BILL ANALYSIS                                                                                                                                                                                                    Ó






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          |SENATE RULES COMMITTEE            |                       AB 2737|
          |Office of Senate Floor Analyses   |                              |
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                                   THIRD READING 


          Bill No:  AB 2737
          Author:   Bonta (D) 
          Amended:  6/20/16 in Senate
          Vote:     21 

           SENATE HEALTH COMMITTEE:  7-0, 6/29/16
           AYES:  Nguyen, Hall, Mitchell, Monning, Nielsen, Pan, Roth
           NO VOTE RECORDED:  Hernandez, Wolk


          SENATE APPROPRIATIONS COMMITTEE:  Senate Rule 28.8

           ASSEMBLY FLOOR:  59-10, 5/27/16 - See last page for vote

           SUBJECT:   Nonprovider health care districts


          SOURCE:    Author
          
          DIGEST:   This bill requires a nonprovider healthcare district,  
          which this bill defines using parameters that limit its  
          application to the Eden Township Healthcare District (ETHD) 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.
          
          ANALYSIS:  

          Existing law:

          1)Establishes "The Local Health Care District Law," under which  
            a local hospital district may be organized, incorporated and  








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            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  
            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.







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          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.


          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.







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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  
            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  







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            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  
            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,  







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            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 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  







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            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.  
            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. 

          Related/Prior Legislation
          
          AB 678 (Gordon and Dickinson, 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 died 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  







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          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, 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 would  
          have created the unintended consequence of reducing the  
          incentive for such arrangements when hospitals are struggling to  
          remain open.


          FISCAL EFFECT:   Appropriation:    No          Fiscal  
          Com.:YesLocal:   Yes


          SUPPORT:   (Verified8/2/16)


          Alameda Health System
          City of San Leandro


          OPPOSITION:   (Verified8/2/16)


          Association of California Healthcare Districts 
          California Special Districts Association
          Eden Township Healthcare District


          ARGUMENTS IN 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,  







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          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 ensures 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. 


          ARGUMENTS IN 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.

          ASSEMBLY FLOOR:  59-10, 5/27/16
          AYES:  Achadjian, Alejo, Travis Allen, Arambula, Atkins, Baker,  
            Bloom, Bonilla, Bonta, Burke, Calderon, Campos, Chau, Chu,  
            Cooley, Dababneh, Daly, Eggman, Frazier, Gallagher, Cristina  
            Garcia, Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez,  
            Gordon, Gray, Roger Hernández, Holden, Irwin, Jones-Sawyer,  
            Kim, Lackey, Levine, Linder, Lopez, Low, Maienschein, McCarty,  
            Medina, Mullin, Nazarian, Obernolte, Quirk, Ridley-Thomas,  
            Rodriguez, Salas, Santiago, Steinorth, Mark Stone, Thurmond,  
            Ting, Wagner, Waldron, Weber, Wilk, Williams, Rendon







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          NOES:  Bigelow, Chang, Chávez, Dahle, Beth Gaines, Harper,  
            Jones, Mathis, Olsen, Patterson
          NO VOTE RECORDED:  Brough, Brown, Chiu, Cooper, Dodd, Grove,  
            Hadley, Mayes, Melendez, O'Donnell, Wood

          Prepared by:Vince Marchand / HEALTH / (916) 651-4111
          8/3/16 19:11:03


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