Organizational Form. Responding to a growing need for medical care as its population grew in the early 1900s; Suffolk County founded the Suffolk County Hospital in 1920, financing construction of the original hospital building and equipment with a $500,000 general obligation bond issue. Over the next 75 years, the hospital was able to sustain its own operations from patient service, federal and state grants, and other revenues, but it relied on the Suffolk County government to finance construction of needed expansions. In 1995, Suffolk County issued $10 million of general obligation bonds to finance a new hospital building. A special property tax levy has paid principal and interest on this debt issue and will continue to do so until 2020.
In 1998, the hospital board of trustees signed a 10-year lease and management contract under which the hospital became an affiliate of ABC Medical Group, a for-profit organization. Under the contract, ABC agreed to provide capital financing for plant expansion and equipment modernization, in addition to providing the county with 15 percent of net income, as defined in the contract. Over the past 10 years, the county has received an average of about $1.5 million each year, but it has had no involvement with the operations of the hospital, except for contenting oversight by the elected board of trustees. As the lease contract nears its renewal date, two of the five members of the hospital board are openly questioning ABC’s quality of care and pricing structures. In addition, these members argue that the hospital has not been sufficiently responsive to county patients and has not provided adequate charity care. The other three members of the board believe that ABC is performing well under the lease contract and that the contract should be renewed for another 10 years. These three members of the board believe, however, that the contract should not be renewed unless a higher share of net income can be negotiated with ABC. A target share of 20 percent has been mentioned by one of the board members. As might be expected in such circumstances, the local print and broadcast media have devoted extensive coverage to this issue and public feelings are running strong both for and against renewing the lease contract with ABC. For the most recent year, ABC reported $10.9 million of net income on revenues of $17.4 million and expenses of $6.5 million.
Required
a. Assume you are the county finance director and have been asked to evaluate the arguments for and against renewing the lease contract with ABC Medical Group. What financial and nonfinancial factors would you consider in conducting your analysis and preparing recommendations to share with the hospital board of trustees?
b. What factors, in your judgment, are most important in deciding whether or not to renew the lease contract?