Case 2:17-cv-00209 Document 1 Filed 06/12/17 1 2 3 4 5 6 UNITED STATES DISTRICT COURT EASTERN DISTRICT OF WASHINGTON AT SPOKANE 7 8 9 10 EMPIRE HEALTH FOUNDATION, a Washington nonprofit corporation, 11 12 13 14 15 16 17 18 19 v. COMPLAINT CHS/COMMUNITY HEALTH SYSTEMS INC., a Delaware corporation; CHS WASHINGTON HOLDINGS, LLC, a Delaware limited liability company; SPOKANE WASHINGTON HOSPITAL COMPANY, LLC, a Delaware limited liability company; and SPOKANE VALLEY WASHINGTON HOSPITAL COMPANY, LLC, a Delaware limited liability company Defendants. 20 21 22 NO. 2:17-cv-00209 Plaintiff, I. 1. PARTIES Empire Health Foundation. Plaintiff Empire Health Foundation 23 (“Foundation”) is a Washington nonprofit corporation and the largest community 24 foundation in Eastern Washington. It was formed with the proceeds of the sale of 25 Deaconess Medical Center and Valley Hospital and Medical Center (“Hospitals”). The 26 Foundation uses its endowment to create measurable, sustainable health improvements SIRIANNI YOUTZ SPOONEMORE HAMBURGER COMPLAINT – 1 701 FIFTH AVENUE, SUITE 2560 SEATTLE, WASHINGTON 98104 TEL. (206) 223-0303 FAX (206) 223-0246 Case 2:17-cv-00209 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Document 1 Filed 06/12/17 in Eastern Washington, with a particular focus on access to health care by Eastern Washington’s lowest income individuals. The Foundation’s vision is to transform Eastern Washington into the state’s healthiest region. In 2008, the Foundation was assigned all rights and obligations of Empire Health System, the nonprofit corporation which sold the Hospitals to Defendants and then dissolved. 2. CHS/Community Health Systems, Inc. Defendant CHS/Community Health Systems Inc. (“CHS”) is a Delaware corporation that does business in the State of Washington, including Spokane County. In 2008, CHS purchased the Hospitals from Empire Health System. CHS continues to own and operate the Hospitals. 3. CHS Washington Holdings, LLC. Defendant CHS Washington Holdings, LLC (“Holdings”) is a Delaware limited liability corporation, registered to do business in the state of Washington. On information and belief, it is wholly owned by CHS. 4. Spokane Washington Hospital Company, LLC. Spokane Washington Hospital Company, LLC (“SWHC”) is a Delaware limited liability company whose primary business is the ownership and operation of Deaconess Hospital in Spokane, Washington. On information and belief, it is wholly owned and controlled by CHS and/or Holdings. 5. Spokane Valley Washington Hospital Company. Spokane Valley Washington Company, LLC (“SVWHC”) is a Delaware limited liability company whose primary business is the ownership and operation of Valley Hospital in Spokane Valley, Washington. On information and belief, it is wholly owned and controlled by CHS and/or Holdings 6. CHS, Holdings, SWHC and SVWHC are referred to herein, collectively, as “Defendants.” 25 26 SIRIANNI YOUTZ SPOONEMORE HAMBURGER COMPLAINT – 2 701 FIFTH AVENUE, SUITE 2560 SEATTLE, WASHINGTON 98104 TEL. (206) 223-0303 FAX (206) 223-0246 Case 2:17-cv-00209 Document 1 Filed 06/12/17 II. JURISDICTION AND VENUE 1 7. 2 Jurisdiction of this Court arises pursuant to 28 U.S.C. §1332 because the 3 amount in controversy exceeds $75,000 and the dispute is between citizens of different 4 states. 5 8. Venue is proper under 28 U.S.C. §1391 because Defendants transact 6 business in Spokane County and a substantial part of the events or omissions giving 7 rise to the claim occurred there. III. NATURE OF THE CASE 8 9 9. The Foundation brings this litigation to enforce the terms and conditions 10 of the Asset Purchase Agreement and related agreements (collectively, the 11 “Agreements”), that govern the sale of the Deaconess and Valley Hospitals to CHS, 12 SWHC, and SVWHC. Under the Agreements, the Foundation stands in the shoes of the 13 seller, Empire Health Systems, to enforce their terms and conditions. 14 10. When defendants purchased the Hospitals, they agreed to provide charity 15 care and essential health services as required under Washington’s Charity Care Act and 16 its Certificate of Need laws. These legal requirements are incorporated into the terms 17 and conditions of the Agreements, by both the Agreements themselves and by state 18 law. The requirements include the provision of charity care at an amount that meets or 19 exceeds the regional average, and a prohibition against putting in place policies and 20 procedures that serve to suppress or reduce the amount of charity care provided. RCW 21 70.38.115 (2)(j); RCW 70.170.060(1). 22 11. Defendants’ provision of charity care never “met or exceeded the regional 23 average of charity care,” at any time since they purchased Deaconess and Valley 24 Hospitals. 25 26 12. Based upon the data reported by Defendants to the Washington Department of Health, Defendants’ provision of charity care has failed to meet the SIRIANNI YOUTZ SPOONEMORE HAMBURGER COMPLAINT – 3 701 FIFTH AVENUE, SUITE 2560 SEATTLE, WASHINGTON 98104 TEL. (206) 223-0303 FAX (206) 223-0246 Case 2:17-cv-00209 1 2 3 Document 1 Filed 06/12/17 regional average by more than $55 million, from September 2008 to December 2015. Based upon information and belief, Defendants’ provision of charity care continues to fail to meet the regional average, continuing to the present. 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 13. Defendants’ reported provision of charity care may be excessively 25 inflated. Starting in at least 2012, Defendants increased the prices charged to self-pay 26 patients for services (commonly referred to as the “chargemaster”) far above the rate of SIRIANNI YOUTZ SPOONEMORE HAMBURGER COMPLAINT – 4 701 FIFTH AVENUE, SUITE 2560 SEATTLE, WASHINGTON 98104 TEL. (206) 223-0303 FAX (206) 223-0246 Case 2:17-cv-00209 1 2 3 Document 1 Filed 06/12/17 medical inflation. Defendants’ chargemaster was increased significantly more than that at the average regional hospital in the Spokane area. Defendants’ inflated chargemaster also inflated Defendants’ reported provision of charity care. 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 14. When Defendants’ charity care reporting is adjusted to account for its 21 excessive chargemaster inflation above that of the regional average, Defendants’ 22 provision of charity care falls short of the regional average by more than $110 million 23 from September 2008 to December 2015. 24 shortfall, when adjusted for chargemaster inflation, continues to the present. Based upon information and belief, this 25 26 SIRIANNI YOUTZ SPOONEMORE HAMBURGER COMPLAINT – 5 701 FIFTH AVENUE, SUITE 2560 SEATTLE, WASHINGTON 98104 TEL. (206) 223-0303 FAX (206) 223-0246 Case 2:17-cv-00209 Document 1 Filed 06/12/17 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 15. The failure to provide more than $110 million in charity care benefits 23 represents a significant loss of health care services that should have been, but never 24 were, provided to residents of the Spokane Region. The loss of those benefits injured 25 the Foundation which is dedicated to improving the health and health systems for 26 residents of the Spokane region. Had Defendants provided $110 million or more in SIRIANNI YOUTZ SPOONEMORE HAMBURGER COMPLAINT – 6 701 FIFTH AVENUE, SUITE 2560 SEATTLE, WASHINGTON 98104 TEL. (206) 223-0303 FAX (206) 223-0246 Case 2:17-cv-00209 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Document 1 Filed 06/12/17 additional charity care benefits to the Spokane Region from 2008 to the present, the Foundation would likely have made different grants and investments to improve the region’s health. 16. Defendants have breached the Agreements by failing to comply with charity care requirements. Their policies and procedures have suppressed their provision of charity care, and, taking the Hospitals together, Defendants have never provided charity care that met or exceeded the regional average. Based upon information and belief, Defendants have never undertaken “reasonable efforts” to provide charity care at a level that meets or exceeds the regional average. The adoption of excessively inflated chargemaster rates and charges masked, at least in part, Defendants’ deficient charity care program. 17. Defendants’ practices and policies appear to be part of a planned effort to drive indigent patients away from the Hospitals, and, if they nonetheless sought services from the Hospitals, to overcharge them. 18. Defendants’ practices and policies are also a breach of the implied duty of good faith and fair dealing. Under the Agreements, Defendants had the discretionary authority to determine when, how much, and who would receive the charity care described in the Agreements. Defendants had an obligation to exercise that discretionary authority in good faith. Defendants’ use of excessively inflated chargemaster rates that masked, at least in part, its deficient charity care program, breached that duty. 19. Based upon information and belief, Defendants may have also breached the Agreements in other ways, including but not limited to: the provision of care through community-based health programs to address identified community needs and improve the health status of the elderly, poor and at-risk populations in the community; 26 SIRIANNI YOUTZ SPOONEMORE HAMBURGER COMPLAINT – 7 701 FIFTH AVENUE, SUITE 2560 SEATTLE, WASHINGTON 98104 TEL. (206) 223-0303 FAX (206) 223-0246 Case 2:17-cv-00209 1 2 3 4 5 6 7 8 9 10 11 14 15 16 17 18 19 20 21 22 23 24 25 26 Filed 06/12/17 the continuation of essential health services; and the provision of $100,000,000 in capital expenditures at the Hospitals. 20. This lawsuit seeks (1) injunctive relief and/or specific performance to require Defendants to fully comply with the requirements of Agreements, which incorporate the Washington Department of Health’s Certificate of Need Conditions, Washington’s Charity Care Act and Certificate of Need requirements; (2) disgorgement of all excess profits retained by Defendants as a result of its failure to comply with the requirements of the Agreements, as modified by state law, including but not limited to, its failure to provide at least the regional average of charity care to Spokane area indigent patients; and (3) all other contractual and equitable relief available to Plaintiff for Defendants’ failure to provide charity care as required by the Agreements. 12 13 Document 1 IV. FACTUAL BACKGROUND 21. In 2008, defendant SVWHC purchased Valley Hospital and SWHC purchased Deaconess Hospital. CHS guaranteed all of the obligations of SWHC and SVWHC under the Agreement. Prior to 2008, the Hospitals were owned and operated by the nonprofit corporation Empire Health Systems. 22. As a condition of the sale, Defendants were (and remain) obligated to provide charity care to indigent patients at a level that meets or exceeds the regional average for hospitals in the Spokane region. 23. Defendants were (and remain) obligated to comply with all aspects of the Charity Care Act, including the obligation to screen patients for indigency before demanding payment for services. 24. Defendants were (and remain) obligated to continue to provide care through community-based health programs in cooperation with local organizations that sponsor healthcare initiatives to address identified community needs and improve the health status of the elderly, poor and at-risk populations in the community. SIRIANNI YOUTZ SPOONEMORE HAMBURGER COMPLAINT – 8 701 FIFTH AVENUE, SUITE 2560 SEATTLE, WASHINGTON 98104 TEL. (206) 223-0303 FAX (206) 223-0246 Case 2:17-cv-00209 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 25. 24 25 26 Filed 06/12/17 Defendants were (and remain) obligated to continue to provide essential health services at both hospitals, and to fund at least $100,000,000 in capital expenditures at the facilities. 26. Since Defendants purchased the Hospitals, they have not provided charity care at a level that meets or exceeds the regional average. In fact, according to Defendants’ own reported data, their provision of charity care has fallen short of the regional average by more than $110 million from September 2008 to June 2016, when adjusted to reflect Defendants’ excessive chargemaster rate inflation. 27. Defendants’ provision of charity care is so far from the regional average, that it indicates that they put in place practices and procedures designed to avoid the provision of charity care at the Hospitals. See RCW 70.170.060(1). 28. Based upon information and belief, Defendants’ provision of care through community-based health programs has also fallen, and it may not have continued to provide essential health services as promised in the Agreement. Defendants may have failed to fulfill its commitment to provide for community health services in other ways as well. 29. CHS has announced a sale of the hospitals to Multicare Health System and plans to sell its other Washington hospitals. 30. Before Defendants leave the State of Washington with their profits generated from the provision of care to the Spokane region, they must provide the value of the charity care services that they were required—but failed—to provide. 22 23 Document 1 V. FIRST CLAIM – BREACH OF CONTRACT 31. The Foundation re-alleges all the paragraphs listed above. 32. Defendants breached the contract with the Foundation by (1) failing to provide charity care at a level that met or exceeded the regional average, or at the very least, failing to make “reasonable efforts” to provide charity care in an amount SIRIANNI YOUTZ SPOONEMORE HAMBURGER COMPLAINT – 9 701 FIFTH AVENUE, SUITE 2560 SEATTLE, WASHINGTON 98104 TEL. (206) 223-0303 FAX (206) 223-0246 Case 2:17-cv-00209 1 2 3 4 5 6 7 8 9 Document 1 Filed 06/12/17 comparable to or exceeding the regional average; (2) engaging in violations of the Charity Care Act and its implementing regulations; and (3) other material breaches of contract, including but not limited to, its failure to continue to provide care through community-based health programs, and its discontinuation of certain essential health services at the Hospitals. 33. The Foundation is entitled to damages for breach of contract including, without limitation, declaratory and injunctive relief, specific performance, and restitution/disgorgement. 10 VI. SECOND CLAIM – BREACH OF IMPLIED DUTY OF GOOD FAITH AND FAIR DEALING 11 34. The Foundation re-alleges all the paragraphs listed above. 12 35. At all relevant times, Defendants had an implied duty of good faith and 13 fair dealing to fulfill their obligations under the Agreements so that each party could 14 obtain the contract’s full benefit. Specifically, under the Agreements, Defendants had 15 the unilateral discretionary authority to determine the prices charged to indigent 16 patients, when and where they were informed about charity care, and the manner in 17 which charity care applications were provided. When they exercised this discretionary 18 authority, they were obligated to do so in good faith and with fair dealing. Defendants 19 breached their implied duty of good faith and fair dealing when they excessively 20 inflated the Hospitals’ chargemaster rates far beyond that of other hospitals in the 21 region. Defendants’ excessive chargemaster inflation had the effect of masking its 22 deficient charity care program, driving indigent patients from its Hospitals before they 23 received treatment, and overcharging the indigent patients who ultimately received 24 treatment at the Hospitals. 25 26 SIRIANNI YOUTZ SPOONEMORE HAMBURGER COMPLAINT – 10 701 FIFTH AVENUE, SUITE 2560 SEATTLE, WASHINGTON 98104 TEL. (206) 223-0303 FAX (206) 223-0246 Case 2:17-cv-00209 1 2 3 36. and fair dealing, including, without limitation, declaratory and injunctive relief, specific performance, and restitution/disgorgement. VII. DEMAND FOR RELIEF 5 WHEREFORE, plaintiff requests that this Court: 6 8 1. 11 Department of Health Certificate of Need conditions; 2. 14 15 Care Act and Certificate of Need law; 3. 18 Department of Health Certificate of Need conditions and consistent with Washington law; 4. and fair dealing; 23 24 25 6. Award the Foundation its attorney fees and costs under the Agreement; 7. Award such other relief as is just and proper. and 21 22 Enter judgment in favor of the Foundation in an amount to be proven at trial due to Defendants’ breach of contract and breach of the implied duty of good faith 19 20 Order disgorgement of all funds retained by Defendants that should have been provided as charity care and/or community benefits under the Agreement, the 16 17 Enjoin Defendants from current and future breaches of (a) contract, (b) the implied duty of good faith and fair dealing, and (c) violations of the Charity 12 13 Declare that Defendants must comply with the Agreement as modified by Washington State’s Charity Care and Certificate of Need laws and the Washington 9 10 Filed 06/12/17 Plaintiff is entitled to damages for breach of the implied duty of good faith 4 7 Document 1 // // // // 26 SIRIANNI YOUTZ SPOONEMORE HAMBURGER COMPLAINT – 11 701 FIFTH AVENUE, SUITE 2560 SEATTLE, WASHINGTON 98104 TEL. (206) 223-0303 FAX (206) 223-0246 Case 2:17-cv-00209 1 Document 1 Filed 06/12/17 DATED: June 12, 2017. 2 SIRIANNI YOUTZ SPOONEMORE HAMBURGER 3 4 By: s/ Stephen J. Sirianni By: s/ Richard E. Spoonemore By: s/ Eleanor Hamburger Stephen J. Sirianni (WSBA #6957) 5 6 (Admitted, Eastern Dist. of Washington) Richard E. Spoonemore (WSBA #21833) (Admitted, Eastern Dist. of Washington) Eleanor Hamburger (WSBA #26478) (Application Pending, Eastern Dist. of Washington) 701 Fifth Avenue, Suite 2560 Seattle, WA 98104 Tel. (206) 223-0303 Fax (206) 223-0246 7 8 9 10 11 Email: 12 13 ssirianni@sylaw.com rspoonemore@sylaw.com ehamburger@sylaw.com Attorneys for Plaintiff 14 15 16 17 18 19 20 21 22 23 24 25 26 SIRIANNI YOUTZ SPOONEMORE HAMBURGER COMPLAINT – 12 701 FIFTH AVENUE, SUITE 2560 SEATTLE, WASHINGTON 98104 TEL. (206) 223-0303 FAX (206) 223-0246