Regulators comment on FAHC ‘synthetic lease’

Print More

(Host) State health care regulators are concerned that officials at Vermont’s largest hospital have systematically tried to avoid state review. Regulators focused on a parking garage being built by Fletcher Allen Health Care in Burlington. The complex financing for the garage involves an offshore insurance company and a construction loan that was made to look like a lease.

VPR’s John Dillon reports.

(Dillon) Two years ago, top executives of Fletcher Allen Health Care in Burlington had a serious budget problem. They were putting together the financing for a huge expansion project, one that would eventually cost $225 million. They also wanted to build a four-level, underground parking garage. But according to their former financial officer, the hospital’s chief executive didn’t want the state to review the $55 million in garage construction costs.

The state review is designed to hold the line on health care expenditures. Hospitals have to prove they need projects that cost over $1.5 million.

David Cox, the former chief financial officer, says hospital President William Boettcher wanted the garage kept off the books, and away from state health care watchdogs. To do that, he turned to a financing mechanism called a “synthetic lease.” Betsy Costle, Vermont’s commissioner of the Banking, Insurance and Health Care Administration, says a synthetic lease is basically a construction loan that’s designed not to appear as debt on the balance sheets:

(Costle) “It was set up in the ’80s and early ’90s so that these dot-com companies that needed buildings wouldn’t have to show the liability for the buildings on their books.”

(Dillon) Cox testified under oath that the hospital set up a separate company to run the garage and arranged a loan guarantee through its Bermuda-based captive insurance company. He said he traveled to Bermuda to arrange the deal.

Cox said that if the hospital had used conventional bond financing for the project, it would have automatically triggered the state review. Cox alleges that hospital President William Boettcher ordered him to set up the synthetic lease. According to Cox, Boettcher told him, “We need to find a way to do this without going through the state certificate of need process.”

Commissioner Costle says the cost of the hospital expansion construction was skyrocketing, so hospital executives may have wanted to remove the garage expense from the overall project:

(Costle) “Our issue was, it was still a capital expenditure on the behalf of Fletcher Allen and it should have come through the process. What started as a $116 million project just grew and grew. And they may have wanted to take it out of the project because the price-tag was getting so hefty.”

(Dillon) Although the hospital treated the garage financing as a lease, the arrangement is counted as a loan for other purposes. Under Internal Revenue Service’s tax accounting rules, for example, the hospital owns the garage and the lease is considered debt.

Earlier this summer, Costle’s agency required the hospital to get a permit for the garage. But by then, the garage construction was well underway and officials conceded they could not order the hospital to stop. Fletcher Allen admitted no wrongdoing but paid $320,000 as part of the garage settlement.

Then last week, the state required the hospital to get a permit for a $9 million computer software upgrade. The hospital had allegedly tried to avoid review by breaking the software project down into smaller pieces. Costle stopped work on the project.

(Costle) “It appears to be a disturbing pattern. I mean maybe we’ll find there’s something we don’t know. Obviously we have not investigated that to the same degree that we’ve investigated the parking garage to date.”

(Dillon) The Fletcher Allen trustees have put CEO Boettcher on paid leave while it investigates the allegations. At a news conference Wednesday, Trustee Chairman Philip Drumheller promised to restore the public’s trust in the institution:

(Drumheller) “I devote many hours to service as a trustee and now as board chairman of this institution. And I do so with only one purpose in mind and that’s to make Fletcher Allen absolutely the best institution it can be in the community and to deliver the best care and health services to the community as well. That’s my only motive, that’s my only goal and that motive and goal is shared by every other trustee. We will do the right thing.”

(Dillon) The trustees have named three people from outside their board to look into the issues. The special committee is expected to make a public report this fall.

For Vermont Public Radio, I’m John Dillon in Montpelier.

Comments are closed.