corporate structure is divided into a Hospital segment and a Medical Group segment. On the hospital side, as of the time of the Department of Health s (Department) review of Prospect s transfer of ownership application, Prospect operates seven hospitals in California; four hospitals in Texas; and two hospitals in Rhode Island. Prospect s hospitals in California and Texas maintain 1,113 inpatient beds, serve 31,100 annual discharges, and see 51,000 annual emergency department visits. Prospect s Medical Group segment includes management of approximately 239,000 at risk members in California, served by nearly 8,900 primary-care and specialist physicians organized in Independent Practice Associations (IPAs) in Los Angeles County, San Bernadino County and Orange County. The applicant notes that the Medical Group s business plan includes participation in all insurance product lines and provides cost efficient quality care. Prospect asserts that the management of such a large number of physicians in an IPA enables Prospect to help physicians transition to a wellness care model of medicine and provide access and coverage for an expanded population of newly insured patients. Prospect plans to replicate this model in New Jersey, where the IPAs will be clinically and administratively integrated with the hospital to support improved quality care management and administrative functions. Prospect contends that its success in the more difficult California health-care market demonstrates that it has assembled the talent, practices, and resources necessary to be successful in its hospital endeavors nationally. The application further notes that

2 Page 2 Prospect s years of health care experience and institutional knowledge and its capital resources would greatly benefit the EOGH community, and that its proven experience in rebuilding and turning around hospitals in financial distress in California and Texas would strengthen the overall operation of EOGH. The applicant believes this transfer of ownership will be another successful endeavor producing a cost efficient and high quality care model hospital. Prospect notes that, upon execution of the transfer of ownership, EOGH will continue to function as a general acute care hospital. According to applicant, the overall acute bed capacity of EOGH is 212 beds. Categorically, the bed composition reflects 160 Medical/Surgical beds, 15 ICU/CCU beds, 18 Open Psychiatric beds and 19 Closed Psychiatric beds. The hospital s service complement includes 3 Mixed Operating rooms, 1 Cystoscopy room, 1 fixed MRI unit, Acute Hemodialysis services, and 7 Chronic Hemodialysis Stations. EOGH is designated as a Primary Stroke Center. In addition, EOGH operates five hospital-based off-site ambulatory care facilities (ACFs). These ACFs include Family Health Center, East Orange General Hospital Hyperbaric Wound Care Center, East Orange General Hospital-Hemodialysis, Occupational and Physical Therapy and Laboratory. Prospect asserts that given its successful track record in California with institutions similar to EOGH, the approval of the transfer of ownership will have a positive financial impact on the delivery of health-care services in the region and will permit EOGH to continue contributing to the orderly development of efficient health care services. Applicant s Justification of Need: The Application narrative describes need as follows: In its application, Prospect observes that EOGH has been a constant in the Essex County Community throughout its 110-year history. In addition, it asserts that EOGH serves as a safety-net hospital providing care and services to low-income, uninsured and vulnerable populations. According to Prospect, EOGH is the only remaining independent hospital in Essex County, and the County s sole hospital provider of certain essential services for individuals, families and communities in East Orange and the surrounding areas. Those essential services include a full complement of behavioral health services and the largest renal dialysis program in the region, according to Prospect. The applicant reports that the EVH Board set specific criteria as it initiated a competitive process to search for a Partner Organization that the Board considered strong and could enable EOGH to continue with its provision of care and services for the region. The application states that out of 25 New Jersey and National providers, the EVH Board selected Prospect as the most appropriate party to which to transfer the ownership of EOGH. The applicant further notes that the EVH Board determined that Prospect met its key criteria as an appropriate partner as follows:

3 Page 3 Demonstrated success in operating clinically sound hospitals in an environment of steady or falling reimbursement and strong competition; Expertise in managing risk-based reimbursement; A commitment to providing services that are demonstrably needed in the communities served by EOGH and that promote the efficient delivery of care; A commitment to local input in governance; Financial strength, including access to capital sufficient to fund several strategic initiatives the Board deems important; Organizational fit and strategic success; Demonstrated success in delivering high-quality services; A commitment to management, employees, and medical staff. The applicant asserts that the EVH Board s selection of Prospect as its partner demonstrates that the Board and Prospect believe that transferring EOGH to Prospect East Orange will satisfy the EVH Board s aforementioned key criteria. Prospect asserts that the transfer would strengthen EOGH s financial viability, chances of survival and enhancement of essential services. Additionally, Prospect states that its plan to institute a network of IPAs in New Jersey consisting of primary care and specialist physicians, who will be clinically and administratively integrated with the hospital will support improved care management and administrative functions. Applicant believes that the transition to a wellness care model of medicine and the provision of access and coverage for an expanded population of newly insured patients in order to decrease hospital admissions and readmissions will have a positive impact for EOGH and its community. Applicant s objective is to offer the community reliable access to a more financially secure hospital in the service area and ultimately benefit the existing providers in the greater service region. Prospect has committed to maintaining EOGH as a general acute care hospital for at least five years. According to the application, the infusion of capital and resources will enable EOGH to continue providing the traditional services it has offered to area residents and indigent patients without any disruption in the delivery of their health care services. The application further notes that without the approval of this Certificate of Need (CN) application for a transfer of ownership, the traditional services now offered at EOGH could be drastically reduced, or the hospital could face the possibility of closure in the near future. Applicant notes that Prospect East Orange is committed to maintaining all of the existing charity care policies currently in place at EOGH to serve uninsured and underinsured patients. Under the new ownership, applicant agrees that Prospect East Orange will ensure access and availability of health care services to the medically

4 Page 4 indigent, Medicare and Medicaid recipients and members of medically underserved groups in the hospital s existing service areas. Prospect stated in its initial application that it forecasted no material changes to the amount of charity care provided by EOGH after the transfer of ownership is completed. However, Prospect acknowledged in completeness responses that it is aware of the proposed reduction in Charity Care reimbursement funding to EOGH, and has also been monitoring the actual increase in Medicaid revenue that resulted from federal health care reform and that formed part of the State s justification for reducing Charity Care reimbursement. Prospect stated that it is satisfied that the proposed Charity Care decrease is counterbalanced by the actual Medicaid increase, making it unnecessary to change near-term financial projections. Applicant s Statement of Compliance with Statutory & Regulatory Requirements: The applicant has stated the following to demonstrate its compliance with the statutory criteria contained in the Health Care Facilities Planning Act, as amended, at N.J.S.A. 26:2H-1 et seq. and N.J.A.C. 8: et seq. as follows: 1. The availability of facilities or services which may serve as alternatives or substitutes: The applicant acknowledges that there are five other hospitals within a 10 mile radius of EOGH. These hospitals are listed in order of their proximity to EOGH as follows: University Hospital (1.76 miles), Saint Michael s (2.16 miles), Newark Beth Israel (4.43 miles), HackensackUMC Mountainside (5.42 miles), Clara Maass (5.46 miles) and Saint Barnabas (6.21 miles). In its initial application, Prospect committed to maintaining the current level of care and services for the area, which would preserve the same alignment of service accessibility and availability for their patients. The applicant further notes that Prospect believes the continuation of these services at EOGH is the least disruptive of all the plausible options for the community. However, in response to completeness questions regarding the Navigant Report, Prospect expressed its willingness to work with the Department and the other area providers to identify services that can be transitioned between EOGH and other providers in order to align need and capacity in the service area in a way that is financially viable and consistent with the state s planning intent. According to the applicant, EOGH has played and will continue under the new ownership to play a prominent role in providing health care to the uninsured and underinsured in the community. Prospect East Orange s goal is to function as a community leader in the delivery of care for these population segments. The applicant notes that Emergency Departments (EDs) have become the first resort for medical care in cities across the State. According to the Health Care Financing Systems Summary of Inpatient Utilization (B-2) data, the number of

5 Page 5 patient ED visits at EOGH in 2012, 2013 and 2014 were 35,276, 34,042 and 32,764 respectively. The applicant states that the closure of the full scale ED at EOGH would have a devastating effect on the surrounding hospitals EDs. Redirecting patients to surrounding hospitals could possibly result in overcrowding of EDs and compromising the provision of care to patients. 2. The need for special equipment and services in the area: The applicant intends to continue to operate EOGH as a general acute care hospital, providing its traditional inpatient and outpatient services in the City of East Orange. However, applicant acknowledges that Prospect East Orange would make future adjustments in the provision of their general or specialized services based on health care need assessments of the region which demonstrate identified gaps in service, the expansion of existing service gaps or the duplication of services. 3. The adequacy of financial resources and sources of present and future revenues: Prospect East Orange has committed to purchase EOGH for $44 million; $10 million of that $44 million is committed to the funding of the East Orange Foundation, which will then become independent of the hospital. 1 Prospect has stated that it will provide Prospect East Orange the funds to consummate the acquisition of EOGH. The applicant states that its financial sponsor is Leonard Green Partners, L.P. (LGP). A nationally recognized institutional Investor founded in 1989, LGP is one of the largest private equity firms and is currently managing more than $20 billion in investments in various well-known companies.... Prospect believes that cost savings would be achieved for this hospital with the implementation of its business model via the application of a higher level of coordinated care and technology, including upgrading outdated equipment, in order to more effectively manage the delivery and quality of their health care services. Applicant acknowledges that it must take into consideration Medicare s goal of basing 50 percent of Medicare payments on the quality of care provided, not on volume. In addition, applicant notes that EOGH is participating in the Delivery System Reform Incentive Program to reduce 30-day readmission rates, which links payment to performance. According to the applicant, these two programs are a reflection of plans to tie payments to quality and health outcomes. 1 This transaction is also being reviewed pursuant to the Community Health Care Assets Protection Act ( CHAPA ), N.J.S.A. 26:2H-7.10 to14.1(a)(2).

6 Page 6 The applicant states that any financing entity utilized will have no ownership rights in the operating rights, plant, property and equipment. 4. The availability of sufficient manpower in the several professional disciplines: According to the applicant, the number of employees at EOGH is approximately 1,507, and Prospect East Orange will retain substantially all of those employees. Prospect does not anticipate any changes in the current contracts with professional staff subsequent to this transfer of ownership. Prospect East Orange plans to implement a number of measures to enhance the hospital s ability to recruit and sustain the appropriate complement of physicians. As previously stated, this would include the development of a network of IPAs, clinical staff, and support personnel to ensure the long-term viability of EOGH. This includes upgrading medical equipment and information technology, maintaining an open medical staff and honoring the medical staff privileges of all physicians on staff as of the closing, as well as incorporating medical staff members on the hospital s governing board. 5. Will not have an adverse economic or financial impact on the delivery of health care services in the region or statewide and will contribute to the orderly development of adequate and effective health care services: Applicant does not foresee any negative consequences resulting from this transfer of ownership. Prospect East Orange is committed to providing the same services currently offered at the existing EOGH. 2 According to the applicant, the continuation of these same services would not have any effect on the delivery of health care services in the region or statewide. Prospect East Orange also intends to continue to serve the same payor mix, 3 thereby maintaining all of the established bridges to access and care. Applicant is convinced non-approval of the CN transfer of ownership application would adversely affect the medically indigent and underinsured because the hospital is a major provider of emergent and urgent care health care services for these populations, and the discontinuance of this role would force the remaining hospitals in the county to absorb an unfavorable payor mix and threaten their financial stability. According to Prospect, denial of its application would place the residents of East Orange and the surrounding communities at greater risk when health care emergencies arise and immediate care is essential, and any unplanned reduction or closure of services would produce serious consequences in accessing healthcare services for community residents. 2 EOGH operates licensed medical/surgical, ICU, open and closed psychiatric beds, MRI, acute and chronic hemodialysis services and five hospital based off-site ambulatory care facilities. 3 The application notes that in year 2013, EOGH s audited Patient Mix was as follows: Medicare-46%, Medicaid -24%, Blue Cross-5%, Commercial Insurance-2%, Self-Pay-19%, Indigent-2% and Other-2% =Total 100%. Projections for years 2014, 2015 and 2016 are very consistent with 2013 percentages.

7 Page 7 In response to completeness questions relating to the Navigant Report, Prospect stated that it Public Hearing: largely supports the No Regret Initiatives detailed in the Section 9 Recommendations portion of the Navigant Report. These recommended initiatives include developing a network of ambulatory access sites to facilitate convenient access to care in cost-effective settings, increasing collaboration among and between health providers in the service area, organizing physicians to support their success in a value-based reimbursement model and population health care model, and coordinating care across the full continuum to facilitate access to the right care in the right place at the right time at the right price. As described in the CN application file, Prospect has demonstrated success in other markets implementing initiatives consistent with the Navigant No Regrets Initiatives. The Public Hearing was held from 6:00 to 8:00 pm at the Langston Hughes Elementary School in East Orange. Approximately 50 persons attended, and 20 offered comments. 20 spoke in favor of approving the application submitted by Prospect to acquire EOGH. Many speakers complimented the hospital board and its intensive and thorough process in evaluating and selecting Prospect as a partner to maintain the hospital as a viable entity in the community. Many noted that they had researched Prospect and noted its successful experience elsewhere in operating other urban hospitals, particularly those with extensive behavioral health services like EOGH. A number of speakers emphasized that EOGH was unique in the area in providing an extensive array of behavioral health services. Some also spoke of Prospect s success in developing creative and innovative methods for quality and clinical improvement. Speakers, including elected officials such as the Mayor of East Orange, spoke of the economic benefits of keeping EOGH, the largest employer in the city, viable, paying needed taxes, and accessible to the large number of persons who would otherwise have difficulty in obtaining care outside of the community. Many spoke of the necessary financial investment in plant and equipment that Prospect proposes. A number of commenters referred to EOGH as a needed safety net hospital for the underserved with a forensic unit to provide needed services to those who are incarcerated. At least one speaker referenced the Navigant Report, but felt it disregarded the important safety net services provided by EOGH and its economic importance to the community in general. Track Record: The Department analyzed Prospect s record in California and Texas in accordance with factors set forth at N.J.A.C. 8: Hospital regulators in California and Texas provided track record information for each Prospect-owned hospital in these states.

8 Page 8 Department staff also note that Prospect acquired two hospitals in the state of Rhode Island following submission of the transfer of ownership application. Due to the date of acquisition of the Rhode Island hospitals, there is insufficient information available on Prospect s record of ownership in that state. Department staff identified no track record violations in California and Texas sufficiently serious to warrant denial of the application. The Navigant Report: In July 2014, the New Jersey Health Care Facilities Financing Authority (HCFFA) engaged Navigant Consulting, Inc. (Navigant) to evaluate the current inventory of healthcare services in the Greater Newark area to determine whether there is duplication of services, unused capacity, or an insufficiency of necessary services in this area, and if so, propose recommendations to the Commissioner of the New Jersey Department of Health for consolidation or regionalization of services. Navigant Report, p. 3. On March 2, 2015, Navigant issued its report, setting forth its findings and recommendations. The Department believes the Navigant Report is a valuable tool to help it fulfill its responsibility for the development and administration of the State's policy with respect to health planning, hospital and related health care services. Several of the Navigant Report s findings are of particular relevance to the review of the current application. For example, Navigant concluded that there is currently excess inpatient capacity in every inpatient bed type (pediatrics, obstetrics, psychiatry, and medical/surgical)[, and that] this surplus is expected to increase in the future. Navigant Report, p. 84. Navigant also found that there appears to be substantial duplication of services and relatively few unique services in the Planning Area. Id. In addition, Navigant noted that [p]hysicians on staff at the Planning Area hospitals have a higher average age than nationally and their practice model is predominately solo and small group practices. This combination of an older age profile and a traditional practice mode will make replacing Planning Area physicians who retire or otherwise leave practice increasingly difficult, given that newly trained physicians are choosing hospital employment or large group practice settings. Navigant Report, p. 86. Finally, Navigant notes that [t]here appears to be a high degree of fragmentation in the organization and delivery of healthcare services in the Planning Area as evidenced by the significant and increasing excess bed capacity and the comparable paucity of accessible, appropriately distributed ambulatory care facilities in the Planning Area. Id. Department Staff Analysis: Department staff has concluded that the applicant has adequately documented compliance with the applicable CN rules (N.J.A.C. 8: et seq.) and general statutory standards at N.J.S.A. 26:2H-1 et seq. For the purposes of this review, this

9 Page 9 application is considered a transfer of ownership of a licensed facility currently offering healthcare services, and not a reduction, elimination, or relocation of health care services. Department staff reviewed the applicant s CN application and determined that the applicant s rationale to transfer the ownership of EOGH is supportable. The Department also reviewed the Navigant Report and, in particular the sections of the report relating to EOGH Inpatient Bed Utilization (p. 43), Financial Performance (p. 44), Payor Mix (p. 45), and Assessment and Estimated Capital Requirements (p. 69). Navigant found that EOGH s inpatient bed occupancy was only 54% in 2013, which is significantly below industry target occupancy rates. Navigant Report, p. 43. During that period, EOGH recorded 53% occupancy in Medical/Surgical and 59% in behavioral health, according to Navigant. This suggests that there is a need to reduce the hospital s Medical/Surgical bed capacity. In addition, based on DMHAS assessment that there is a current lack of resources to serve the population s behavioral health needs, and [a]ny disruption in the mental health services provided [by EOGH] would be a significant hardship for the population served, there may be a need to increase the hospital s behavioral health bed capacity. Some of the services provided by EOGH, such as its forensic unit, are not provided by any other hospital in the area. Navigant also found that EOGH s financial position does not appear sustainable and would require a significant additional ongoing subsidy without fundamental changes in the organization s operations and/or business model. Navigant Report, p. 44. Department staff believes that Prospect s responses to the Department s completeness questions related to the Navigant Report demonstrate a willingness to change EOGH s business strategy using a Coordinated Regional Care approach, and to implement initiatives consistent with the Navigant No Regrets Initiatives. Prospect has stated that it is confident that the hospital s financial performance will improve after the transfer of ownership is completed. With respect to payor mix, Navigant found that EOGH s discharges from Medicare and self-pay/indigent care were higher proportionally than those for the Planning Area overall. This suggests that if EOGH were to close, the Medicare and self-pay/indigent population would be negatively impacted. The staff believe that Prospect has demonstrated a willingness to provide accessible and affordable health care services to the community. Overall operating losses and reduction in patient volume at EOGH is one factor supporting the decision to transfer ownership to Prospect East Orange. For EOGH to continue to function as a community, independent hospital without the implementation of long range strategies to improve the quality of clinical services with an emphasis on population health, and strengthen the financial viability of the hospital and outpatient clinics, it is inevitable that significant financial pressure would be exerted on the limited resources of the hospital, increasing its operating losses, possibly leading to either a significant unplanned reduction in community health services or hospital closure. The Department has long been aware of

10 Page 10 the need for long-term planning for EOGH. As a condition of receiving Health Care Stabilization Grants, EOGH was required, as early as 2009, to conduct a review of all services to identify areas for strategic partnerships. 4 A national health-care services delivery company, Prospect has shown its ability to respond to the rapidly changing reimbursement and care-delivery models in health care in other states. Prospect s objective in this transfer of ownership is to reshape the healthcare delivery system at EOGH and provide more efficient and effective services, without causing any disruption in the continuity of care for its patients. Multiple reports and studies have noted the market for inpatient care is shrinking in New Jersey and many parts of the country. In New Jersey, the number of inpatient admissions dropped 3.1% from million in 2012 to million in 2013, a loss of 33,300 impatient admissions. 5 Based on the applicant s response to completeness questions, staff is confident that the applicant will actively engage in long-term planning to repurpose/reposition/transform the facility. In addition, the applicant has stated its concurrence with most of the goals of the Navigant Report, with the exception of that report s recommendation regarding the closure of EOGH. The applicant has agreed to work with the Department and other area providers to ensure that service need and capacity in the area are properly aligned, and that quality and financially viable services are accessible to residents of East Orange and surrounding communities. EOGH provides an extensive array of behavioral health services. The Division of Mental Health and Addiction Services (DMHAS) within the Department of Human Services (DHS) submitted a letter in support of Prospect s application, noting the extensive and vital mental health services EOGH provides in Essex County, a densely populated county with many service needs. According to DMHAS, EOGH is one of only three screening service providers in Essex County that serve an average of approximately 3,500 individuals annually. If EOGH were to cease the provision of psychiatric screening services, that loss would create a strain on the other two screening service providers. According to DMHAS, EOGH currently provides supportive housing for 65 individuals so they can remain in their own apartments. The formal procurement process for a replacement provider typically takes several months, causing possible disruption of services for individuals currently benefiting from this program if EOGH were to cease its participation in the program. DMHAS also notes that EOGH is one of two providers of the Projects for Assistance in Transition from Homelessness (PATH) program in Essex County. PATH is an outreach program for homeless individuals, which engages them and then enrolls them in appropriate mental health, addiction and social services and helps them secure 4 EOGH received a total of $15,553,000 in Stabilization Grants from 2009 through A number of conditions were imposed. 5 Recent Changes in Primary Care Delivery and Health Provider Systems in New Jersey, June 2015, prepared by an Baumgarten, MA, JD. RWJF.

11 Page 11 permanent housing. EOGH s PATH program is one of the largest programs contracting with DMHAS to outreach 500 individuals annually and enrolling 200 of those individuals in services annually. Access to the program s designated psychiatrist and the availability of special emergency consumer funds are additional services provided by this PATH program. In its letter, DMHAS also notes that EOGH provides essential mental health services that are not under contract with DMHAS as follows: EOGH s Children and Adolescent Psychiatric Services (CAPS) program a children s crisis mobile outreach response service, funded by the Division of Family Development; in 2014, EOGH s CAPS service averaged 855 visits a month. DMHAS notes that if this service were no longer available at EOGH, it would mean that responses to requests for services would likely take longer for those children and adolescents that need to be brought back to a screening service. EOGH s adult outpatient program averaged 1,928 total visits in Every county is in dire need of outreach programs, and there are very lengthy waits for this service. If EOGH was not available to provide this service, even longer wait periods would result, causing more individuals to turn to the acute care service system to meet their needs until they can access outpatient services; the elimination of the outpatient services provided by EOGH would severely exacerbate this situation. EOGH s Partial Hospital Program had 2,004 total consumer visits a month in EOGH is one of the few partial hospital providers, and if this service is eliminated another program cannot be started to replace it. Individuals currently served may not be able to access the same level of care if EOGH s program were terminated. EOGH operates 19 voluntary/open and 18 involuntary/closed inpatient psychiatric beds. If EOGH were to close these beds it would result in consumer loss of access to inpatient psychiatric care and services. DMHAS concludes that [a]ny disruption in the mental health services provided would be a significant hardship for the population served. In addition, there currently is a lack of resources to serve the population needs since there are few, if any, accessible alternatives and if the services that are currently provided by EOGH were to be eliminated the process to reinvestment of these funds would be difficult with no guarantee that all the current services could be replaced or replaced at the same levels of service.

12 Page 12 In reviewing the availability of facilities or services which may serve as alternatives or substitutes, Department staff notes that there are five hospitals (University Hospital, Saint Michael s, Newark Beth Israel, HackensackUMC Mountainside, Clara Maass and Saint Barnabas ) within a ten mile radius of EOGH. Please refer to Table 1. Four of the five hospitals are discussed in the Navigant Report. That report also sets forth the average daily census (ADC) for each of the hospitals, and EOGH s ADC is set forth in Table 2. Staff are in agreement that there is an overall projected surplus of beds in this region, and notes that the applicant, in response to completeness questions, indicated it maintains very few of the bed categories and services identified in the Navigant Report as contributing to excess capacity or unnecessary duplication in the service area. Specifically, EOGH does not provide pediatrics, obstetrics or cardiac services. Staff reiterates that a critical issue in the planning area is excess capacity of inpatient beds. Table 1 Distance from Central Avenue East Orange NJ to Area Hospitals Provider/Location University Hospital Bergen St Newark, NJ Saint Michael's, Inc Central Avenue Newark, NJ Newark Beth Israel Lyons Ave. Newark, NJ HackensackUMC Mountainside Bay and Highland Ave Montclair, NJ Clara Maass One Clara Maas Drive Belleville, NJ Saint Barnabas Old Short Hills Rd. Livingston, NJ Distance from East Orange General Hospital (miles) Travel times from East Orange General Hospital 1.76 mi. 4 min mi. 9 min mi. 10 min mi. 11 min mi. 14 min mi. 14 min. Source: Map Quest

13 Page 13 Table 2 Average Daily Census Year Beds M/S ICU Psych ADC Lic.Beds ADC Lic.Beds ADC Lic.Beds ADC Lic.Beds Table Market Share by Zip Code Data From Navigant Report Zip NBIMC CMMC EOGH SMMC UH 5 Hosp. Total % 27% 1% 2% 3% 36% % 13% 28% 7% 9% 71% % 5% 33% 6% 13% 72% % 29% 0% 19% 11% 64% % 36% 0% 4% 1% 44% % 37% 2% 13% 5% 61% % 5% 19% 7% 12% 55% % 5% 6% 24% 20% 81% % 6% 7% 12% 34% 82% % 39% 2% 17% 15% 83% % 11% 4% 19% 21% 74% % 5% 9% 8% 19% 68% % 33% 4% 11% 24% 83% % 4% 3% 9% 21% 80% % 49% 1% 2% 4% 59% % 33% 0% 1% 1% 36% % 4% 5% 5% 12% 71% % 3% 2% 6% 10% 79% % 5% 3% 14% 21% 76% % 2% 0% 2% 4% 33% Total 20% 18% 8% 9% 14% 68%

14 Page 14 After reviewing the data pertaining to licensed and maintained beds (see Table 2 above, and appendices), as well as the Navigant Report s market share figures for each of the hospitals in the report (Table 3 above), Department staff believes that the decision to transfer the ownership of EOGH is in the best interest of the hospital s patient base in East Orange and the surrounding communities. This transfer, the only option presented to the Department, would be the least disruptive to the area s health care delivery system of all the possible options, at this time. Staff does not believe this transfer would significantly affect any of the existing providers or create access problems; however, staff believes the new ownership must evaluate the appropriate alignment of services to meet the needs of the community, improve the clinical quality, operational efficiency and financial performance of the services provided. On balance, this applicant has agreed to review the current and future healthcare needs of the community, has identified options to improve access to specialty care and outpatient services, and therefore, continuation as an acute care general hospital is supported over the alternative of an unplanned reduction of services or significant disruption resulting from closure. Department staff is satisfied that the health status of the patients in Essex County would not be compromised based on the completion of this transfer with CN conditions. The need for special equipment and services in the area will not be impacted as the applicant is to maintain the facility as an acute care general hospital at the licensed bed complement and service levels. Department staff accepts the applicant s commitment to maintain and evaluate inpatient and outpatient services and acknowledgement that the applicant s business plan does not establish any new inpatient services, although low utilization in terms of maintained bed occupancy is noted. Adequacy of financial resources and sources of present and future revenues According to projections provided by the applicant, improvements in operating performance implemented by the new owner, combined with funds provided by Prospect, Prospect East Orange will have sufficient resources to implement and sustain the project. The operating improvements include reduced length of stay, an increased case mix index and new procedures in the Patient Accounting/Billing Office to speed up collection of accounts receivable. A letter from City National Bank indicates that Prospect has the necessary funds to complete the transfer and provide the ongoing support identified in the projections. Staff Recommendations: Based on this documentation of compliance with regulatory and statutory criteria, Department staff recommends approving the transfer of ownership of EOGH to Prospect East Orange for the following reasons and with the conditions noted below.

15 Page 15 Reasons: 1. The Department agrees that EOGH needs a strategic partner to ensure that it serves the community efficiently by maintaining services provided to residents of East Orange and the surrounding communities without reliance on health care stabilization funding. The EVH Board exercised its fiduciary duty in researching, reviewing and discussing applicants, both for-profit and not-for-profit New Jersey and national providers, in order to select a partner organization that could enable EOGH to continue its mission and maintain and preserve essential services for the region. 2. The applicant s plan for IPAs to be clinically and administratively integrated with the hospital to support improved care management and administrative functions are consistent with goals of improving the health of populations and improving quality and satisfaction. 3. EOGH is a community hospital with no obstetric, pediatric or angioplasty services, which differentiates it from all other Essex County Hospitals. Therefore, Navigant s finding that there is a duplication of services in the area does not apply with equal force to EOGH. EOGH continues to serve the East Orange and surrounding communities with an inpatient service complement including critical care, oncology and psychiatry, and it is the only hospital in the area that has a forensic unit. EOGH is a current provider of outpatient and residential behavioral health services, and DMHAS has indicated that any disruption of these services would have a significant negative impact on all behavioral health services and clients in East Orange and surrounding communities. In a letter of support for the transfer of ownership of EOGH to Prospect, DMAHS has identified EOGH as a provider of essential behavioral health services. DMHAS notes that if EOGH were no longer the provider of the PATH services, it is unlikely that these services could be provided by a different provider at the same level. If EOGH was not available to provide outpatient behavioral health programs, even longer wait periods would result causing more individuals to turn to the acute care service system to meet their needs until they can access outpatient services. EOGH is one of the few partial hospital providers and if this service is eliminated, another program cannot easily be started to replace this program. If EOGH were to close its psychiatric beds it would result in consumer loss of access to inpatient psychiatric care and services without creating a planned call for additional inpatient psychiatric beds creating a potential gap in services. DMHAS believes, and the Department agrees, that a disruption (hospital closure or reduction of services) to the mental health services provided by EOGH would be a significant hardship for the population served. In addition, there currently is a lack of resources to serve the population needs since there are few, if any, accessible alternatives. 4. The applicant, in response to completeness questions regarding the Navigant Report, has indicated a willingness to work closely with the Department and other

16 Page 16 hospitals noted in the Report to accomplish the objectives noted in the Report, including the expansion of Behavioral Health and Outpatient Services, and right sizing Medical/Surgical beds. 5. Prospect has noted that it expects that EOGH will continue to serve primarily the residents of East Orange, Newark, and Irvington. 6. The applicant has complied with the Department s general transfer of ownership criteria: there is a willing buyer and seller; the buyer has presented a financially feasible project; and the buyer does not have any identifiable track record violations sufficiently serious to warrant denial of the application. 7. The application and its attachments shall be incorporated and accepted as commitments and conditions of licensure by Prospect and Prospect East Orange. 8. The applicant acknowledges and understands its obligations to provide care to the uninsured and underinsured. The expansion of Medicaid eligibility in New Jersey has added 420,000 more Medicaid enrollees since the beginning of 2014, or a total of 1.7 million recipients. Conditions: Based on this documentation of compliance with regulatory and statutory criteria, Department staff recommends approving this transfer of ownership, with the following conditions: 1. The applicant completes the Office of Attorney General Community Health care Assets Protection Act, N.J.S.A. 26:2H-7.10 et seq., review for the proposed transfer of ownership of assets of EOGH to Prospect East Orange. 2. The applicant shall file a licensing application with the Department s Division of Certificate of Need and Licensing (Division) to execute the transfer of the ownership of EOGH s license to Prospect East Orange. 3. The applicant shall notify the Division, in writing, of specifically who is responsible for the safekeeping and accessibility of all EOGH s patients medical records (both active and stored) in accordance with N.J.S.A. 8: et seq. and N.J.A.C. 8:43G Upon the request of the Department, Prospect East Orange shall participate in all meetings called to address inpatient and outpatient medical and behavioral health care trends, needs, service reallocations, consolidations, and regionalizations necessary to ensure a high quality, accessible system of care for East Orange and surrounding communities.

17 Page The applicant, Prospect East Orange, within six months of licensure shall provide the Department with a written report detailing: (a) its plan to reduce unnecessary and duplicative services and excess inpatient beds; (b) Its plan for addressing the need for expansion of or additional ambulatory care services; (c) capital improvement plans physical plant improvements, equipment upgrades and additions (including IT), and other capital projects. 6. Prospect East Orange shall operate EOGH as a general hospital, in compliance with all regulatory requirements, for at least five years, including the operation of behavioral health services as designated by DHS and other agencies currently involved with EOGH s provision of behavioral and mental health services. This condition shall be imposed as a contractual condition of any subsequent sale or transfer, subject to appropriate regulatory or legal review, by Prospect within the five-year period. 7. For at least five years, Prospect East Orange shall continue inpatient and clinical services and community health programs. Any changes involving either a reduction, relocation out of EOGH s current service area, or elimination of clinical services or community health programs offered by EOGH s former ownership shall require prior written approval from the Department and shall be subject to all applicable statutory and regulatory requirements. This condition shall be imposed as a contractual condition of any subsequent sale or transfer, subject to appropriate regulatory or legal review, within the five-year period. 8. EOGH s shall continue compliance with N.J.A.C. 8:43G-5.21(a), which requires that [a]ll hospitals... provide on a regular and continuing basis, out-patient and preventive services, including clinical services for medically indigent patients, for those services provided on an in-patient basis. Within 30 days of the issuance of the license and every six months thereafter for a period of five years, Prospect East Orange shall submit documentation of compliance with this condition to the Division. Such documentation of clinical services shall include, but not be limited to, a list of all physician specialties, the number of physicians within each specialty and the number of those physicians within each specialty that accept Medicaid reimbursement. 9. Prospect East Orange shall comply with federal EMTALA requirements, and provide care for all patients who present themselves at EOGH without regard to their ability to pay or payment source in accordance with N.J.S.A. 26:2H and N.J.A.C. 8:43G-5.2(c).

18 Page Prospect East Orange shall provide care in accordance with N.J.S.A. 26:2H and N.J.A.C. 8:43G-5.2(c), which shall be consistent with the needs of the uninsured and provide unimpaired access to all services offered by the hospital. 11. Within 60 days of licensing, Prospect East Orange shall establish an effective Local Governing Board for the hospital responsible for (a) representing the Acute Care Hospital in the community and taking into account the views of the community in its deliberations; (b) participating in Prospect East Orange s community outreach programs; (c) supervising the Hospital s charity care policies and practices; (d) monitoring financial indicators and benchmarks; (e) monitoring quality of care indicators and benchmarks; and (f) developing a Community Needs Assessment (CHNA) and approving its implementation plan, as discussed in Condition 14. Local Governing Board shall adopt bylaws and maintain minutes of monthly meetings. Prospect East Orange shall submit, on a quarterly basis, to the Department a current working description of the Local Governing Board s authorities, roles and responsibilities, governance authority, and shall clearly define those in comparison to its working relationship with the national Prospect Board. On an annual basis, Prospect East Orange shall provide the Department with the Local Governing Board s roster and advise the Department of any significant changes to the Local Governing Board s policies governing Board composition, governance authority and Board appointments made during each year that the hospital is in operation. The Local Governing Board shall maintain suitable representation of the residing population of EOGH s service area who are neither themselves employees of, nor related to employees or owners of, any parent, subsidiary corporation or corporate affiliate. 12. Within 30 days of licensing, Prospect East Orange shall provide the Department with an organizational chart of the hospital and each service that shows lines of authority, responsibility, and communication between Prospect and hospital management and the Local Governing Board. Prospect, as licensee operating Prospect East Orange, shall be responsible for compliance. 13. Every six months for the next five years, starting on the date a license is issued to Prospect East Orange, Prospect East Orange shall report the progress on the implementation and measured outcomes of the following initiatives noted in the application to improve the operational efficiency and quality of care at EOGH: a. Prospect s establishment and progress in management of the proposed network of IPA(s); its growth; how the IPA(s) are clinically and administratively integrated with the hospital; b. The documentation should demonstrate measures that the IPA(s) have taken to support the orderly development of efficient and effective health-

19 Page 19 care services, improve the quality of patient care management and administrative, thereby reducing unnecessary Emergency Department visits; c. The institution of a community outreach program to meet the primary care needs of the community reducing unnecessary Emergency Department visits; d. The institution of a Clinical Systems Improvement initiative capable of improving health outcomes and increasing productivity; and e. The institution of a community outreach program to meet the primary care needs of the community, which will also reduce unnecessary Emergency Department visits. 14. Within 90 days of licensure approval, Prospect East Orange shall develop and participate in a Community Advisory Group (CAG) to provide ongoing community input to the hospital s CEO and the hospital s Local Governing Board on ways that Prospect East Orange can meet the needs of the residents in its service area. This would include participating in the development and updating of the CHNA. a. Prospect East Orange shall determine the membership, structure, governance, rules, goals, timeframes, and the role of the CAG in accordance with the primary objectives set forth above, and within 60 days from the date of formation of the CAG, shall provide a written report setting forth same to the hospital s Local Governing Board, with a copy to the Department and subject to the Department s approval. b. Prospect East Orange may petition the Department to disband the CAG not earlier than three years from the date of licensure and on a showing that all of the above conditions have been satisfied for at least one year. 15. Prospect East Orange shall submit annual reports to the Department for the initial five years following the transfer of ownership, or upon request, detailing: a. The investments it has made during the previous year at the hospital. Such reports shall also include a detailed annual accounting of any long- or shortterm debt or other liabilities incurred on the hospital s behalf and reflected on the Prospect East Orange s balance sheet; b. The transfer of funds from the hospital to any parent, subsidiary corporation, or corporate affiliate. Such reports shall also detail the amount of funds transferred, in order to document that assets and profits reasonably necessary to accomplish the healthcare purposes remain with the hospital. Transfer of funds shall include, but not be limited to, assessment for corporate services, transfers of cash and investment balances to centrally