BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                AB 2180
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        ASSEMBLY THIRD READING
        AB 2180 (Alejo)
        As Amended  March 29, 2012
        Majority vote 

         LOCAL GOVERNMENT    6-3                                         
         
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        |Ayes:|Alejo, Bradford, Campos,  |     |                          |
        |     |Davis, Gordon, Hueso      |     |                          |
        |     |                          |     |                          |
        |-----+--------------------------+-----+--------------------------|
        |Nays:|Smyth, Knight, Norby      |     |                          |
        |     |                          |     |                          |
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         SUMMARY  :  Limits specified benefits for health care district 
        employees unless the same options are available to all officers and 
        employees.  Specifically,  this bill  :  

        1)Prohibits an employer from providing to, or on behalf of, an 
          officer or employee any of the following, unless the employer 
          makes the same options available to all officers and employees:  
          a) a lump sum payment, including one based on service or merit; b) 
          any payment contingent upon severance or retirement; c) a 
          contribution to more than one retirement plan or other 
          supplemental pension plan, whether public or private; or, d) any 
          other retirement benefit.

        2)Defines "employer" to include "the board of directors, a hospital 
          district, and a health care facility of a hospital district."

        3)Defines "officer or employee" to include "the hospital 
          administrator, a director, policymaking management employee, or 
          medical staff officer, and any executive or staff of the health 
          care facilities of the district."

         EXISTING LAW  :

        1)Establishes the Local Health Care District Law.

        2)Allows a local health care district to be organized, incorporated 
          and managed, as specified under the Local Health Care District 
          Law.








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        3)Allows a health care district to include incorporated or 
          unincorporated territory, or both, or territory in any one or more 
          counties, and allows the territory comprising the district to not 
          be contiguous, as specified.

        4)Enumerates the powers and duties of health care districts.

        5)Allows, notwithstanding any other provision of law, a hospital 
          district, or any affiliated nonprofit corporation upon a finding 
          by the board of directors of the district that it will be in the 
          best interests of the public health of the communities served by 
          the district and in order to obtain a licensed physician and 
          surgeon to practice in the communities served by the district, to 
          do any of the following: 

           a)   Guarantee to a physician and surgeon a minimum income for a 
             period of no more than three years from the opening of the 
             physician and surgeon's practice;

           b)   Guarantee purchases of necessary equipment by the physician 
             and surgeon;

           c)   Provide reduced rental rates of office space in any building 
             owned or leased by the district or any of its affiliated 
             entities, or subsidize rental payments for office space in any 
             other buildings, for a term of no more than three years;

           d)   Provide other incentives to a physician and surgeon in 
             exchange for consideration and upon terms and conditions the 
             hospital district's board of directors deems reasonable and 
             appropriate; and,

           e)   Finds and declares that this section is necessary to assist 
             district hospitals to attract qualified physicians and surgeons 
             to practice in the communities served by these hospitals, and 
             that the health and welfare of the residents in these 
             communities require these provisions. 

        6)Requires, at least once each year, the board of the health care 
          district to engage the services of a qualified accountant of 
          accepted reputation to conduct an audit of the books of the 
          hospital and prepare a report, as specified.
         








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        FISCAL EFFECT  :  None

         COMMENTS  :  Near the end of World War II, California faced a severe 
        shortage of hospital beds.  To respond to the inadequacy of acute 
        care services in the non-urban areas of the state, the Legislature 
        enacted the Local Hospital District Law, with the intent to give 
        rural, low income areas without ready access to hospital facilities 
        a source of tax dollars that could be used to construct and operate 
        community hospitals and health care institutions, and, in medically 
        underserved areas, to recruit physicians and support their 
        practices.

        The Local Hospital District Law (now called the Local Health Care 
        District Law) allowed communities to create a new governmental 
        entity - independent of local and county jurisdictions - that had 
        the power to impose property taxes, enter into contracts, purchase 
        property, exercise the power of eminent domain, issue debt, and hire 
        staff.  In general, the process of creating a hospital district 
        started with citizens in a community identifying the need for 
        improved access to medical care.  The hospital district's boundaries 
        were usually based on the distance between communities and the 
        closest available acute care hospital services.  A petition for 
        formation was then filed by the community to the county board of 
        supervisors, and then residents of the proposed district were needed 
        to vote in favor of the measure to create the hospital district.  In 
        1963, the Knox Nisbet Act was passed, which created local agency 
        formation commissions (LAFCOs) and clarified and formalized the 
        process for establishing a district.

        According to the Association of California Healthcare Districts, 
        there are currently 74 districts, of which 30 are rural, 20 are 
        critical access, five have stand-alone clinics, and three have 
        stand-alone skilled nursing facilities.  These institutions provide 
        a significant portion of the medical care to minority populations 
        and the uninsured in medically underserved regions of the state and 
        are mainly funded by Medicare, Medi-Cal, and district tax dollars.

        This bill prohibits local health care districts from providing to an 
        employee any special retirement benefits unless the district makes 
        the same options available to all employees.  According to the 
        author, this bill would allow all public employees to benefit from 
        the same retirement benefits that hospital administrators are often 
        offered.  The author notes that this bill creates a fair pension 
        system within local health care districts and would prevent 








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        hospitals from giving excessive retirement benefits to hospital 
        executives.  This bill is author-sponsored.

        The author notes that "in recent years, local health care districts 
        have come into public scrutiny with allegations of administrative 
        waste, wrongdoing, and lack of appropriate spending priorities."  
        The author sites the recent Bureau of State Audits (BSA) examination 
        of Salinas Valley Memorial Health Care System as one of the reasons 
        for the justification for the bill.

        The BSA audit, released in, March 2012, concluded the following in 
        the opening letter to the Governor and Legislative Leaders:

              This report concludes that the ÝSalinas Valley Memorial] 
              Health Care System's board of directors, when making 
              decisions regarding executive compensation, violated the 
              Ralph M. Brown Act, which requires legislative bodies of 
              local public agencies to conduct their meetings in an 
              open manner.  In an environment characterized by a lack 
              of an executive compensation policy and limited 
              transparency, the Health Care System granted compensation 
              for its executives at the upper end of the range for the 
              health care industry.  In addition, the former chief 
              executive officer (CEO) received generous retirement and 
              severance benefits totaling $4.9 million between 2008 and 
              2011, most of which were paid to him before he retired.

              Our review also noted weaknesses in controls in several 
              areas.  We audited instances in which the Health Care 
              System had business relationships between 2006 and 2010 
              with entities in which its executives or board members 
              had economic interests.  In the two relationships we 
              reviewed, the former CEO may have violated 
              conflict-of-interest laws in one instance, and the board 
              may have violated conflict-of-interest laws in the other 
              instance.  Also, the Health Care System did not ensure 
              that many of the individuals its conflict-of-interest 
              code identified as needing to submit statements of 
              economic interests did so.  Further, it does not have 
              written policy and procedures to demonstrate that its 
              community funding furthers its public purposes, thereby 
              risking questions about whether this funding violates the 
              constitutional prohibition against public agencies making 
              gifts of public funds.  Additionally, for contracts we 








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              reviewed for which it was not required by state law to 
              use a competitive process, the Health Care System 
              generally did not document how it selected contractors in 
              a way that demonstrated that it obtained the best value 
              when procuring goods and services.

        According to a report completed by the California HealthCare 
        Foundation in 2006, the majority of health care district programs 
        place great emphasis on community health and wellness programs and 
        services designed to prevent or postpone acute hospital care.  In 
        many cases, the districts have filled gaps in local health services, 
        resulting from the funding constraints faced by local public health 
        departments, public safety organizations, and transportation 
        agencies.  They also play a vital role in physician recruitment and 
        nurse training, in light of the shortages of medical professionals 
        in most regions of California.

        The California Nurses Association (CNA), in support, writes that 
        "the bill reflects a need for fairness at district hospitals where 
        executive compensation is often at shocking levels, particularly 
        within the public sector."  CNA notes that "despite the large sums 
        paid for executive compensation at district hospitals, Ýnurses] have 
        continued to see attempts to undercut patient care services and 
        employee compensation."

        The Association of California Healthcare Districts (ACHD), in 
        opposition, writes that the bill "will remove the recruitment and 
        retention mechanisms of district hospitals to compete with private, 
        non-profit and other public hospitals."  ACHD notes that many 
        district hospitals are located in rural areas and as such, the 
        hospitals find the only tool they have to recruit strong leadership 
        is by offering competitive compensation packages.  Additionally, 
        ACHD believes that "removing these tools from a district hospital's 
        reach will negatively impact the daily operations of the hospital 
        and the communities they serve."

        ACHD writes that "increasing transparency of district hospitals may 
        be a better solution than limiting widely accepted employment 
        tools."  The Legislature may wish to consider whether greater 
        transparency and community involvement may help solve the issue of 
        excessive benefits for some health care district employees versus 
        others.

        Health care districts were designed to compete in the private 








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        sector, and as such, are very different from other types of special 
        districts in California.  The Legislature may wish to consider 
        whether the provisions of the bill decrease the ability of health 
        care districts to attract employees and administrators, thereby 
        undermining the competitive nature with which districts were 
        created.

        In 2000, the Legislature passed the Cortese-Knox-Hertzberg Act, 
        which rewrote the previous 1985 Act and gave new powers to LAFCOs to 
        conduct municipal service reviews (MSRs) of all the special 
        districts in a county, including health care districts.  MSRs 
        consist of making determinations about infrastructure needs or 
        deficiencies, growth and population projects, the location and 
        characteristic of any disadvantaged unincorporated communities, 
        present and planned capacity of public facilities, the financial 
        ability of agencies to provide services, the status of, and 
        opportunities for, shared facilities, accountability for community 
        service needs, and any other matters related to effective or 
        efficient service delivery.

        The Legislature may wish to consider whether there are alternative 
        ways of increasing transparency through the LAFCO MSR process in 
        order to deal with the goal of the bill to combat excessive 
        retirement benefits.

        Support arguments:  Supporters argue that this bill reflects a need 
        for fairness at district hospitals where executive compensation is 
        often at shocking levels and is a good response to issues recently 
        brought up in the BSA audit of Salinas Valley Memorial Health Care 
        System.

        Opposition arguments:  Opponents argue that districts will not be 
        able to compete for top talent with other public, private, and 
        non-profit hospitals that do not have the same restrictions as this 
        bill places on health care districts.


         Analysis Prepared by  :    Debbie Michel / L. GOV. / (916) 319-3958 


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