KSB, OSF merger: Lee County judge rules to dissolve 129-year-old estate gift that created Dixon hospital

DIXON – A Lee County judge approved a joint motion by KSB Hospital and the city of Dixon on Monday to extinguish the restrictions outlined in a 129-year-old charitable gift, which was originally responsible for creating the hospital, in anticipation of its merger with OSF HealthCare.

In 1895, Judge Solomon H. Bethea, a federal judge and mayor of Dixon in the early 1880s, gifted his estate to the city of Dixon for it to be established as a local hospital in honor of his late wife, Katherine Shaw Bethea.

That property has grown to become KSB Hospital, which provides medical services in primary and select specialty areas to the residents of Dixon at its main campus along with those in Lee and Ogle counties through its six other locations.

When the city of Dixon accepted the gift, its city leaders adopted an ordinance – in compliance with the conditions of the property deed laid out by Bethea – that gave the city the power to select and appoint the hospital’s board of directors.

Now, as KSB is partnering with OSF HealthCare and anticipating a full merger with the organization, the conditions of the Bethea deed must be dissolved through Lee County courts in order for the merger to happen. The conditions laid out by Bethea that relate to the process of appointing hospital board members act as a barrier to the hospital’s affiliation with another health care system that would have its own process for selecting and appointing board members.

Attorney Tim Zollinger, representing the city of Dixon, stood before Judge Douglas Lee on Monday and explained the joint motion to extinguish the original charitable gift restrictions.

In the motion, Zollinger and Attorney Eric Tower, representing KSB Hospital, outlined the history of the deed restrictions, including the 1978 court case where a judge ruled to modify the restrictions that previously only allowed women to serve on the hospital’s board and expanded it to allow both men and women to be appointed.

In support of dissolving the restrictions, Zollinger pointed out that the property gifted to the city by Bethea in 1895 now comprises only a small portion, about 6%, of KSB’s 10-acre main campus in downtown Dixon.

He also said that KSB’s affiliation with OSF will not go against the original intent of Bethea’s gift to the city. Instead, the merger would fulfill Bethea’s wish to provide quality and affordable medical care to the residents of Dixon by allowing KSB to continue to serve the community.

“Judge Bethea certainly would want a hospital to continue to serve Dixon and this merger will allow that to happen,” Zollinger said.

In February, KSB’s board of directors announced that it was formally exploring potential partnerships due to escalating operating and staffing costs, as well as changes to health care financing and how patients use health care.

KSB’s board of directors analyzed the feasibility of continuing to operate the hospital independently and found that it would likely lead to its closure, according to a resolution approved by the Dixon City Council on Aug. 5 which declared its support of dissolving the deed restrictions.

After the COVID-19 pandemic, KSB experienced an increase in expenses including wages, pharmaceuticals, utilities, facility costs and medical supplies. Those increased expenses were not covered by increased reimbursement rates because KSB, like other rural hospitals, serves a large portion of patients on Medicare and Medicaid, which reimburse at a lower rate than commercial insurance, according to the resolution.

As a result, KSB operated with negative margins in 2022 and 2023. Those operating margin challenges led to the erosion of the balance sheet and in January 2024, the hospital’s cash on hand dropped to five days, which made it impossible to borrow funds and reinvest in the organization, the resolution says.

The agreement between KSB and OSF includes $40 million in funding for facility renovations to improve access to care locally and to create seamless referrals to subspecialties, according to a joint news release from the organizations on May 10.

At Monday’s hearing, Kristin Louis and Ashly Giddens from the Illinois Attorney General’s Office represented the interests of the Bethea deed. They agreed with Zollinger’s statement that the merger would fulfill the gift’s original purpose.

“We agree with the assertion that Judge Bethea would not want the restrictions to prevent the deal,” Louis said.

“We do not object to the petition,” she said.

Judge Lee acknowledged that all parties were in agreement and “no dispute exists.”

He said Illinois law allows the courts to dissolve gift restrictions if they substantially impair the original intentions of the gift, and referenced the doctrine of equitable deviation. That doctrine allows the court to modify deed restrictions in order to achieve the deed’s original purpose if the restrictions would prevent the gift’s original intent from being achieved or unforeseeable changes in circumstances have occurred.

In recent years, rural hospitals all across America have struggled to continue to operate independently and have subsequently undergone mergers and affiliations with other health care systems to remain open, Lee said.

He said that “the court has every confidence” that the merger between KSB and OSF will allow KSB to remain open and offer quality health care to the community.

“The court is pleased to grant the proposed motion and sign the joint order,” Lee said.