BILL ANALYSIS
SENATE LOCAL GOVERNMENT COMMITTEE
Senator Dave Cox, Chair
BILL NO: SB 1240 HEARING: 4/7/10
AUTHOR: Corbett FISCAL: Yes
VERSION: 2/19/10 CONSULTANT:
Weinberger
HEALTHCARE DISTRICTS' ASSETS
Background and Existing Law
California's 80 local health care districts are governed by
directly elected boards of directors. As hospitals, they
face market pressures to compete with other health care
providers. As local governments, they must follow the
Brown Act, the Public Records Act, the Political Reform
Act, the public contracting laws, and other statutory
restrictions.
Responding to changes in health care delivery, public
hospitals explore economic and organizational alternatives,
including leasing or selling their assets to nonprofit
corporations or even to for-profit companies. If a local
health care district wants to transfer 50% or more of its
assets to any corporation, the transfer needs
majority-voter approval (SB 1771, Russell & Kopp, 1992).
The requirement for voter approval originally applied only
to transfers to nonprofit corporations. Although the law
was silent on transfers to for-profit corporations, some
districts leased their hospitals to profit-making
companies. In 1998, the Legislature specifically
authorized transfers to for-profit corporations, but
required voter approval before a local health care district
could transfer 50% or more of its assets (SB 460, Kelley,
1998).
The authorization of transfers to for-profit corporations
sunsets on January 1, 2011 (AB 1131, Torrico, 2005). The
Torrico bill also required a district to report to the
Attorney General, within 30 days of any transfer of
district assets to a corporation, the type of transaction
and the entity to whom assets were transferred or leased.
The Eden Township Healthcare District formed in 1948 to
serve the Alameda County communities of San Leandro, San
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Lorenzo, Hayward, and Castro Valley. In 1954, the District
opened Eden Medical Center (EMC) hospital. In 1997, the
District's voters approved a merger agreement between the
District and Sutter Health. Under the 1997 agreement, the
District sold EMC to Sutter Health. In 2004, the District
purchased, San Leandro Hospital and leased it to EMC to
operate.
The Marin Healthcare District built Marin General Hospital,
which opened in 1952. In 1985, the District entered into a
30-year lease of the hospital to a new non-profit. After a
series of non-profit mergers, Sutter Health currently
leases the hospital. However, a settlement and transfer
agreement will return control of the Marin General Hospital
to the District on June 30, 2010.
In response to concerns about transfers of publicly-owned
assets under the Eden and Marin lease agreements, some
elected officials and unions representing health care
workers want the state to more strictly regulate health
care districts' contracts with third parties that operate
district facilities.
Proposed Law
When a health care district contracts with another public
or private entity to operate one or more of its health
facilities, SB 1240 requires the contract to comply with
the following three requirements:
No assets of the district, including all revenue
generated by the district facility or facilities being
operated by the other entity, can be used to benefit any
person or entity other than a hospital within the
district's jurisdiction.
The hospital and the operating entity must have an annual
independent fiscal audit and the district must make
public the resulting report.
For the subsequent sale of the hospital facility or other
assets of the district to the operating entity, any
losses incurred by the entity in the operation of the
facility cannot be a credit against the purchase price.
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SB 1240 has retroactive effect and applies to contracts
entered before January 1, 2011, unless there has been full
performance by both parties before then.
Comments
1. Protecting public assets . Local health care districts'
assets are the product of taxpayers' investing billions of
dollars statewide to support vital community health
services. Over the years, the Legislature has enacted a
series of voter-approval requirements and other oversight
mechanisms to protect the public's interest in these
publicly-owned assets. Despite these efforts, there is a
growing concern that some health care districts sign
contracts with private corporations that sacrifice the
districts' assets and financial security. Observers point
to contracts between Sutter Health and the Eden Township
Healthcare District and between Sutter Health and the Marin
Healthcare District as examples of contracts that benefit
the contracting corporation to the detriment of the
districts' residents. SB 1240 prohibits two particularly
egregious types of contract provisions and provides for
enhanced accountability through annual audits, thereby
protecting local health care districts' assets and ensuring
that community health care needs are met.
2. Local discretion and state interests . The
responsibility for protecting the public's interest in a
health care district's assets lies with the district's
elected board of directors. Health care districts face a
rapidly changing and competitive marketplace. They also
must make costly investments to meet the state's seismic
safety standards for hospitals by 2013. In meeting these
substantial challenges, district directors need some
discretion in determining whether transfers or leases of
district assets serve the best interests of the residents
they represent. The Legislature has balanced local
discretion with the state's interests in protecting vital
health care assets by enacting several safeguards, such as
requiring the State Attorney General to review asset
transfers and, in some cases, requiring voter approval.
But, state laws, no matter how detailed, cannot guarantee
that health care district directors will always make wise
decisions in contracting with private corporations. The
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Committee may wish to consider whether, by regulating
specific elements in health care districts' contracts, SB
1240 disrupts the existing balance between protecting state
interests and preserving local discretion.
3. Retroactive ? SB 1240 declares that it has retroactive
effect, applying to contracts entered into before the date
on which the bill takes effect. This retroactivity
provision raises a number of concerns about unintended
consequences. Is the bill intended to apply to the
contract between Sutter Health and Marin Healthcare
District, which expires this June? If so, is the bill
intended to require Sutter Health to repay funds to the
District if the bill takes effect next year? Is the bill
intended to retroactively change the terms of the contract
between Sutter Health and Eden Township Healthcare District
for the lease and possible sale of San Leandro Hospital?
What other existing contracts between districts and private
corporations does the bill retroactively affect? How does
the retroactivity provision comply with the California
Constitution's prohibition of bills that impair contract
obligations? The Committee may wish to consider amending
SB 1240 to make its requirements prospective, thereby
avoiding confusion, potential litigation, and unintended
consequences.
4. Other questions . SB 1240 contains several undefined
terms and vague provisions. The bill requires that
district assets, including revenues, must be used for the
"benefit" of a hospital within the jurisdiction of the
district. The bill does not define what is meant by
"benefit," nor does it designate any individual or agency
who is responsible for determining whether a particular
reallocation of assets benefits a district hospital. The
bill requires that annual audits must be "made public," but
does not specify whether a district can fulfill this
requirement by responding to Public Records Act requests,
making the audits available at public libraries, posting
audits online, or by other means. SB 1240 states that it
does not apply retroactively to contracts for which there
has been "full performance" before the bill becomes
effective. It does not define what is meant by "full
performance" of a contract. The Committee may wish to
consider amending SB 1240 to clarify the meaning of these
terms.
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5. Mandate . The California Constitution requires the
state to reimburse local governments for the costs of new
or expanded state mandated local programs. Because SB 1240
imposes new duties on health care district officials,
Legislative Counsel says that it imposes a new state
mandate. SB 1240 requires the state to reimburse local
agencies if the Commission on State Mandates determines
that the bill imposes a reimbursable mandate.
6. Double-referral . Because SB 1240 affects local health
care districts' contracts with other entities to operate
health care facilities, the Senate Rules Committee ordered
a double-referral of the bill -- first to the Senate Local
Government Committee and then to the Senate Health
Committee.
Support and Opposition (4/1/10)
Support : California Nurses Association/National Nurses
Organizing Committee.
Opposition : California Hospital Association.