Health District of Northern Larimer County gives initial okay to amended operating lease with Poudre Valley Health System

The board of directors of the Health District of Northern Larimer County voted Jan. 30 to provisionally approve amendments to the operating lease under which Poudre Valley Health System (PVHS) operates the Health District-owned Poudre Valley Hospital.

The board’s action was in response to a request by PVHS for changes required to enable a joint operating agreement under which PVHS and University of Colorado Hospital (UCH) would join to create a new regional health system to be operated by a new joint operating company.

The Health District leases Poudre Valley Hospital and certain other assets to PVHS, which has operated them under terms of a 50-year operating lease signed by the two organizations in 1994.

The amendments to the current operating lease are set forth in a proposed Operating Lease Amendment and Consent Agreement (the lease amendment and consent), which will be considered for final approval by the Health District board following a period for public comment and a public hearing.

The terms of the lease amendment and consent would provide for:
• an extension of the term of the operating lease by 18 years, from 2044 to 2062;
• commitments by the new health system and PVHS to continue providing adequate levels of high-quality healthcare services to the local community (including to those unable to afford the full cost of care) through local hospitals and other facilities;
• flexibility for the new health system to seek financing on more favorable terms, including to provide for future capital needs of PVHS; and
• an adjustment of the present lease payment that was originally established in 1994.

The Health District board has determined that these changes are in the best interests of the local community and that the proposal by PVHS to join with UCH in a larger, regional health system will better position the PVHS system for future success amid looming changes that will have major effects on the healthcare industry. These include an aging population, prospective changes in reimbursement for healthcare services, the movement toward increasingly integrated care, and demands and requirements for sophisticated information technology systems and other technological advances, as well as other
challenges.

“We support the joint operating agreement between PVHS and UCH and believe that the creation of a
larger, but still nonprofit, health system will enable PVHS to meet the challenges of the future and
continue providing comprehensive, high-quality and cost-effective care for our community. PVHS and University Hospital are both strong, top-quality health systems with excellent records, and the combination will give our community new opportunities, including more immediate access to the latest
medical research,” said Celeste Kling, president of the Health District board of directors.

In evaluating the request for changes to the operating lease, the Health District board’s top priority was to ensure that the historic purposes of the PVHS healthcare system would be maintained and that PVHS and the new health system were committed to continuing a broad range of high-quality healthcare
services to meet the current and future needs of the residents of the communities presently served by
PVHS.

The proposed lease amendment and consent provides that critical local facilities such as Poudre Valley
Hospital, Medical Center of the Rockies and Harmony Campus will not be closed without consent of the
Health District board unless appropriate substitutes are provided. At the end of the term of the operating lease in 2062, the hospitals and other healthcare facilities serving the local communities, as well as other assets, would be returned to the Health District or another operator designated by the Health District, unless the operating lease is renegotiated and extended.

The Health District board also considered the significant increases in capital requirements for funding
construction and improvements of the hospitals and other healthcare facilities since the original operating lease was signed in 1994, as well as the future need for access to capital on favorable credit terms. The joint operating agreement with UCH would enhance PVHS access to such funding through combined financings under the umbrella of the new, larger health system. To enable such combined financing by the new health system, the Health District board agreed to certain changes in the present operating lease. Requirements that the Health District give prior approval for the issuance of bonded debt that involves pledges of PVHS revenue would be reduced so long as the new health system meets certain guidelines, including credit quality standards.

The board also revisited the annual lease payment from PVHS to the Health District. At the time of the
original agreement, the annual lease payment was $300,000, with no provision for adjustment over time.
PVHS also agreed to pay additional amounts sufficient to retire the Health District’s existing bonded
indebtedness, which had funded past hospital expansions. The debt was repaid in full in 2004.

After evaluating the legal, financial and practical implications of the proposed lease modification, the board determined that the annual lease payment should be $916,000 beginning in 2012, with an annual
increase of three percent thereafter. The board’s decision took into account numerous factors. It balanced a reasonable return for the community for the 18-year lease extension, the pledge of PVHS revenues as security for UCH debt, and the transition of control from a local to a regional system, with such factors as past and expected future expansions and improvements to healthcare facilities, and
commitments by the new healthcare system to maintain robust, high-quality healthcare services for local
communities, including for those unable to afford the full cost of care.

“The board believes that the adjustment to the lease rate is in the best interests of the community and
will assure that a reasonable rate will be paid under the 50-year operating lease as amended,” said
board president Celeste Kling.

After its creation, the new combined health system would have its own board of directors, which would exercise authority over the entire system. PVHS also would retain a local board of directors, which
would have some authority and would continue to include a liaison member from the Health District board.

Before taking final action with respect to the proposed Operating Lease Amendment and Consent Agreement, the Health District board of directors will hold a public hearing Feb. 16 at 7 p.m. at Hilton Fort Collins, 425 W. Prospect Ave. The board also welcomes written public comment; the deadline
for submitting written comment is Wednesday, Feb. 22. People can address comments to [email protected] or by mail at Board of Directors, Health District of Northern Larimer County, 120 Bristlecone Drive, Fort Collins, CO 80524.

The Health District board will give final consideration to the lease revisions at its next regular meeting Feb. 28, 5:30 p.m., at the Health District, 120 Bristlecone Drive, Fort Collins.

The Health District is a public agency that provides dental, mental health, prescription assistance and
health promotion services to the residents of northern Larimer County, in addition to its duties with
respect to PVHS.