Gov. David Ige has signed an agreement transferring operation of three financially struggling Maui County hospitals to Kaiser Permanente in the first privatization of Hawaii public hospitals ever.
The deal will save the state — which heavily subsidizes Maui Memorial Medical Center, Kula Hospital and Lanai Community Hospital — an estimated $260 million over 10 years, Ige said at a news conference Thursday. It also sets a precedent for future privatization of state-owned hospitals.
“They’re promising to reduce state operating subsidies by a quarter-billion dollars over the next few years. That’s what the state’s looking for, something to stop the red ink,” said Eric Mais, professor of finance at the University of Hawaii Shidler College of Business. “Privatizing state-owned enterprises has been going on for a long time, and it’s probably not a bad thing here. The state is trying to save money here, and Kaiser has an opportunity to do it because they’re big and they can make operations more efficient. We’ve seen it happening all around the world. I wouldn’t say it’s something to be fearful of. This might be a precedent for that if it works out well.”
Kaiser, the state’s largest health maintenance organization, has committed to spending $100 million to upgrade and operate the hospitals through 2025, including at least $20 million to improve the hospitals’ information technology systems.
The state will continue to own the hospitals, but Kaiser will be given a 30-year lease.
State officials said they couldn’t put a price on the deal because the lease and collective bargaining agreements have yet to be negotiated. But Ige called the chance to improve health care on Maui “priceless.”
“I do believe that this transaction is a fundamental change in how we are committed to providing quality health care for the people of Maui,” the governor said.
The state will now begin lease negotiations with Kaiser, which also must come to a collective bargaining agreement with the public workers union representing roughly 1,150 workers. The deal is expected to close June 30. Kaiser will begin operations as Maui Health Systems on July 1.
Kaiser, both a health insurer and medical provider, said the facilities will remain community hospitals open to patients with all types of insurance plans, including rival Hawaii Medical Service Association.
“Our commitment is that Maui regional hospitals will remain community hospitals open to all payer types with comparable rates and open to all medical staff that want to practice at that hospital. We have a commitment to that for the life of the agreement,” said Mary Ann Barnes, president of Kaiser’s Hawaii region.
Barnes said the company plans to reduce the number of patient transfers to Oahu hospitals. “We want to keep care on Maui. We’re committed to making investments in the hospitals and facilities, giving back any profits to the Maui hospitals.”
Kaiser, an integrated system that includes a health insurance company, hospitals and physicians under one umbrella, has more than 243,000 members in Hawaii, including more than 55,000 on Maui, where it operates several clinics.
“The money stays in the Maui Health Systems … and decisions stay in that board,” said Avery Chumbley, chairman of the Maui Region board of directors, which selected Kaiser to operate the facilities. “One of the things that was really important to us was the reduction and lessening of the dependency on the state subsidies over time. This proposal contained a financial plan that accomplished that.”
Kaiser, which began courting the Maui hospitals late in the game after years of heated privatization discussions at the Legislature, beat out Hawaii Pacific Health, parent company of Kapiolani Medical Center for Women &Children, Pali Momi Medical Center, Straub Clinic &Hospital and Wilcox Health on Kauai, which shocked many in the health care industry.
Lt. Gov. Shan Tsutsui, who is from Maui and worked for years on a privatization bill in the Legislature, was initially displeased with the selection of Kaiser, but said he feels more comfortable with the decision after learning more about the company’s proposal.
“Much work is still to come, as the state and Kaiser continue to negotiate a lease agreement and take the necessary steps to complete the transfer before July 1,” Tsutsui said in a statement. “While this won’t be an easy task, we should continue to be optimistic, yet remain vigilant to ensure that Kaiser will honor the commitments it pledged in its initial proposal.”
Ige signed a law last year authorizing Hawaii Health Systems Corp., parent company of the Maui hospitals, to transfer the facilities to a new entity to mitigate budget deficits that were threatening services and jobs. The Maui region was initially facing a $28 million deficit for the current fiscal year.
Kaiser pledged to reduce the state subsidy request over the next decade from $33.4 million in 2016 to $11.6 million in 2020 and zero in 2025. The agreement calls for a 50-50 split between the state and Kaiser on investments in capital improvements over the first 10 years.
“Kaiser doesn’t own the facilities; they lease the facilities,” Chumbley said. “We, jointly with the state and Kaiser, will reinvest in the facilities and expand the services so you’re getting access to more health care and better coverage in a situation that’s sustainable over a 30-year agreement. All the money, in excess of 2 percent operating margin, goes back to the hospitals. Together (the deal is) worth hundreds of millions of dollars.”
The United Public Workers union, which represents employees at the hospitals, is suing the governor in federal court to block the privatization deal to preserve workers’ contracts. A U.S. District Court judge Wednesday took the union’s complaint into consideration but didn’t say when a decision would be made.