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Empire Health Foundation v. CHS/Community Health Systems, Inc.

United States District Court, E.D. Washington

October 11, 2017

EMPIRE HEALTH FOUNDATION, a Washington nonprofit corporation, Plaintiff,
v.
CHS/COMMUNITY HEALTH SYSTEMS, INC, a Delaware corporation; CHS WASHINGTON HOLDINGS, LLC, a Delaware limited liability company; SPOKANE WASHINGTON HOSPITAL COMPANY, LLC, a Delaware limited liability company; and SPOKANE VALLEY WASHINGTON HOSPITAL COMPANY, LLC, a Delaware limited liability company, Defendants.

          ORDER DENYING IN PART AND GRANTING IN PART DEFENDANTS' MOTION TO DISMISS

          SALVADOR MENDOZA, JR. United States District Judge

         I. INTRODUCTION

         This case arises from the sale of two hospitals in Spokane in 2008. Empire Health Foundation (the Foundation) alleges that the defendants (collectively CHS) have breached the hospital Asset Purchase Agreement (the contract) by failing to provide sufficient charity care and by failing to meet several other community-health and capital-expenditure obligations. CHS moves to dismiss, arguing that (1) the charity-care requirement the Foundation seeks to enforce is not a part of the contract and not enforceable under the contract; (2) the Foundation fails to allege facts supporting any other breach of contract claim; (3) the Foundation fails to allege cognizable injury; and (4) the Foundation's claims are barred by the statute of limitations.[1] The charity-care requirement at issue here is not directly included in the contract, and, in fact, it is inconsistent with the contract's charity-care provision. However, because the contract's charity-care provision is “subject in all respects to changes in legal requirements or governmental guidelines or policies, ” the requirement the Foundation seeks to enforce, which is included in a Certificate of Need (CON) issued by the Washington Department of Health (DOH), is enforceable under the contract. With respect to CHS's remaining arguments, the Foundation has alleged a cognizable injury; the Foundation fails to state a claim for breach of any other contractual provision; and the Foundation's claims are not time barred.

         II. BACKGROUND

         In 2008 Empire Health Systems (Empire) sold Deaconess Medical Center and Valley Hospital and Medical Center (the Hospitals) to Defendant Spokane Washington Hospital Company, LLC (SWHC) pursuant to an Asset Purchase Agreement (the contract). ECF No. 1 at 1-2, 8; ECF No. 14-1. SWHC is owned and controlled by CHS/Community Health Systems, Inc. (CHS)[2] which guaranteed all of SWHC's obligations under the Contract. ECF No. 1 at 2, 8. The Foundation is a non-profit community health foundation formed from the proceeds of the hospital sale. ECF No. 1 at 1. The Foundation was assigned all of Empire's rights and obligations when dissolved following the sale. ECF No. 1 at 1.

         The Foundation alleges that when CHS purchased the Hospitals it agreed to provide charity care and essential health services as required under Washington's Charity Care Act and Certificate of Need laws. ECF No. 1 at 3. The Foundation alleges the CHS was obligated to provide charity-care to indigent patients at a level that meets or exceeds the regional average, screen patients for indigency before demanding payment, provide care through community-based health programs designed to serve elderly, poor, and at-risk populations, and to fund at least $100, 000, 000 in capital expenditures at the Hospitals. ECF No. 1 at 3, 8-9.

         The Contract addresses “Indigent Care Policies” as follows:[3]

As of the Closing Date Buyers shall adopt the indigent care policies of CHS attached as Exhibit D hereto, including the relevant provisions of the billing and collections policy with respect to the indigent which are at least as favorable to the indigent and uninsured as Seller's indigent care policy, including the relevant provisions of the billing and collections policy with respect to the indigent, for the Hospitals as Buyers' indigent care policy. No patient will be turned away because of age race gender or inability to pay. Buyers shall use best efforts to cause the Hospitals to continue to provide services to patients covered by the Medicare and Medicaid programs and those unable to pay for emergent or medically necessary care at levels similar to the historic levels of indigent care previously provided by the Hospitals. For a period of at least ten (10) years following the Closing Date Buyers will provide the Board of Trustees with an annual report of their compliance with this Section 10.14. Buyers will also continue to provide care through community-based health programs, including cooperation with local organizations that sponsor healthcare initiatives to address identified community needs and improve the health status of the elderly, poor, and at-risk populations in the community. This covenant shall be subject in all respects to changes in legal requirements or governmental guidelines or policies (such as implementation of universal healthcare coverage).

Contract § 10.15, ECF 14-1 at 53-54. The indigent care policy provides that “[i]n order to serve the health care needs of our community, and in accordance with RCW 70.170 and WAC 246-453, Deaconess Medical Center (‘Hospital') will provide “Charity Care” to patients or the “Responsible Party” without financial means to pay for ‘Appropriate hospital-based medical services.'” ECF No. 14-2 at 14. The policy defines eligibility and processes for identification of charity cases, provision of charity care, and denial of charity care. ECF No 14-2 at 14-19.

         Pursuant to the Contract, CHS applied for and obtained a “Certificate of Need” from the Department of Health. ECF No. 18-1 at 2. The Certificate provided that:

Deaconess Medical Center will provide charity care in compliance with the charity care policies provided in this Certificate of Need application, or any subsequent policies reviewed and approved by the Department of Health. Deaconess Medical Center will use reasonable efforts to provide charity care in an amount comparable to or exceeding the average amount of charity care provided by hospitals in the Eastern Washington Region. Currently, this amount is 3.35% of the adjusted revenue. Deaconess Medical Center will maintain records documenting the amount of charity care it provides and demonstrating its compliance with its charity care policies.

ECF No. 18-1 at 2-3.

         The Foundation alleges that CHS has failed to meet its charity requirements. ECF No. 1 at 3. Specifically, the Foundation alleges that the CHS fell more than $55 million below the regional charity-care average between 2008 and 2015. ECF No. 1 at 4. The Foundation further alleges that the Hospitals have inflated their charity-care numbers by charging inflated rates to self-pay patients. ECF No. 1 at 4-5. The Foundation points out that the Hospitals' total charges per patient day for self-pay patients (known as the “chargemaster”) has increased at rates significantly higher than the average for Eastern Washington Region hospitals. ECF No. 1 at 5. Considering this alleged chargemaster inflation, the Foundation alleges that CHS fell more than $110 million below the regional charity-care average between 2008 and 2016. ECF No. 1 at 5-6, 9.

         The Foundation also alleges that CHS has implemented policies and practices designed to drive indigent patients away from the Hospitals and to overcharge them when they do seek care, failed to provide sufficient care through community-based health programs, and failed to meet its obligation to fund capital expenditures. ECF No. 1 at 7, 9.

         The Foundation alleges that CHS's actions have (1) breached the agreements associated with the hospital purchase and (2) constitute a breach of the implied duty of good faith and fair dealing. ECF No. 1 at 7, 9-10. The Foundation seeks injunctive relief requiring the Defendants to comply with the its charity-care obligations under the contract and Washington law and disgorgement of ...


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