Full statement of Severinghaus position

By John W. Severinghaus, M.D.

Documentation of failures of Sutter/MGH

District hospitals are mandated to promote the health of all residents regardless of income, religion, race/ethnicity, or insurance coverage. This uniquely inclusive mission has created remarkable healthcare institutions that provide quality care and are much loved by their communities. Marin General Hospital, owned by residents of the Marin Healthcare District, is among our county's most valuable public assets.

Quentin Cook was employed simultaneously as general counsel to the Healthcare District and as counsel to an existing corporation renamed MGH Corp. He created California Healthcare Systems (CHS) which owned Marin Health Systems (now Marin Community Health (MCH)), the entity that manages MGH Corp (56). Then Cook became CEO of CHS (57). In that role, he negotiated the 1995 Sutter/CHS merger. He became a Sutter Vice President, resigned in 1996, and became a missionary for the Mormon Church (58). His law firm remains counsel to MGH Corp.

A 1987 San Francisco Examiner editorial called for return of the hospital to the District (11). Former County Supervisor Gary Giacomini called the lease "the biggest theft of public property in Marin's history." (12).

According to a document Sutter/MGH mailed to all Marin households in September, 2000, the lease was necessary to survive "in the competitive managed care environment", to provide the "financial safety net of a larger organization", and to "eliminate public disclosure requirements." (9).
The covert purpose of the lease was to remove decision making from public oversight and review without vote of the district residents. Attorney Nancy McCarthy then wrote and the Calif legislature passed a law requiring that similar transfers of healthcare district assets need a vote of district residents (10).

Only this year has Marin come to fully understand that the lease has no covenants to protect quality of care for its patients and provides no means to require quality care.
The flawed lease states in several places that its purpose is to promote the health and welfare of District residents. Yet this noble goal has not been met and, in fact, care at MGH has deteriorated. The following are some examples documented during the last six years at District Board meetings and in other settings:

Since the lease took effect, millions of dollars have been diverted from patient care to fuel skyrocketing executive salaries and, since 1995, to promote Sutter's financial growth. When the District managed MGH, it paid its CEO Henry Buhrmann a $75,000 salary (27) As the Sutter/MGH CEO, Buhrmann's 1996 pay package was about $500,000 (28). In contrast, Washington Healthcare District in Hayward pays its CEO $250,000, including a $25,000 bonus. Tax returns indicate the 1996 pay package for Robert Montgomery, the Sutter executive who sits on the MGH Corp. Board, was $716,000, (29) and for Sutter's CEO Van Johnson, $1.1 million (30).
Audited HAFD reports filed with OSHPD show MGH Corp. earned $2.1 million in net profit in 1995 and $5.2 million in 1996 (31). In 1997, Sutter disclosed a 1996 systemwide net income of $23.7 million (32). MGH, averaging 100 patients per day in 1996 and one of 26 hospitals in the Sutter system, contributed an astounding 22% of Sutter's total net income. Clearly Sutter/MGH has the financial means to fund on-call neurosurgery coverage at a reported cost of $1,000 every fourth weekend (33).

By way of contrast, El Camino Healthcare District, in Mountain View, lost $31 million from 1994 to 1996 under a similar lease (34). The District successfully sued to break their lease on the grounds that a conflict of interest existed in its formation. El Camino earned $17 million for the first six months of 1997 as an independent District Hospital.
El Camino Hospital profits are being spent to increase staffing, purchase new equipment, and improve healthcare within the District. Washington District Hospital uses its profits to fund needed community health services (35). These District hospitals have learned how to benefit from cooperative affiliations without the detrimental effects of long-term leases to corporations with conflicting missions.

With the 1995 merger, Sutter required MGH Corp. to obtain District approval to join the Obligated Group and Excess Cash Transfer Programs. The Obligated Group facilitates Sutter's access to capital. Not all Sutter subsidiaries participate. For example, Sutter has 26 hospitals, but its 1996 bond issue shows 13 in the Obligated Group, including MGH (36).
Concerned District residents mounted a vigorous campaign to oppose District approval of the Obligated Group and Excess Cash Transfer Program, but the District Board approved them with only two of the 5 Directors voting: Valerie Bergmann and Suzanna Coxhead. Director Larry Bedard (later recalled due to conflict of interest) formed the quorum but abstained from the vote. Director Paul Lofholm (also recalled due to conflict of interest) recused himself. Director Diana Parnell wisely declined to participate in forming the quorum (37).
Sutter's tax-exempt revenue bonds are guaranteed by the entities in the Obligated Group, which include MGH and Marin Home Care. According to Sutter's 1997 bond issue, "All members of the Obligated Group are jointly and separately liable with respect to the payment of each obligation incurred." (38).
What have been the consequences of the Obligated Group to MGH and District residents? In 1995, Sutter owed about $800 million in tax-exempt bonds. Two years later, Sutter owes over $1 billion in tax-exempt bonds (39)
Sutter is a mixed-status conglomerate. This means some Sutter subsidiaries are privately held or publicly traded for-profit corporations and others are non-profit (40). Some subsidiaries, including one in which MGH Corp. holds stock, are located in the Cayman Islands (41).
The State Controller is investigating Sutter's use of tax-exempt funds to support for-profit subsidiaries (42). IRS investigators found evidence of illegal private gain by Sutter Directors that could result in loss of its tax-exempt status (43). Sutter pleaded guilty to Medicare billing fraud (44). Should Sutter lose its tax-exempt status or default on its bonds, Obligated Group members will be required to use their future revenue to retire more than $1 billion in bonds, even if the members never benefited from them.
The District Board asked Sutter/MGH to provide details to District residents about MGH participation in the Obligated Group. On October 20, 1997, Sutter/MGH declined to provide such information (45).

The Excess Cash Transfer program allows Sutter to require MGH Corp. or Marin Home Care to transfer to it all but 2 weeks of operating cash (46). Sutter may use this "excess cash" as it sees fit (47).
Sutter sets the amount of cash that members of the Excess Cash Transfer Program may retain, and Sutter may change the amount, as it desires. There is no requirement that "excess cash" ever return to the District (48).
Sutter claims it has not invoked the Excess Cash Transfer Program in Marin. However, many ways exist to transfer money. MGH Corp. and Marin Home Care pay annual "membership fees" set by Sutter which have more than doubled since the merger, and they are required to purchase goods and services from privately held for-profit Sutter entities, at prices or fees set above market values by those subsidiaries. Examples are liability insurance (from their Cayman Islands tax free subsidiary) and pharmaceuticals.
The District asked Sutter/MGH to identify the ways in which it has transferred funds to Sutter and the amounts that have been transferred. On October 20, 1997, MGH Corp. declined to provide information.

As described in an analysis prepared this year, the lease is unfair to the District in the following additional ways (49).

All the District's cash, accounts receivables, and inventory were transferred to Sutter/MGH. The lease has no provision for the transferred cash and assets to be returned to the District upon termination. The lease permits capital improvement credits in lieu of cash rent, but makes no provision for Sutter/MGH to return these improved assets to the District upon lease termination; nor does it allow the District to approve or oversee these capital improvement credits. Sutter/MGH is allowed to sell District assets, without input from the District. Proceeds from asset sales stay with Sutter/MGH, without compensation to the District. No provision guarantees sale proceeds will be used for healthcare purposes within the District. Sutter/MGH is not required to carry earthquake insurance, or to replace the physical assets after a major disaster. Additionally, the District could not end the lease if Sutter/MGH decided not to rebuild.

The lease does not require actual patient care, quality assurance, or financial reports from Sutter/MGH. No safeguards exist to allow the District to meaningfully monitor Sutter/MGH performance or to require remedial action in case of unsatisfactory performance. The District can't prevent Sutter/MGH from closing currently offered services such as psychiatric inpatient care, or force them to fund services such as a neurosurgeon on call. The lease lacks a provision for the District to end the lease for financial or operational mismanagement, or for non-operation.

The vote to initiate litigation (if mediation was unsuccessful) was taken on July 29, 1997 by a vote of 4-0 (Director Coxhead absent) (51). The District tried to resolve its disputes with Sutter/MGH, spending much time and resources on the mediation. On August 20, the District voted unanimously (5-0) that the mediation had produced an unsatisfactory result (52). The Board waited two months for Sutter/MGH to come forward with another proposal. On October 23 the Board instructed counsel to implement the earlier Board actions (53). Suit was filed November 7, 1997 naming Sutter and MGH Corp. as defendants (54).
During the past twelve years, the public records fell into complete disarray. Board agenda packages are missing entirely for 1984 and 1985, no taped records have been found for any year before 1986, and 1995 tapes are missing for meetings discussing the merger. Financial records are in such disarray that the Board is unable to determine if several hundred thousand dollars due the District under the lease were collected. The following individuals chaired the District Board during the last twelve years:
Mary Carpou, Chair 1985-1986, 1988-1990. Peter Eisenberg, MD, Chair 1986-1988. Phyllis Miller, Chair 1990-1992 (appointed in 1986 following a 2-minute public discussion, then elected in 1988) (70) Valerie Bergmann, Chair 1992-1994. Bergmann is a former MGH employee, was Eisenberg's election campaign chair, and is still on the District Board (71) Larry Bedard, MD, Chair 1994-1996. He was recalled in 1996 due to conflict of interest.

By January 2001, the California Appellate Court will rule on the District's case regarding the conflict of interest, provided that voters elect Directors committed to continue the case through the California Supreme Court appeal. It is probable that the court will rule, as it has many times before in 17 similar cases, that the public is not time-barred from recovering its improperly transferred assets. In San Diego last spring (2000) the appellate court ruled similarly in Grossmon Hospital's favor.
If MGH is returned to the control of elected Directors accountable to the voters, Directors would set hospital policy and hire professional managers to carry out those policies. Those managers would report to the elected Board for their actions on behalf of the public wellbeing rather than to a private board for their actions on behalf of corporate profits.
Over 80% of district hospitals in California and nationally are managed this way. This is the only way to have public oversight and accountability for important issues like the availability and quality of healthcare, and for balancing these when economic issues intrude.

In 1986, Marin Community Health (MCH) became the governing entity for MGH Corp. and the other transferred District assets. That structure remains to the present. When the dispute is resolved, all MCH Board members should resign to be replaced by new members appointed by the public District Board. These new members would serve at the pleasure of the District Board, the public's elected representatives. This simple strategy would return the Healthcare District assets to public control and return public oversight through the District Board's leadership.

The MCH Board is one of many "governing boards" Sutter appoints to manage District assets. Each governing board is charged with overseeing operations of the various assets of the Marin Healthcare District. Currently, MCH meetings are closed to public oversight and minutes are not available from it or any of the subsidiary entities. Under the recommended structure, the MCH Board would meet monthly and report to the District Board quarterly. Public meetings would be conducted under the Brown Act requirements of full and open disclosure.

This legal and organizational structure will be useful for immediacy and legal requirements. Fundamentally, continuing the existence of MCH would return District assets in the shortest possible time. With numerous legal, licensing, and accreditation requirements to meet, it would be critical for such a structure to be in place to move forward with operational and professional issues. To transition the 501(c)(3) governance structure back to the District structure would take considerably longer and cost a great deal at a time of intensive competitive pressures. The District would benefit the most by leaving the existing MCH structure in place and operating under the Brown Act, with public oversight by the elected District Board.
The El Camino Healthcare District adopted this strategy when it successfully sued to regain control of its assets. This has been a significant factor in that District's speedy return to profitability and quality care.

Yes. With the advent of competition in health care, the Brown Act (a California state law governing all political subdivisions) was amended shortly after the lease was signed to allow District Hospitals the same competitive advantages as their private counterparts. With proper notice, the Board may meet in closed session for purposes of discussing legal and strategic issues, personnel matters and quality assurance, as defined by California law.

Rapidly stabilizes the organization at a critical period in its competitive history. Preserves a better employee compensation method. Saves millions of dollars in expenses to shift non-profit employees to government employees. Allows valuable joint ventures not permitted under legal restrictions imposed by the Government Code. Greatly enhances potential to secure investment income: government agencies can invest only in fixed securities such as bonds, whereas private organizations have more favorable options. Continues a familiar organizational structure for the Marin Healthcare District. District directors would function as the Governing Body which appoints subsidiary Governing Boards to operate the various District entities, i.e., MGH, MGH Foundation, Marin Home Care and other associated assets.

Yes. The public owns the District and all its assets, including the Hospital. Those assets once again would be protected through public oversight by the public's elected District Board representatives. To keep informed, the public would continue to attend monthly District Board meetings for education and governance issues, and would be able to attend monthly MHS meetings for hospital operations issues. In addition, the local media routinely would be able to cover these meetings and report about upcoming board concerns and decisions. As now is the case for the District Board, meetings would be announced in advance to the public, the media, and interested residents who request to be on the mailing list.
The problems the District is having with Sutter/MGH are all about the need for trust, the need for accountability and responsibility, the need for appropriate management and performance, and the need for a decision process open to public scrutiny. The Marin Safe Healthcare Coalition suggests a strategy that would provide these.
Following twelve turbulent years of experimenting with a failed integrated delivery system that has been shrouded in secrecy, the current leadership of the Marin Healthcare District Board predicates its future success on the conviction that public assets should be used in the public interest with appropriate public oversight. As the District Board determines how best to serve the needs of its residents, the organization would continue to change accordingly.

Yes. Any time the District Board wished to change the organization in any respect, including structure, personnel or procedures, it could do so with appropriate public notice and a majority vote of the Board. Should a District Board majority recommend leasing the Hospital, it could be accomplished only by a majority vote of District residents. Thus, the public and its elected representatives would have authority and responsibility for all assets and operations of the District and its programs.

This document was adapted from material prepared by a health policy analyst at the University of California, San Francisco and from the following website in which the listed references may be found: http://members.aol.com/mshcc/stats/facts.htm