How SCL Health Removed $251 Million From St. Francis Health Center in Topeka

By Michael Hooper

SCL Health strategically depleted $251 million in reserves from Saint Francis Health Center in Topeka before selling the operation in 2017 to University of Kansas Health System and Ardent Health for a $1.00.

A Form 990 tax return filed for Saint Francis Health Center in 2016 shows the removal of $251 million in assets that had been listed as inter-company receivables the year before.

The explanation for -$251 million is listed in schedule O of the Form 990 at the very bottom, it says, "Transfer of SFT accountable health network net expenses -$114,710 Equity transfer - Refunding of Kansas 2012 bond issue -$32,467,007 Equity transfer - Refunding of Kansas 2010 bond issue -$163,662,319 Equity transfer - Marian Clinic -$649,000 Equity transfer - Unrecognized service cost in pension plan -$14,670,430 Equity transfer - Interest expense in excess of interest income -$21,023,283 Equity transfer - Fund unrecoverable costs of fixed assets -$20,558,442 -Transfer of Medcare assets from SCLHS -$1,334,702."

My math says that adds up to -$254.4 million in "equity transfers." That pretty much wipes out the $251 million in intercompany receivables on the tax return the previous year. How convenient these numbers are nearly the same.

I'm trying to uncover the mystery behind the the two bond issues that add up to a $196 million.

The St. Francis balance sheet on the 2015 tax return lists no bond indebtedness, indeed only $19 million in liabilities. And total assets that year were $368 million, including $251 million inter-company receivables, and virtually no debt. Then in the 2016, the tax return says St. Francis has to pay all these debts? 

I asked Neil Dobler, a St. Francis board member, about the $196 million bond issues. He said he does not remember that much money going to St Francis from those bond issues. He recalls some improvements including a renovation of the Saint Francis Emergency Room, he recalls capital spending around $20 million, but SCL Health capital spending wasn't there in final three years of ownership of St. Francis.

Around the time of those 2010 and 2012 bond issues, SCL Health was acquiring control of three hospitals in Colorado. SCL Health System agreed to pay $275 million to Community First Foundation for full control of three Exempla hospitals, The Denver Post Reported.

SCL Health is the professional management corporation that took over management of the Sisters of Charity of Leavenworth assets.  Around this time SCL Health was also looking to exit Kansas. Around 2011 some changes were made in the system and management company moved the headquarters from Lenexa to Broomfield, Colorado.

SCL Health had actually considered closing the Topeka hospital, but local advocates worked to save the organization. A year ago, hundreds of people rallied in favor of saving the hospital.

Saint Francis Health Center was for over a hundred years a successful hospital that generated a modest profit because of frugal management and high professionalism. The sisters were very particular about their Devotion to the mission of taking care of the sick. The nun CEO was a very important role in the management of the hospitals over the years, but such nuns became scarce. Who wants to take a vow of poverty and do the work of a CEO who normally gets paid hundreds of thousands of dollars? Sister Loretto Marie Colwell was one of the last great nun CEOs. When she left St. Francis in the early 2000s the hospital had over $200 million in reserves, some of that generated by donations in Kansas.

I asked Nikki Sloup, spokeswoman for SCL Health, why did St. Francis issue $163 million in bonds in 2010 and $32 million in 2012? Where did you spend the money? Was the money spent in Topeka?

"I believe you previously discussed this in detail with contacts from SCL Health and our organization had in-depth conversations with the Attorney General, who declared satisfaction with the disposition of these funds. I don't have any additional insights I can offer beyond what's already been shared."

I did look at this issue a year ago. Here is one article about the loss of St. Francis reserves. The difference today is that we have the 2016 tax return proving SCL Health took $251 million from St. Francis in "equity transfers."

I asked the Kansas Attorney General about the depletion of $251 million.

Jennifer Montgomery, spokeswoman for the AG, said "I received your messages. Additional information about the questions you raise can be found in documents posted on our website at the following link:  http://ag.ks.gov/docs/default-source/documents/stfrancis-ag-schmidt-letter.pdf?sfvrsn=58eed41a_4 and here:

http://ag.ks.gov/docs/default-source/documents/exhibit-b---hinkle-law-firm-assessment.pdf?sfvrsn=3edd41a_4.

In the Attorney General Derek Schmidt letter, he writes, 

"We are aware of a separate but related question that has arisen in community discussion, including comments filed with our office. Some have noted that as recently as 2015, St. Francis' financial statements showed roughly $250 million in an account receivable from SCL, a fact that has led some to question "What happened to those funds?" We need not, and do not, definitively answer that question here. However, because of the community interest in this question, we provide the following information that appears to offer an explanation. First, based upon information available to us at this time, it appears that because of the legal structure of the relationship between SCL and SFH - a structure established by numerous 7 decisions made years ago - SCL (the parent entity) had authority to use those funds for the broader purposes of the SCL system, not solely for the purposes of SFH."

"Three of those past decisions are particularly notable. In 1993, the Articles of Incorporation for SFH were amended to eliminate a requirement that SFH exist solely for the operation of a hospital in Topeka. In 1997, SFH and SCL entered into a Restricted Affiliate Agreement that gave extensive control over SFH finances to the parent entity. And in 2004, SFH again amended its Articles of Incorporation to make express that SFH operates to carry out the broader charitable purposes of SCL."

"Those decisions, which gave SCL almost complete authority over SFH and its finances, were made many years before the proposed transaction and, in any event, are long beyond any statute of limitations. A copy of a timeline explaining the reorganization of SFH is attached hereto at Exhibit E. Second, despite the legal relationship described above that gave SCL broad latitude to use funds generated by SFH, it nevertheless appears the vast majority of those accounts receivable were in fact used for purposes benefiting SFH. Our inquiry revealed the following: As a result of routine transfers of funds over time from St. Francis Health Center, Inc. ("SFH") to the Sisters of Charity of Leavenworth Health System, Inc. ("SCL), as expressly permitted by the Master Trust Indenture and related Restricted Affiliate Agreement, SFH had accumulated an intercompany receivable from SCL in the amount of approximately $249 million as of December 31, 2015. Following the decision by SCL's Board of Directors on May 26, 2016, to either sell or close SFH due to the hospital's continuing losses, SCL opted to use the accumulated assets associated with SFH to effectively "clean up" SFH' s books by defeasing bonds issued for the benefit of SFH and paying off other SFH intercompany obligations. The bond defeasances included a $163. 7 million defeasance in connection with a 2010 Kansas bond, and a $32.5 million defeasance in connection with three Colorado bonds that had been used in identifiable part for SFH asset purchases (since Colorado is a multi-state issuer). In addition, SCL used $20.6 million to fund previously unrecognized pension costs associated with SFH employees, $14.7 million to fund unrecovered costs for information technology assets, $21 million to fund system-wide interest expenses in excess of interest income, and another $700,000 to fund other non-profit entities in the SCL network, for a total of $252.5 million, an amount that accounts for all of the $249 million in 2015 accounts receivable. "

Accounting Tricks

SCL used accounting tricks to swindle $251 million from St. Francis. Those reserves were generated here and belong here. Maybe legally, SCL Heath got ahold of the funds, but morally those funds belong in Kansas.

Sisters of Charity of Leavenworth Started in Kansas, made a huge impact on the world from Kansas, but now their assets are no longer here. Kansas got taken.

I believe the Kansas Attorney General still could make a case for $196 million that belongs in Kansas in a charitable foundation. That money could be used for indigent care, mental health services, drug and alcohol treatment and other health care initiatives needed in Kansas, where there is simply not enough money for health care.

The future

Neil Dobler said the new owners are doing a good job with the hospital.

Despite all the struggles over the past year, the hospital didn't lose too many staff. New people have been hired.

Dobler said the hospital staff are very dedicated and continue to provide excellent care to patients. "It's definitely headed in the right direction," he said.