Hospital Loans May Be Illegal, Court Rules

The Bergen Record ( — Tuesday, April 10, 2007


The for-profit manager of New Jersey's largest hospital received $33 million in nearly interest-free, unsecured loans from Bergen County taxpayers – and did not appear to use the money to benefit the public, a state appellate court ruled Monday.

In reversing the earlier decision of a Superior Court judge, the appellate court went further. It said evidence suggests that the $108 million in annual management fees Bergen County pays to Bergen Regional Medical Center LP could be "excessive" – and if that is the case, those fees could be viewed as a "gift" that runs afoul of the state constitution.

The court's decision clears a hurdle for a 2005 lawsuit by county residents and New Jersey Citizen Action, which claims the loans were an illegal gift of public money to a private entity. The state constitution bars such gifts, unless the money is being used for a public purpose.

Monday's ruling also creates an opportunity for the Bergen County Improvement Authority, the public agency that holds the Paramus hospital's license, to reevaluate its 19-year contract with the for-profit private hospital manager.

"What they're saying is that the fee charge may be so excessive that it actually becomes a gift," said Dennis Oury, a lawyer for the Bergen County Improvement Authority.

The fees and the favorable-rate loans are entrenched in the privatization contract approved by the county in 1998 under the administration of Republican County Executive William "Pat" Schuber. The current Improvement Authority inherited the contract, Oury said, and although it may not be ideal, the authority was bound by its terms.

"Now we may have to reevaluate our position," Oury said, adding that the authority board will meet on the matter soon.

Philip Lentz, a spokesman for the hospital management company, said Monday that the hospital would appeal the ruling to the state Supreme Court.

"Bergen Regional Medical Center continues to believe that the loans to a government contractor performing direct services for the government comply with the New Jersey Constitution and that the trial court's dismissal of the citizen action complaint was correct," he said.

In their 18-page decision however, the appellate court judges said there do not appear to be adequate safeguards to ensure that taxpayer money is being used for the purpose of operating a public hospital. Hospital attorneys, arguing their case before the appellate panel, "conceded that the $33 million is presently invested outside New Jersey for purposes unrelated to the operation of the hospital," the judges wrote.

Signed in 1998

The loans in question date to 1998, when the county signed a contract ceding daily operations of the hospital to Colorado-based Solomon Health Services, and its local arm at the time, Bergen Regional Medical Center LP. The contract allowed the hospital to keep all proceeds and reimbursements received from patient care. It also provided for two loans from the Improvement Authority to Solomon.

One was a $6 million "working capital loan," interest free until 2006, and after that, at one-half the rate of inflation.

The second was a $27 million "accounts receivable loan." It was essentially money that the private company recovered from patients for medical service rendered by the county before privatization.

That loan – interest free until 2014, and then at one-half the rate of inflation – is due to be repaid in 2020, three years after the agreement with Solomon expires.

"You or I couldn't get a loan from any bank with those kinds of interest rates," said Leon Savetsky, a lawyer for the plaintiffs, on Monday.

In the ruling, the judges bolstered the plaintiffs' complaint that the company has run the hospital for the last nine years with patient reimbursements and management fees without having to draw down on a $10 million line of credit.

Regina O'Neill, one of the plaintiffs, and also chief of staff to state Sen. Loretta Weinberg, said the ruling was welcome news.

"I'm thrilled to know that the taxpayers are finally going to get their day in court on this issue," said O'Neill, of Maywood.

"I mean, when you think about it, this was a back-room deal that really hurt the taxpayers and more importantly, really hurt the patients in the hospital. ... The county allowed them to take this money and do whatever they wanted to do with it."

What's next

The Bergen County Improvement Authority will hold its next scheduled meeting on Monday at 5:30 p.m. in the Freeholders' Public Meeting Room on the fifth floor at One Bergen County Plaza in Hackensack.

Top Top | NJCA Homepage | NJCA in the News