Lexington Medical Center’s transition provides financial relief for continued growth
West Columbia, SC (Paul Kirby) – When Lexington County Council recently voted to allow the Lexington Medical Center to convert from a health service district to a non-profit entity, they actually helped position the hospital to be more competitive among other healthcare providers in the Midlands. Contrary to what some want you to believe, they did not sell the hospital, give it away, or in any way endanger it so that it wouldn’t be there to serve the citizens of Lexington County for many years to come.
The first thing most will want to know is what changed. Looking in from the outside, most people will never notice anything different. The hospital will still have the same name, look the same, provide the same services, and be located in the same spot on Sunset Boulevard where it has been since 1971. It will still be managed by the same board of trustees and have the same president. Really, the only thing that has changed is that LMC will no longer be a quasi or partial government entity. After changing from a partially government agency to a non-profit, there will be a new board that acts as an intermediary between the Lexington County Council and the non-profit organization in the future. If you didn't know that the Lexington Medical Center operated as a quasi-government entity that's okay. Few people really understood that anyway. It was in fact a special purpose district.
In South Carolina, there are many special purpose districts that provide a number of services. In Lexington County alone there are the Lexington County Recreation and Aging Commission, the Gilbert-Summit Rural Water District, the Irmo Fire District, and the Lexington County Joint Municipal Water and Sewer Commission just to name a few. These districts were set up years ago to provide specific services to Lexington County’s citizens when a specific need was identified. Back when there were no adequate countywide services to speak of, you and your neighbors could obtain a needed service if you were willing to pay for it with a little higher tax.
If you needed a fire department near you to protect your property, you approached your neighbors and then your legislator. Together, you identified the boundaries of a district, agreed to pay a small tax above what people outside the boundaries did, and started a fire department. Its expenses would be paid by the tax. This was done to provide fresh water, fire protection, recreation, and whatever else you could get your neighbors and the legislature to agree on.
Before the Lexington County Hospital, now known as the Lexington Medical Center, was built and opened in 1971, the only hospitals available to Lexington County citizens were the Newberry County Hospital, which opened in 1925, or the old Columbia, Baptist, and Providence hospitals in the city of Columbia. In fact, Richland Memorial was not completed and open until 1972. Because there was a substantial gap in health care for the citizens of Lexington County, the South Carolina Legislature created the Lexington County Health Service District. Its boundaries included all of Lexington County. The legislators who created it organized it so that it was governed by a board of directors appointed by the Lexington County Council. That’s what’s about to change. In the future, the new intermediary board will be appointed by Lexington County’s Council to act as a liaison between county government and the medical center. That board will have one member appointed to it that represents each county council district. That intermediary board will be the extent of its ties to county government.
Starting in the early ‘70s, citizens in Lexington County paid a small tax to cover any bond debt that was incurred when the original hospital was built. At some point around that late 80s or early 90s, LMC became self-sustaining and was able to pay its own debt using money made when the public used the hospital or its services. At that point, there was no need for Lexington County’s citizens to contribute to the hospital through a tax millage anymore, so that stopped.
The original hospital was built on 18 acres owned by Lexington County. That property was donated by a county resident. In fact, the original building which is now a part of what is known as the South Tower is still owned by Lexington County today. Of course, overtime it changed dramatically! It grew into the huge campus that operates on Sunset Boulevard and has practices across the Midlands. Who would even envision what LMC would be like today way back in 1971?
Even though the tax support stopped, the health service district was still a quasi-or partial government entity. Employees of Lexington Medical Center worked for the quasi-government and were enrolled in South Carolina State Employees’ Health Care Plan as other government employees are. They also contributed to the South Carolina State Retirement System. Being a member of that state retirement system is the primary reason that the Lexington Medical Center is now changing its business designation to a nonprofit organization.
Over the past four or five years the shortcomings of the SC State Retirement System have been covered in the news and yet, many people still do not understand that the South Carolina's State Retirement System is in big trouble! In the past, it was mismanaged and had some very poor investment decisions made. In fact, it is grossly underfunded and is struggling to pay retirement benefits to all the baby boomers now retiring. Many of these people are living much longer and enjoying their retirement checks longer in the process. That longevity issue is also causing a strain on the retirement system.
When Curtis Loftis was elected the treasurer of SC, he quickly pointed out the shortcomings of the retirement plan to the state legislature. Even though the state legislators did not want to face that reality, they eventually had to come up with a plan that would fully fund the SCRS in the future. Part of that plan was to increase the contribution rate that both employees and employers pay into that retirement system.
Lexington Medical Center is one of the largest contributors to the South Carolina State Retirement System. In fact, they are consistently one of the top 10 contributors to the system when compared to other government entities in South Carolina. As the retirement contribution rate increases, the amount LMC pays each year also increases. This past year, Lexington Medical Center contributed just over $100 million dollars to the SCRS. LMC’s portion of the unfunded liability in the SCRS is approximately $750 million dollars. By changing their business designation from quasi-government to non-profit status, they expect that their portion of the unfunded liability should be reduced to approximately $350 million within ten years.
Other than reducing this liability, why is this change so important? Each of the contributing agencies in the SCRS must show the shortfall they owe on their books. In other words, LMC would have to show they owe $750 million dollars to the SCRS on their financial balance sheet. This hurts their credit rating when they are borrowing money. It makes what lenders call their debt to income ratio seem all out of whack! That makes LMC’s interest rates much higher when they borrow.
In just the past decade, the Prisma Health system began acquiring hospitals and practices in the Midlands and across the state. This is one of the ways that medical systems grow. Lexington Medical Center has also acquired doctor’s practices in various specialties. Through these acquisitions, LMC has been able to meet all the medical needs of the people it serves. The problem is, acquiring these medical practices is not cheap. That brings us back to what county council has recently done.
LMC requested that the Lexington County Council allow them to convert from the health service district it originally was to a nonprofit organization. After months of research and discussion, the council decided that they would do what was best for LMC’s long term financial stability and viability. Council wanted LMC to be financially ready to serve the county’s citizens for many years to come so they approved the change. In the future LMC will no longer be a quasi-government entity. Since they will no longer have a government affiliation, they will not have to pay those increasing contributions to the South Carolina State Retirement System.
Is LMC running away from its responsibility to the SCSR system or doing something sneaky or dishonest? In short, absolutely not! In fact, other health care systems that began as a quasi-government or partial government entity made this switch some time ago. The list of these include the hospital systems in both Greenville and Spartanburg counties. The only government health care system that has not moved on is SC’s teaching hospital system the Medical University of South Carolina based in Charleston. Some government watchers are keeping an eye on MUSC to see what they will do in the future.
Back at LMC, employees that have already retired will keep receiving their retirement benefits from SCRS. Current employees who are part of the SCRS can remain in the system. Any new employees hired after the change will be in a different retirement system. Certainly, everyone believes that the new retirement system will be one that is better managed.
This move will free up a great deal of money that will allow the Lexington Medical Center system to grow and stay competitive. As the leaders of LMC see a need in their continuum of care, they will begin looking to acquire practices that will fill that need.
There are some caveats that County Council insisted upon. First and foremost, the original 18 acres and the original hospital building is still owned by Lexington County. Those will be leased to Lexington Medical Center.
Next, the new nonprofit will never be able to sell the Lexington Medical Center system or change its name without the approval of county council. This means that it cannot be gobbled up by a conglomerate like Prisma. That is a good thing. If Prisma can continue acquiring hospitals and practices, it may take the healthy competition in the Midlands health care market away. The Lexington County Council wants to promote competition to keep prices fair and service levels high.
Lexington County Council also made sure that they would always have a strong voice in what is going on at the Lexington Medical Center. They did this by mandating that the Lexington Medical Center's Board of Directors would always have at least one member from every county council district serving on the board. There are nine county council districts which means that there will be a minimum of one representative from each county council districts on LMC's board.
To protect Lexington County financially, the council also mandated that it would not be responsible or liable for any of LMC’s current or future debt. All of this was included in the negotiations and will be included in the written agreement that allows LMC’s conversion to nonprofit status.
As stated at the beginning of this article most people will never know anything has changed at Lexington Medical Center. It will be a not for profit entity and any profits it does make will be held by LMC and used for expenses and future growth.
Once you understand what the county council did, they hope you can see that it was a smart move on their part. It made Lexington Medical Center more competitive with giants like Prisma Health. Lexington Medical Center will be competitively positioned to grow and be a strong competitor in the health care marketplace for decades to come.