[S]tate health care regulators have approved a $22.1 million property purchase by University of Vermont Medical Center in South Burlington.
Hospital administrators had sought permission to buy two Tilley Drive buildings that UVM Medical Center currently occupies and leases from a private owner. The transaction, administrators say, will save tens of millions of dollars in the long run.
Green Mountain Care Board members agree, saying the transaction “will not unduly increase the costs of care” in northwestern Vermont.
“To the contrary, the savings associated with the project represent a financial benefit to the public by freeing up funds that would have gone to lease payments and reinvesting the savings in patient care and quality improvement initiatives,” care board members wrote.
Hospital leaders say the purchase makes financial and logistical sense.
“Our philosophy is that when we can afford to do it, we should own properties we intend to occupy for a long time, such as well-established patient care sites, because it helps meet our ongoing objective to lower operating costs,” said Dawn LeBaron, UVM’s vice president of hospital services. “It’s also more desirable to make improvements to properties we own.”
University of Vermont Medical Center is the state’s largest hospital.
Green Mountain Care Board documents say the hospital serves approximately 1 million people in Vermont and New York and has more than 30 patient care sites, in addition to its main campus in Burlington.
In 2017, the hospital had $1.2 billion in net patient revenues, and brought in a surplus of $38 million. Ultimately, the board ordered the hospital to use $21 million of the surplus to increase the state’s mental health treatment capacity.
Hospital officials say the South Burlington project is not meant to spur growth or raise new revenue. Care board members say the proposal “does not involve the construction or development of new buildings or improvements, the acquisition of any equipment, the creation of any new health care facilities or the initiation of any new health services.”
UVM Medical Center administrators say they want a greater stake in two buildings that are considered “critical” to hospital operations.
The 28,069-square-foot building at 62 Tilley Drive houses the hospital’s cardiology and cardiac rehabilitation programs as well as the endocrinology program and the Center for Pain Management.
And the 53,600-square-foot structure at 192 Tilley Drive hosts the hospital’s orthopedic center and related radiology services.
Taken together, base rent is nearly $1.9 million for those properties. Management fees and operating expenses push annual costs to nearly $2.5 million, and hospital documents have said the Tilley Drive buildings are “two of our most expensive leased properties.”
So earlier this year, the hospital filed an application with the Green Mountain Care Board to buy the properties from current owner Pizzagalli Properties LLC. At both locations, administrators said, owning will be cheaper than renting.
On May 22 — about three and a half months after the hospital’s application — the care board issued a certificate of need allowing the purchase to move forward.
The board found that the $22.1 million purchase price “is reasonable in relation to its expected long-term financial benefit.”
“Even with (first-year) costs in excess of $5.6 million – largely due to the down payment for the loan – the applicant will achieve positive annual cash flows by year two, and its cumulative cash flows will break even by year eight,” the board ruled.
After the hospital pays off a 15-year mortgage on the properties, “cumulative savings will accelerate to over $1.6 million per year,” care board members wrote. “And by year 30, the applicant estimates a positive cumulative cash flow of approximately $54.3 million.”
The board also concluded that “there are no viable, cost-effective alternatives to the project” due to a lack of similar, available commercial buildings in the Burlington area.
The certificate of need for the purchase includes several conditions.
For example, the board says UVM Medical Center cannot increase the rates it charges commercial insurers to cover any expenses related to the South Burlington transaction. The board also says the hospital “shall not make any incentive payments or pay bonuses in connection with the project to any (UVM Medical Center) employee.”
Additionally, the care board ordered the hospital to submit regular reports until the ownership transfer is complete. Those reports are supposed to contain detailed information about how the hospital is spending money on the project.
“Through the project implementation period and annual budget submissions, we expect the applicant to identify how cost savings generated from this project are being reinvested into patient care and quality improvement initiatives,” care board members wrote.
There is one financial impact of the purchase that the care board did not take up: UVM Medical Center is a nonprofit, and as such it will not be obligated to pay property taxes on the South Burlington properties.
Municipal records say the two parcels are assessed for tax purposes at more than $8.7 million combined, with annual tax payments of $182,659.
While not releasing a dollar figure, hospital administrators said they will continue sending money to the city and state via payments in lieu of taxes, also known as PILOT agreements. “When we convert leased property to ownership, we pay a PILOT based on a calculation of square footage, which is what will happen in this case,” LeBaron said.
South Burlington City Manager Kevin Dorn said the hospital already makes payments in lieu of taxes on other city properties. He noted that such payments are not equal to tax revenues, so “we’ll undoubtedly see some reduction in overall tax payments to the city – about 80 percent of which goes to the (state) education fund.”
