BILL ANALYSIS
SENATE HEALTH
COMMITTEE ANALYSIS
Senator Elaine K. Alquist, Chair
BILL NO: SB 1240
S
AUTHOR: Corbett
B
AMENDED: April 13, 2010
HEARING DATE: April 21, 2010
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CONSULTANT:
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Hansel/jl
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SUBJECT
Local health care districts: operation of facility by
another entity
SUMMARY
Imposes conditions on contracts between health care
districts and other entities to operate one or more health
facilities owned by the district. States that its
provisions apply to all existing and future contracts,
unless there has been full performance by both parties to
the contract prior to January 1, 2011.
CHANGES TO EXISTING LAW
Existing law:
Under the Local Health Care District Law, provides for the
formation of local health care districts (districts).
Until January 1, 2011, authorizes a district to transfer
ownership, at fair market value, of any part of its assets
to one or more corporations to operate and maintain the
assets.
Before the district transfers, pursuant to this paragraph,
50 percent or more of the district's assets to one or more
corporations, in sum or by increment, the elected board
must, by resolution, submit to the voters of the district a
measure proposing the transfer.
Continued---
STAFF ANALYSIS OF SENATE BILL 1240 (Corbett)Page 2
After January 1, 2011, existing law changes these
provisions to restrict these transfers only to nonprofit
corporations.
Also authorizes a district to transfer, at less then fair
market value, any part of the assets of the district to one
or more nonprofit corporations to operate and maintain the
assets, if the transfer benefits the communities served by
the district, the transfer agreement provides that all
assets transferred to and accumulated by the nonprofit
corporation are transferred back to the district upon
termination of the transfer agreement, and other conditions
are met.
Before the district transfers 50 percent or more of the
district's assets to one or more nonprofit corporations,
the elected board must, by resolution, submit to the voters
of the district a measure proposing the transfer.
Requires the district to report to the Attorney General,
within 30 days of any lease of district assets to one or
more corporations, the type of transaction and the entity
to whom the assets were leased.
This bill:
Imposes additional specific conditions on contracts between
districts and other entities to operate one or more health
facilities owned by the district:
Specifically provides that no assets of the district
shall be used for the benefit of any person or entity
other than a hospital within the jurisdiction of the
district;
Provides that the hospital and the operating entity must
undergo an independent fiscal audit, which must be made
public; and
Provides that, in the case of a subsequent sale of the
hospital facility or other assets of the district to the
operating entity, any losses incurred by the entity may
not be used as a credit against the purchase price of the
facility or other district assets.
States that its provisions apply to all existing and future
contracts, unless there has been full performance by both
STAFF ANALYSIS OF SENATE BILL 1240 (Corbett)Page 3
parties to the contract prior to January 1, 2011.
FISCAL IMPACT
This bill has not been analyzed by a fiscal committee.
BACKGROUND AND DISCUSSION
According to the author, health care districts are formed
when citizens take the extraordinary step to assess
themselves in order to provide hospital and other health
care services in their community. Many struggle to
maintain their fiscal viability and some decide to contract
with larger private health care systems to manage their
hospitals. Unfortunately, in too many cases, those
relationships end with assets being transferred out of the
district to the benefit of the contracting private health
system. The author cites as examples of this a 2007
agreement between the Eden Township Healthcare District
Sutter Health, under which Sutter obtained a right of first
refusal to purchase San Leandro Hospital, and the right to
first deduct their operating losses from the purchase
price, and an agreement between Marin Healthcare District
and Sutter Health, under which the author states that $90 -
200 million was transferred from Marin General Hospital to
Sutter over a two-year period.
Health Care Districts
Health care districts are special districts formed under
state law to meet local health needs
not satisfied by other health care resources or government
programs in a given geographical area. Health care
districts formed pursuant to state law are financed by
assessments on real and personal property within the
district. A 2006 report published by the California
Healthcare Foundation found that 85 health care and
hospital districts have been formed in California since the
first hospital district enabling legislation was passed in
1946.
Health care districts operate medical facilities, including
hospitals, public health clinics, and skilled nursing
facilities. Some also provide community-based education
programs to the residents of their districts. Given the
volatile health care market in recent decades, hospital
STAFF ANALYSIS OF SENATE BILL 1240 (Corbett)Page 4
districts have contemplated service changes, leasing
arrangements, and affiliations with both nonprofit and
for-profit health care corporations as means or providing
health care services to residents.
Eden Township Healthcare District
The Eden Township Health Care District was formed in 1948
to serve the Alameda County communities of San Leandro, San
Lorenzo, Hayward, and Castro Valley. In 1954, the District
opened Eden Township Hospital. In 1997, the District's
voters approved a merger agreement between the District and
Sutter Health. Under the 1997 agreement, the District
created a nonprofit, in conjunction with Sutter Health,
known as the Eden Medical Center (EMC), to operate the
hospital. The agreement maintained a role for the
District in the governance of EMC by providing for the
membership of the District's five elected directors on a
new 11-member Eden Medical Center Board of Directors.
In 2004, the District purchased San Leandro Hospital and
leased it to EMC to operate. The amended hospital lease
and operating agreement states that Sutter may assign its
interests, or any portion of its interest, in the purchase
option without the landlord's consent. San Leandro
Hospital is an acute care hospital that currently provides
medical, surgical, and rehabilitative services, including
an emergency room that receives approximately 25,000 visits
per year.
In 2007, Sutter Health proposed to replace EMC with a newly
constructed hospital which complies with the state's
seismic safety law. The proposal also altered EMC's
governance structure, eliminating the participation of the
Eden Township Hospital District's elected directors on the
board that governs the new facility. The withdrawal of the
district's members from the EMC board was not approved by
district voters, although some believe it should have been
voted on. However, newly elected board members refused to
hand over the hospital, prompting Sutter to file a lawsuit.
The board then filed a countersuit to halt the transfer,
claiming that the original decision to transfer San Leandro
Hospital to Sutter involved a conflict of interest. Sutter
claims that it cannot afford to keep San Leandro Hospital
open as it works to revamp Eden Medical Center to meet
seismic safety standards.
STAFF ANALYSIS OF SENATE BILL 1240 (Corbett)Page 5
Marin Healthcare District
The Marin Healthcare District built Marin General Hospital
(MGH), which opened in 1952. In 1985, the District entered
into a 30-year lease of the hospital to a nonprofit
corporation. MGH is currently operated under a lease by
the Marin General Hospital Corporation, a nonprofit
corporation of which Sutter Health is currently the sole
corporate member. A settlement and transfer agreement will
return control of MGH to the District on June 30, 2010. At
that point, the District will become the sole corporate
member of the nonprofit corporation.
Prior legislation
SB 1351 (Corbett) of 2008 would have required voter
approval before a health care district can transfer, for
the benefit of the communities served by the district and
in the absence of adequate consideration, any part of the
assets of the district to one or more
nonprofit corporations to operate and maintain the assets,
as opposed to 50 percent or more of the district's assets.
Would have expanded the Attorney General's ability to
review and comment on proposed transfers. Would have
prohibited a health care district from relinquishing its
membership on the board of a nonprofit corporation to which
the district has transferred or leased its assets without a
vote of the district electorate. Vetoed by the Governor
with the following message:
District hospitals are governed by a locally-elected
health care district board and are governed by the
Brown Act, the Public Records Act, the Political
Reform Act, public contracting laws and other
statutory restrictions. I cannot support placing
additional restrictions on a local hospital district,
especially when they are elected by, and accountable
to, their local community.
AB 1131 (Torrico), Chapter 194, Statutes of 2005, extends
for five years, until 2011, the January 1, 2006 sunset date
permitting health care districts to transfer or lease
assets to for-profit corporations, as specified.
SB 1508 (Figueroa), Chapter 169, Statutes of 2000, extended
the authority for districts to transfer or lease assets to
a for-profit until January 1, 2006.
STAFF ANALYSIS OF SENATE BILL 1240 (Corbett)Page 6
SB 460 (Kelley), Chapter 18, Statutes of 1998, permits,
until 2001, a health care district to transfer at fair
market value its assets to for-profit corporations, as
specified.
SB 1771 (Russell & Kopp), Chapter 1359, Statutes of 1992,
defines the terms and conditions under which a health care
district may transfer, without adequate consideration, any
part of its assets to one or more nonprofit corporations,
including that the transfer must be for the benefit of the
community served by the district, provide for the transfer
back to the district of the assets at the end of the lease,
and be approved by a majority of the voters in the district
if the transfer is of 50 percent or more of the district's
assets.
Arguments in support
The California Nurses Association (CNA), the sponsor of SB
1240, states that the experience of nurses at district
hospitals leased by Sutter Health has revealed the urgent
need for state action to protect public assets contracted
to private operators. CNA argues that Marin General
Hospital is being returned to the health care district much
poorer as it faces renewed competition from Sutter's
hospital in Novato. CNA also argues that Eden Township
Health Care District's MOU with Sutter gave Sutter a
perverse incentive to run the San Leandro Hospital into the
ground and close the hospital.
The California Labor Federation states that agreements
between health care districts and private corporations in
recent years have allowed the corporations to transfer
assets out of the district. Some of these agreements have
contained incentives for the corporation to ruin the
hospital financially, in order to purchase them at a lower
price, and have resulted in an abuse of taxpayer funds.
Taking a support if amended position, the Marin Healthcare
District requests an amendment to provide that the bill
does not apply to a tax exempt hospital that is operated
under an agreement between the hospital district and a
nonprofit corporation where the district serves as the
nonprofit corporation's sole corporate member.
Arguments in opposition
STAFF ANALYSIS OF SENATE BILL 1240 (Corbett)Page 7
The California Hospital Association (CHA) argues that
existing law already provides adequate protections and
public review prior to a district entering into a major
contract. CHA argues that district hospitals, like all
hospitals, face intense market pressures; often,
contracting with a health care system is what a district
must do in order to sustain the operations of a hospital,
and often these agreements require the movement of assets
between operating organizations. CHA also asserts that
outside entities may be reluctant to enter into agreements
to operate hospitals given the restrictions proposed in SB
1240.
COMMENTS
1. Double referral. This bill was also referred to the
Senate Local Government Committee, which heard it on April
7, 2010 and adopted it on a do pass as amended motion.
2. Exemption of certain leasing arrangement. In some
cases, a district creates a nonprofit entity to operate its
hospital, which it controls, rather than leasing to an
outside nonprofit entity. Examples of these types of
arrangements are the relationship between the El Camino
Hospital District and the nonprofit entity that operates El
Camino Hospital, and the relationship that will exist
between the Marin Healthcare District and the nonprofit
entity that operates Marin General Hospital, when control
of the hospital transfers back to the district in June
2010. Staff understand that the author intends to offer an
amendment to exempt these types of arrangements from some
or all provisions of the bill.
3. Retroactivity. As amended, SB 1240 would apply to
existing and future contracts in place when the bill takes
effect, except for contracts where there has been full
performance of the terms by both parties prior to January
1, 2011. Some believe the retroactive feature of the bill
may violate constitutional prohibitions on the impairment
of contracts. Should the bill be enacted with this
provision, the question of how this provision would apply
to existing contracts would likely be decided through
litigation.
4. Suggested technical amendments. Suggested technical
STAFF ANALYSIS OF SENATE BILL 1240 (Corbett)Page 8
amendments would be to clarify what is meant by a "fiscal
audit" in paragraph (2) of the bill and to clarify that a
the bill's provisions precluding losses from the hospital
facility to be deducted from the purchase price of the
facility, in a subsequent sale of the facility to the
operating entity, do not bar a sale that otherwise meets
the fair market value standard in existing law.
PRIOR ACTIONS
Senate Local Government 3-2
POSITIONS
Support: California Nurses Association (sponsor)
California Labor Federation
Marin Healthcare District (if amended)
Oppose: California Hospital Association
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