Why can’t the city just enforce the 1996 lease and require LHA to continue to operate Lakewood Hospital for the remaining term of the lease?
The city does have the option of enforcing its rights under the lease and requiring LHA to continue to operate the hospital in accordance with the requirements of the lease—but this may not be in the best interests of the city or its residents. If the city did elect to enforce LHA’s obligation to continue to operate the hospital for the remainder of the lease term, there are several possible outcomes that need to be weighed:
- LHA continues to perform its obligations under the lease, but cash and other asset reserves are depleted and the hospital condition continues to deteriorate. Analysis by Huron, an independent consultant hired by the city, concluded that LHA will “exhaust its investment portfolio before the end of the lease term” and concludes that “the ability of the hospital to continue operating as a going concern is highly speculative”. If LHA is able to fulfill its obligations for the remainder of the lease, at the end of the term, the hospital property (with capital needs in excess of $91.5 million) and other assets will return to the city without any guarantee of a partner to continue to operate the hospital.
- LHA defaults on its obligations to operate the hospital and the city has to enforce its remedies under the lease. The lease provides that the city has all rights and remedies available at law or in equity to enforce the lease, but a Court may be unwilling to require operation of a hospital by LHA and only those monetary damages awarded by a Court that LHA can afford to pay would be available. This would again mean the hospital property (with capital needs in excess of $91.5 million) and other assets will return to the city without any guarantee of a partner to continue to operate the hospital.
- LHA is unable to continue to operate the hospital and elects to file for bankruptcy. A bankruptcy court could release LHA from its obligations under the lease and the definitive agreement and the city would once again be left without a partner to operate the hospital and the hospital property (with capital needs in excess of $91.5 million).
Under each of these scenarios, the city is left with the hospital and its assets, but without a viable partner to operate the hospital (or any other healthcare facility) going forward. As the Huron report concludes, if LHA is forced to continue to operate under the existing lease and is unable to improve performance, address facility issues, retain physicians and find a new healthcare provider partner, “the cost to the community in terms of financial losses and lost services could be significant.” The likelihood of the city finding a new operating partner in time to preserve hospital assets appears to be small. As discussed in both the Subsidium and Huron reports, the hospital was marketed to most local healthcare systems and a select group of national organizations. While a few local systems initially expressed interest, no systems have presented the city or LHA with an offer to run Lakewood Hospital as it is currently operated. The city has only received an offer from the Cleveland Clinic to operate a family health center.