BILL ANALYSIS Ó
SENATE COMMITTEE ON HEALTH
Senator Ed Hernandez, O.D., Chair
BILL NO: AB 2737
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|AUTHOR: |Bonta |
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|VERSION: |June 20, 2016 |
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|HEARING DATE: |June 29, 2016 | | |
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|CONSULTANT: |Vince Marchand |
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SUBJECT : Nonprovider health care districts
SUMMARY : Requires a nonprovider healthcare district, which this bill
defines using parameters that limit its application to the Eden
Township Healthcare District in Alameda County, to spend at
least 80% of its annual budget on community grants awarded to
organizations that provide direct health services, and no more
than 20% of its annual budget on administrative expenses.
Existing law:
1)Establishes "The Local Health Care District Law," under which
a local hospital district may be organized, incorporated and
managed. Permits a district to include incorporated or
unincorporated territory, or both, in any one or more
counties. Requires health care districts to be governed by an
elected board of five members, who are required to live within
the healthcare district.
2)Provides local health care districts with certain powers,
including establishing and operating one or more health
facilities or other health care programs, and to establish and
operate, or provide assistance in the operation of, free
clinics, diagnostic and testing centers, health education
programs, wellness and prevention programs, rehabilitation,
aftercare, and any other health care services providers,
groups, and organizations that are necessary for the
maintenance of good physical and mental health in the
communities served by the district.
3)Authorizes a health care district to transfer, for the benefit
of the communities served by the district, any part of the
assets of the district to one or more non-profit corporations
to operate and maintain the assets. Prior to the district
AB 2737 (Bonta) Page 2 of ?
transfer, requires the district board to submit a measure to
the voters of the district proposing the transfer.
4)Requires a health care district that leases or transfers its
assets to a corporation to act as an advocate for the
community to the operating corporation, and to report annually
to the community on the progress made in meeting the
community's health needs.
5)Establishes a local agency formation commission (LAFCO) in
each county, and provides LAFCOs with certain duties and
powers, including the power to control the boundaries of
cities and special districts. Requires LAFCOs to prepare and
regularly revise a sphere of influence for each city and
special district, and before preparing this sphere of
influence, to conduct a municipal services review of the area,
as specified.
This bill:
1)Prohibits a nonprovider health care district, as defined, from
spending more than 20% of its annual budget on administrative
expenses, as defined.
2)Requires a nonprovider health care district to spend at least
80% of its annual budget on community grants awarded to
organizations that provide direct health services, as defined.
3)Defines "nonprovider health care district," for purposes of
this bill, as a health care district that meets all of the
following criteria:
a) The district does not provide direct health
care services to consumers;
b) The district has not received an allocation of
real property taxes in the past three years;
c) The district has assets of $20 million or
more;
d) The district is not located in a rural area
that is typically underserved for health care
services; and,
e) In two or more consecutive years, the amount
the district has dedicated to community grants has
amounted to less than twice the total administrative
costs and overhead not directly associated with
revenue-generating enterprises.
AB 2737 (Bonta) Page 3 of ?
4)Defines "direct health service," for purposes of this bill, as
ownership or direct operation of a hospital, medical clinic,
ambulance service, transportation program for seniors or
persons with disabilities, a wellness center, health
education, or other similar service.
5)Defines "administrative expenses," for purposes of this bill,
as expenses relating to the general management of a health
care district, such as accounting, budgeting, personnel,
procurement, legal fees, legislative advocacy services, public
relations, salaries, benefits, rent, office supplies, or other
miscellaneous overhead costs.
FISCAL
EFFECT : According to the Assembly Appropriations Committee,
unknown costs to the Eden Township Healthcare District (ETHD) in
Alameda County, likely minor, to comply with the administrative
requirements in the bill. Any costs are potentially
reimbursable, should ETHD choose to submit a claim to the
Commission on State Mandates and the Commission determines the
costs are reimbursable.
PRIOR
VOTES :
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|Assembly Floor: |59 - 10 |
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|Assembly Appropriations Committee: |17 - 3 |
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|Assembly Local Government | 7 - 0 |
|Committee: | |
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COMMENTS :
1)Author's statement. According to the author, ETHD was
established to serve the health needs of Castro Valley, San
Leandro, San Lorenzo, Hayward and other nearby communities. At
one point, ETHD owned and operated a hospital and provided
direct healthcare services to the community. Currently, ETHD
no longer owns or operates a hospital and does not provide any
direct health services to the public. Aside from managing
buildings they own, ETHD primarily serves as a grant-making
entity with the purpose of providing grants to community
AB 2737 (Bonta) Page 4 of ?
non-profits to provide healthcare services to the public. In
2013 and 2014, ETHD spent almost twice as much on salaries and
benefits for its three employees compared to what it gave out
in community grants for healthcare services. The basic
foundation for a healthcare district's existence is to provide
healthcare services to the community it serves. When that
basic premise isn't being followed, rules need to be set in
place for the benefit of the community.
2)History of ETHD. ETHD was established by the voters of that
district in 1948 to finance construction of Eden Medical
Center, which opened in 1954. ETHD is governed by a
five-member board of directors elected to four-year terms and
serves a 130 square mile area that includes the City of San
Leandro, most of the City of Hayward, and the unincorporated
areas of Castro Valley and San Lorenzo. ETHD, like most health
care districts, initially was funded by voter-approved
property tax assessments, which financed the construction and
operation of Eden Medical Center. However, the district ceased
levying taxes to fund its operation in 1977. In the 1990s,
facing a seismic upgrade requirements, voters authorized ETHD
to sell Eden Medical Center to Sutter Health, which replaced
the old hospital with a new Eden Medical Center that was
completed in 2012. With the proceeds of the sale of Eden
Medical Center, ETHD purchased two medical office properties
to generate lease income, and in 2013, opened a third medical
office building that it built itself. In 2004, ETHD purchased
San Leandro Hospital and immediately leased it to Sutter
Health. The lease agreement also gave Sutter the option to
purchase San Leandro Hospital. In 2009, Sutter exercised the
option to purchase, but ETHD refused to comply due to
community concerns that Sutter would close the emergency room.
Various lawsuits and appeals ultimately resulted in Sutter
prevailing over the ETHD, with a judgment against ETHD for $19
million. On October 31, 2013, Sutter transferred San Leandro
Hospital to the Alameda Health System, the public health
authority that operates Alameda County's health care system.
ETHD has made one payment, and has a current liability for
this judgement of $17.7 million.
ETHD's 2016 budget allocates $340,000 for salaries and benefits
provided to district employees, while allocating $250,000 to
grants to health service providers. The $219,000 that ETHD
has budgeted in 2016 for consulting, legal, accounting, and
public relations costs is nearly as much as it budgeted for
AB 2737 (Bonta) Page 5 of ?
grants. Alameda County LAFCO's 2012 municipal services review
(MSR) identified three governance structure options for ETHD:
annexation of the City of Dublin by ETHD; dissolution; or,
consolidation with Washington Township Healthcare District.
The MSR found that, while ETHD no longer owns and operates a
hospital, it is premature to dissolve it, pointing to the
grant funding, leased office space, and an indication from
ETHD of their willingness to provide direct services in the
future.
3)Grand Jury Report on ETHD. On June 1 of this year, the Alameda
Grand Jury release a report titled "The Failure of Eden
Township Healthcare District's Mission" (report). The report
followed an investigation that was initiated by a citizen
complaint that ETHD does not adequately provide for the
healthcare needs of its residents, and questioned whether the
district should continue to exist. The report stated that ETHD
administers income generated from a $12 million cash
management portfolio and other investments for purposes of
funding a community grants program for the marginalized,
underserved, high-risk and special needs populations of the
district. In the past three years, the district annually
awarded between $200,000 and $300,000 in grants, which is less
than 5% of the organization's total expenses. In the previous
15 years, ETHD dispersed $10 million in grants to more than 60
organizations, and that current district policy is to allocate
65% of its regulated investment proceeds to community grants.
According to the report, ETHD's forecasted grant awards to
service providers account for a mere 12% of the district's
total expenses, with 88% of the budget spent on real estate,
administration, legal and consulting fees. In effect, the
report stated, ETHD is essentially a commercial real estate
management operation rather than an indirect (or direct)
healthcare provider for citizens of the community. The
findings of the report include the following:
a) ETHD lacks a clear vision of its future as a viable
governmental agency;
b) The amount of resources devoted to ETHD's primary
mission is only 12% of its total expenses, which is an
indication that ETHD's attention has been diverted away
from its primary mission which is to "improve the health
of the people in our community;"
c) ETHD's stated priority to provide direct healthcare
services to the community is unachievable under its
AB 2737 (Bonta) Page 6 of ?
current operating structure, and that this problem
highlights the fact that the district has not aligned its
strategic priorities with the reality of its operating
structure; and,
d) There is little or no evidence of collaboration
between ETHD and the Alameda County Health Care Services
Agency, which is wasteful and detrimental to the
community the district serves.
The report recommended, among other steps, that ETHD provide
the electorate with a choice to vote on whether the district
should continue to exist.
4)Overview of health care districts. The Local Hospital
District Law was established in 1945 to authorize special
districts to build and operate hospitals and other health care
facilities in underserved areas. Legislation in 1994 renamed
it the Local Health Care District Law to reflect the fact
health care was increasingly being provided outside of the
hospital setting. Health care districts are a form of special
district. Special districts are local governments that are
legally separate from counties and cities, and they have the
authority to build public works projects and run programs, and
the power to impose taxes to raise funds to pay for these
services. Special districts have the ability to enter into
contracts, purchase property, exercise eminent domain, issue
debt, and hire staff. Each health care district is governed by
a locally elected five-member board of directors, and are
subject to state policies and regulations as applied by each
county's LAFCO.
There are currently 78 health care districts, and most of these
were established in the first two decades following enactment
of the Local Hospital District Law. Of these, 40 own and
operate hospitals, eight operate ambulance services, five
operate clinics, and four operate skilled nursing facilities.
A handful of others own a hospital but lease its operations to
another hospital provider. The remainder, numbering
approximately 12 to 15 (including ETHD), do not provide any
direct health services. Most health care districts receive a
share of local property taxes, which varies among districts.
Some health care districts have received two-thirds approval
to levy special "parcel taxes," such as Alameda Health Care
District, which was formed in 2002 when voters approved a $296
annual parcel tax to assume operation of Alameda Hospital.
AB 2737 (Bonta) Page 7 of ?
Health care districts can also generate revenues from other
resources, including property lease income and interest
earnings from investments, or by creating debt to borrow money
for capital projects. Five health care districts have been
dissolved or otherwise reorganized by their respective LAFCO
since 2000.
5)Related legislation. AB 2471 (Quirk) would require the Alameda
LAFCO to order the ETHD's dissolution if it meets certain
criteria, including that the ETSD does not provide a direct
health care service, and that it fails to comply with the
provisions of this bill to spend at least 80% of its budget on
community grants awarded to organizations that provide direct
health care services. AB 2471 passed the Senate Governance and
Finance Committee by a vote of 4-1 on June 22, 2016.
AB 2414 (Garcia) would require the Riverside County LAFCO to
submit to voters a proposal to expand the Desert Healthcare
District. AB 2414 passed the Senate Governance and Finance
Committee by a vote of 4-1 on June 22, 2016.
6)Prior legislation. AB 678 (Gordon and Dickinson of 2013),
would have required health care districts to conduct a
community health needs assessment every five years with the
involvement of specified stakeholders, and to include progress
toward meeting the health needs identified in this assessment
in an existing annual report that is required of health care
districts. AB 678 was held on the Senate Appropriations
Committee suspense file.
SB 804 (Corbett, Chapter 684, Statutes of 2012), required health
care districts to include, in an agreement transferring more
than 50 percent of the health care district's assets, the
appraised fair market value of any asset transferred to a
non-profit corporation, as defined. Further required the
appraisal of the fair market value to be performed within the
six months preceding the date on which the district approves
the transfer agreement.
SB 1240 (Corbett of 2010), would have imposed conditions on
contracts between districts and other entities to operate one
or more health facilities owned by the district. SB 1240 was
vetoed by Governor Arnold Schwarzenegger, who stated that SB
1240 would have limited the discretion of a district when
entering into a contract with another operating entity and
AB 2737 (Bonta) Page 8 of ?
would have created the unintended consequence of reducing the
incentive for such arrangements when hospitals are struggling
to remain open.
7)Support. This bill is supported the City of San Leandro
(City), which states that one of its top priorities is a
legislative solution to help address the financial
sustainability of San Leandro Hospital. The City states that
with the resolution of the six-year lawsuit between ETHD and
Sutter regarding San Leandro Hospital, it is imperative to
activate ETHD's obligation to the San Leandro community and
create a sustainable environment for the hospital. The City
states that considerable efforts have been made by the City,
Alameda County, and Alameda Health System to keep San Leandro
Hospital open for the community. The City argues that the
basic foundation for a healthcare district's existence is to
provide healthcare services, and when a district isn't
following that basic premise, rules need to be put into place.
This bill is also supported by the Alameda Health System,
which states that this bill would ensure health care districts
that do not provide direct health services are required to
spend a minimum amount of their budget in support of health
care for the communities they serve.
8)Opposition. ETHD opposes this bill, stating that it does not
define overhead and appears to make arbitrary rules on what
constitutes services to the community. ETSD states that this
bill targets a local agency, with a publicly elected board,
entirely bypassing existing statutes and provisions for
dealing with such issues as excessive overhead and inadequate
service delivery, which are adequately handled under existing
law by the LAFCO. The Association of California Healthcare
Districts (ACHD) states in opposition that, while it
recognizes that the bill is focused on a specific healthcare
district, it is concerned about the precedent-setting approach
this bill takes to a local issue that can be best resolved by
a local discussion. ACHD states that while it can appreciate
that there may be local concerns about the level, type, and
cost of services provided, the best approach to addressing
those concerns is through engagement with the duly elected
trustees of the district. The California Special Districts
Association also opposes this bill for similar reasons as
ACHD, stating that bypassing an important local discourse is
likely to impose unintended consequences on other local
agencies not involved in the controversy.
AB 2737 (Bonta) Page 9 of ?
9)Policy comments.
a) Dispute is about support for San Leandro Hospital.
As noted by the support letter from the City of San
Leandro, at least a portion of the dispute concerning
ETHD is about the extent to which it should be supporting
the operation of San Leandro Hospital. As discussed
above, ETHD at one point owned this hospital, and sued to
prevent Sutter Health from exercising its option to
purchase the hospital in order to try and prevent Sutter
from closing the emergency department. Five years of
litigation ensued, with ETHD ultimately losing, and
Sutter was awarded a nearly $20 million judgment for
legal costs and the costs of keeping the emergency room
open. After prevailing in the lawsuit, Sutter Health
turned the hospital over to Alameda Health System, a
public health authority, in 2013. At the time, according
to local news reports, Sutter pledged to provide $20
million, ostensibly from the settlement, to the Alameda
Health System to help support the operation of San
Leandro Hospital. However, subsequent to that, the court
permitted ETHD to make the settlement payments in $2
million installment payments over a ten year period. It
is now unclear whether, and to what extent, these
settlement funds will go toward Alameda Health System for
the support of the hospital. Newspaper articles from 2013
also reported that ETHD pledged to contribute $20 million
to Alameda Health System, but since that time, ETHD has
argued that the legal settlement with Sutter has meant
that they do not have the funds to make this
contribution. This bill is an effort to ensure ETHD
provides financial support for direct health care
providers such as San Leandro Hospital.
b) Bypassing a locally elected board and LAFCO. This
bill is imposing limitations on how a particular health
care district is to spend its resources by requiring that
80% of its annual budget be awarded in the form of grants
to organizations that provide direct health services, as
defined. While the original purpose of health care
districts was to operate health facilities, and this
particular health care district no longer operates the
hospital it was originally formed to operate, ETHD does
have a locally elected board of directors. Additionally,
AB 2737 (Bonta) Page 10 of ?
special districts are subject to the oversight of the
LAFCO for the county in which they are located. For
example, upon request by a city within the LAFCO's
jurisdiction, the LAFCO could begin a dissolution process
of a special district. The committee may wish to consider
whether those concerned with ETHD have exhausted remedies
available under existing law related to special
districts.
c) Is 80% a realistic number? This bill requires 80% of
ETHD's annual budget to be spent on direct health
services. However, by using a percentage of the overall
annual budget, this bill does not distinguish between
expenses where there may be flexibility to spend less,
such as staff salaries and benefits, and fixed operating
costs, such as those associated with owning commercial
properties. Given that ETHD receives the bulk of its
income from lease revenue associated with its commercial
properties, the amount available for health care spending
is limited by non-optional spending, such as debt service
and maintenance associated with its commercial
properties. Therefore, in order to comply with this
bill's requirements, it is probable that one or more
properties would have to be sold, which would reduce
annual income available for grant-making in favor of
one-time cash availability.
SUPPORT AND OPPOSITION :
Support: Alameda Health System
City of San Leandro
Oppose: Association of California Healthcare Districts
California Special Districts Association
Eden Township Healthcare District
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