BILL ANALYSIS
SB 1240
Page 1
Date of Hearing: June 22, 2010
ASSEMBLY COMMITTEE ON HEALTH
William W. Monning, Chair
SB 1240 (Corbett) - As Amended: April 28, 2010
SENATE VOTE : 22-12
SUBJECT : Local health care districts: operation of facility by
another entity.
SUMMARY : Imposes conditions on contracts between health care
districts (districts) and other entities to operate one or more
health facilities owned by the district. Requires that the
contract 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. Specifically, this bill :
1)Requires contracts, when a district contracts with another
public or private entity to operate one or more of its health
facilities, to:
a) Prohibit assets of the district, including, but not
limited to, all revenue generated by the district facility
or facilities being operated by the other entity from being
used for the benefit of any person or entity other than a
hospital within the jurisdiction of the district;
b) Require the hospital and the operating entity to
annually undergo an independent financial audit and the
resulting report to be made public by the district; and,
c) In the case of a subsequent sale of the hospital
facility or any other assets of the district to the
operating entity, prohibit any losses incurred by the
entity in the operation of the facility from being used as
a credit against the purchase price of the facility or
other district assets. Exempts this provision from a sale
of a hospital facility that is otherwise in compliance with
existing law, as specified.
2)Exempts all existing and future contracts from 1) above that
have not had a full performance by both parties prior to
January 1, 2011. Defines "full performance" as the complete
execution by all parties of all terms and conditions of a
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contract.
3)Exempts 1) through 2) above from applying to a contract by a
district that meets all of the following criteria:
a) The contract is between the district and a tax-exempt
nonprofit corporation, qualified under Section 501 (c) (3)
of the Internal Revenue Code;
b) The nonprofit corporation operates one or more general
acute care hospitals, as defined in existing law, that are
the subject of the contract;
c) The general acute care hospital or hospitals that are
operated by the nonprofit corporation are owned by the
district; and,
d) The district is the nonprofit corporation's sole
corporate member.
EXISTING LAW :
1)Establishes the Local Health Care District Law which
authorizes communities to form special districts to construct
and operate hospitals and other health care facilities to meet
local needs.
2)Authorizes, until January 1, 2011, 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.
Prior to the district transfer of 50% or more of the
district's assets to one or more corporations, requires the
elected district board to submit to the voters of the district
a measure proposing the transfer.
3)Requires, after January 1, 2011, the provisions in 2) above to
restrict these transfers to only nonprofit corporations.
4)Authorizes a district to transfer, at less than 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.
Requires the transfer agreement to provide that all assets
transferred to and accumulated by the nonprofit corporation
are transferred back to the district upon termination of the
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transfer agreement, and other conditions are met. Prior to
the transfer of 50% or more of the district's assets to one or
more nonprofit corporations, requires the elected district
board to submit to the voters of the district a measure
proposing the transfer.
5)Requires the district to report to the California 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.
FISCAL EFFECT : According to the Senate Appropriations
Committee, pursuant to Senate Rule 28.8, negligible costs.
COMMENTS :
1)PURPOSE OF THIS BILL . According to the author, due to rapid
changes in health care delivery, technology, and
reimbursement, hospitals owned and operated by districts must
compete with other health care providers in addition to
complying with the state's hospital seismic requirements. The
author maintains that all of these factors have forced
districts to ponder arrangements with non-profit or for-profit
entities in order to keep their districts solvent and maintain
a strong presence in their communities. The author asserts
that, in some cases, district boards enter into a contract
with larger, private health care systems to manage the
district hospitals which, unfortunately, in too many cases,
end with assets being transferred out of the district to the
benefit of the contracting private health system and to the
detriment of the local community. The author argues that
there is a growing concern that some districts are entering
into contracts that reduce the district's assets and access to
acute care. The author cites as examples of this a 2007
agreement between the Eden Township Healthcare District and
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 to $200 million
was transferred from Marin General Hospital to Sutter over a
two-year period. According the author, this bill is intended
to protect the assets of a district to ensure the community's
health care needs are met.
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2)HEALTHCARE DISTRICTS . According to the Association of
California Healthcare Districts (ACHD), districts originated
in 1946 in the aftermath of World War II in response to an
acute hospital bed shortage. The Legislature responded by
enacting the Local Hospital District Act [now Health Care
District Act (the Act)] which authorized communities to form
special districts to construct and operate hospitals and other
health care facilities to meet local needs. Under the Act,
communities were authorized to impose property tax
assessments, with voter approval, to help subsidize community
hospital and health care services. According to ACHD, there
are 72 districts operating today, 46 of which operate
hospitals within their district boundaries. Eleven of the 72
have either leased or sold their hospital facilities to
for-profit or not-for-profit health systems but still provide
health related services to the people within their district
boundaries. The remaining 15 districts provide health-related
services to those living within their districts. ACHD
maintains that 37 of the 46 hospitals owned and operated by a
district are considered rural representing over 50% of the
rural hospitals in the state. These hospitals are the chief
source of inpatient, outpatient, and emergency care for
California's rural residents which include a significant
minority population, the underinsured and the uninsured.
According to ACHD, in fiscal year 2000 a significant majority
of the 46 district hospitals experienced financial losses
ranging from $100,000 to over $10 million. Over the last 10
years, according to ACHD, seven districts have filed for
public entity bankruptcy reorganization and three districts
have ceased to exist.
3)ASSET TRANSFERS . The author states that this bill intends to
protect district assets when district hospitals are operated
by an outside entity and cites the following incidents as
examples of the need for this bill:
a) 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
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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 EMC
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 EMC to meet seismic safety
standards.
b) 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 MGH 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.
4)EXEMPTIONS TO THIS BILL . The April 28, 2010 amendments carve
out an exemption for certain districts. According to the
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author, 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 MGH, when control of the hospital
transfers back to the district in June 2010. The author
maintains that the hospital license in these two instances is
held by the operating non-profit entity and keeping these
contractual arrangements in place greatly eases the transition
and operations of the hospital. Otherwise, the author argues,
all HMO contracts, labor agreements, retirement programs,
employee contracts, hospital licenses, etc., would have to be
cancelled and remade.
5)SUPPORT . The California Nurses Association (CNA), the sponsor
of this bill, 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 MGH is being returned to
the district much poorer as it faces renewed competition from
Sutter's hospital in Novato. CNA also argues that Eden
Township Health Care District's Memorandum of Understanding
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
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.
6)OPPOSITION . 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
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reluctant to enter into agreements to operate hospitals given
the restrictions proposed in this bill.
7)PREVIOUS LEGISLATION .
a) SB 1351 (Corbett) of 2008, would have required voter
approval before a 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% or more of the
district's assets. SB 1351 would have also expanded the
Attorney General's ability to review and comment on
proposed transfers and prohibited a 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. SB
1351 was vetoed by Governor Arnold Schwarzenegger, who
stated that he could not support placing additional
restrictions on a district, especially when they are
elected by, and accountable to, their local community.
b) SB 460 (Kelley), Chapter 18, Statutes of 1998,
permitted, until 2001, a district to transfer at fair
market value its assets to for-profit corporations, as
specified.
c) 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.
d) AB 1131 (Torrico), Chapter 194, Statutes of 2005,
extends the January 1, 2006 sunset date to 2011, permitting
districts to transfer or lease assets to for-profit
corporations, as specified.
e) SB 1771 (Russell and Kopp), Chapter 1359, Statutes of
1992, defines the terms and conditions under which a
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% or more of the district's assets.
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8)POLICY CONCERN . This bill 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. 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.
REGISTERED SUPPORT / OPPOSITION :
Support
California Nurses Association (sponsor)
American Federation of State, County and Municipal Employees,
AFL-CIO
California Labor Federation
Marin Healthcare District
Opposition
California Hospital Association
Analysis Prepared by : Tanya Robinson-Taylor / HEALTH / (916)
319-2097