Proposed Sale of French Hospital Medical Center, Arroyo Grande Community Hospital and Corona Regional Medical Center to Universal Health Services

Proposed Sale of French Hospital Medical Center, Arroyo Grande Community Hospital and Corona Regional Medical Center to Universal Health Services
San Luis Obispo
Public Hearing
September 15, 2003

I am Leslie Bennett, staff attorney at Consumers Union. In addition to the comments made by my colleague, we ask that the Attorney General investigate several other issues, including the sale price, whether there has been a breach of fiduciary duty, and the impact of this transaction on the health care environment in San Luis Obispo.

The law requires that the assets be sold at "fair market value."(1) The regulations state that the seller must provide "[t]he estimated market value of each health facility or other asset to be sold."(2) We ask that the value of each of the facilities and the property associated with each. Also required is "[a] description of the methods used by the applicant to determine the market value of any assets involved in the proposed . . . transaction."(3) The seller addresses this issue by saying "[w]e have reason to believe that this price [$120,600,000] is based upon a multiple of earnings at approximately 5 times trailing EBIDA (earning before interest, depreciation and amortization) for the fiscal year ended December 31, 2001."(4)

That is not sufficient to state with any certainty the market value of these nonprofit charitable health assets. These assets do not belong to Vista or Permian. They were charged with the responsibility of ensuring that these assets were adequately protected for the public. Which leads me to the next issue.

The law requires that the Attorney General determine whether "[t]he market value has been manipulated by the actions of the parties in a manner that causes the value of the assets to decrease."(5) The filing says French is "currently suffering from a capital deficiency which affects the level of services that it is able to provide to its constituent community."(6) Approximately $180 million in bonds was obtained for Vista and French over the last 11 years. In addition, there is now $50 million in accrued and unpaid interest on that money amounting to a debt load of $230 million. We have questions about how French got into this financial turmoil and where the bond money has gone. We request that the Attorney General obtain the official statements for the bonds to ensure that the money was used appropriately. The boards of directors of these organizations have a fiduciary duty to protect these assets and ensure that resources were not mismanaged and it is the Attorney General's responsibility to oversee the state's nonprofit organizations.

Along that line we have a question about why earthquake insurance for French and Arroyo Grande has been cancelled.(7) We would like to know when these policies were cancelled and the reasons for cancellation. It seems highly inappropriate to cancel those policies, unless there are plans to close those facilities, in which case that information should be made available.

The Attorney General must determine whether "[t]he proposed use of the proceeds from the . . . transaction is consistent with the charitable trust on which the assets are held by the health facility." At issue here is what will happen to the money held by the supporting organizations. The filing states that there are three nonprofit corporations that provide financial support to each of the hospitals, namely the Corona Regional Medical Center Foundation, Arroyo Grande Community Hospital Foundation and French Hospital Medical Center Foundation. Each of those organizations is tied to supporting these tax-exempt facilities. Since the Attorney General has the responsibility over nonprofits, it is appropriate that the future of these resources be made clear.

In particular, the filing states that Arroyo Grande and French foundations have not conducted any fundraising since their formation in 2002(8). However, the Arroyo Grande Auxiliary, another nonprofit public benefit corporation that provides financial support to the Arroyo facility has, since 1961, "generously donated hundreds of thousands of dollars to the hospital."(9) It is, therefore, appropriate for the Attorney General to determine if there were any restricted funds that donated to the auxiliary, which should be protected for their intended use.

The filing states that there will be assistance that "may include, but will not be limited to" such things as "[c]ommunity health education," "[h]ealth screening[s]," "[s]upport for community clinics," "[f]ree health services," a "[c]hildren's preventative health center," and "[s]cholarships for high school students." If the articles of incorporation are to be amended as the law requires for these supporting organizations (removing their association with what will become for-profit hospitals), it is appropriate for them to be made available so the Attorney General may more adequately evaluate the proposals.

Without careful review and analysis, it is impossible to know, as the law mandates, whether this transaction will "create a significant effect on the availability or accessibility of health care services to the affected community." (10)

Before this sale can be approved, the Attorney General must determine whether it is "in the public interest."(11) Universal says that it is currently in the process of negotiating a sale of French and Arroyo to a nonprofit system. We encourage you to obtain all the details you can about this proposal before issuing any decision as it seems highly inappropriate that Universal would be permitted to purchase these facilities at a "fire sale," clear them of accumulated debts through a bankruptcy court and then be able to turn them around for a profit. We recommend that the bankruptcy court hold an auction for these assets and allow the nonprofit system and any other interested bidder to participate.

Further, Universal is asking for the Attorney General's "support" for a consolidation of French and Arroyo Hospitals if a sale is not completed and French is "an undue hardship on Universal."(12) We would encourage the Attorney General not to issue such a recommendation unless there is ample documentation that that action is appropriate for the community. In 2002, French handled more than 44 thousand outpatient visits, more than 14 thousand emergency services visits in the hospital, and more than a thousand patient days in the Birthing Center.(13) French also handled a significant number of Medi-Cal patients, more than 4,800 outpatient and 1,600 emergency visits in 2002.(14)

While Universal says that the closure of French would provide for "increased investment in patient services at Arroyo Hospital,"(15) we would ask that those guarantees be made in writing. What investments will be made at Arroyo? How much money will be spent? Over what period of time? And how will those implied improvements in patient services be measured? Will Universal agree to conduct quality surveys of patients modeled on the Patients' Evaluation of Performance in California or PEP-C surveys?(16) And will Universal provide that information to the Attorney General?

Universal says Sierra Vista, Twin Cities and Arroyo Hospital can handle the health care needs of the area because there are plenty of patient beds. If this sale is approved, Universal will own 179 of the 464 hospital beds in San Luis Obispo. Universal asserts that if French Hospital is closed the loss of 112 beds is inconsequential and says "it is practical to assume the three competing hospitals could absorb French Hospital's volume if Universal exercised its option to consolidate."(17) Universal seems to imply that these three hospitals will compete. It's hard to believe that Sierra Vista and Twin Cities will compete with each other when they are owned by the same for-profit company, Tenet Healthcare. In fact, Tenet will own more than 80% of the beds in San Luis Obispo if French is closed.(18) So, while Universal believes that there would be no "significant adverse effects on health care," a serious question exists about this assertion. (19)

Therefore, we respectfully request that the Attorney General impose conditions on this transaction relating to the delivery of health care to this community, modeled after the provisions placed on the Daniel Freeman Hospitals transaction. (20)

In particular, Universal should be required to:

maintain the current level of emergency room capacity and services delivered by these hospitals. If there is any intention to eliminate
emergency services, Universal should be required to meet with the Attorney General and conduct a comprehensive planning process.
maintain the same charity care policies, not merely use "best efforts," and provide a designated level of charity care that is specified. A penalty should be imposed if that does not occur. (21)
provide a certain number of patient days for Medi-Cal patients at French Hospital. If that facility is closed or sold that requirement should be continued.
provide for alternatives in the event that French Hospital ceases to operate as an acute care hospital with 24-hour emergency room services.

We appreciate the opportunity to comment and hope that our testimony will help inform the contents of the health impact statement, evaluating this transaction in more detail.

Appendix A
Patients Evaluation of Performance in California (PEP-C) for surgical and maternity patients.

Both documents are in PDF format only

Eval - 1
Eval - 2

Appendix B
Available Beds by System in 2002.
(Data obtained from Office of Statewide Health Planning and Development filings.)

_______

Notes:

(1)California Corporations Code § 5917(c).

(2)Cal. Code Regs. tit. 11 § 999.5(B).

(3)Id. at § 999.5(C).

(4)Vista Hospital Systems, Inc. and French Hospital Medical Center and Universal Health Services, Submission to the Attorney General, Description of the Transaction at 3.

(5)California Corporations Code § 5917(d).

(6)Vista Hospital Systems, Inc. and French Hospital Medical Center and Universal Health Services, Submission to the Attorney General, Appendix A.

(7)Vista Hospital Systems, Inc. and French Hospital Medical Center and Universal Health Services, Submission to the Attorney General, Schedule 5.18(c).

(8)Vista Hospital Systems, Inc. and French Hospital Medical Center and Universal Health Services, Submission to the Attorney General, Description of the Transaction at 11.

(9)Arroyo Grande Community Hospital and French Hospital Medical Center website, <http://www.agfh.org/volunteer
agch.shtml>.

(10)See California Corporations Code § 5917(h).

(11)California Corporations Code § 5917(i).

(12)Vista Hospital Systems, Inc. and French Hospital Medical Center and Universal Health Services, Submission to the Attorney General, Appendix A.

(13)French Hospital, Office of Statewide Health Planning and Development 2002 filing.

(14)See French Hospital Medical Center's Office of Statewide Health Planning and Development filings.

(15)Vista Hospital Systems, Inc. and French Hospital Medical Center and Universal Health Services, Submission to the Attorney General, Appendix A.

(16)See Appendix A. (Patients' Evaluation of Performance in California (PEP-C) for surgical and maternity patients).

(17)Vista Hospital Systems, Inc. and French Hospital Medical Center and Universal Health Services, Submission to the Attorney General, Appendix A.

(18)Appendix B (Available Beds by System in 2002).

(19)Vista Hospital Systems, Inc. and French Hospital Medical Center and Universal Health Services, Submission to the Attorney General, Appendix A.

(20)Mark Urban, Deputy Attorney General, letter to James R. Schwartz, Manatt, Phelps & Phillips, December 7, 2001.

(21)The annual financial statements report that the gross charges for charity care in 2001 and 2002 were $1.2 million and $1 million, respectively. Vista Hospital
Systems, Inc. and French Hospital Medical Center and Universal Health Services, Submission to the Attorney General, Schedule AA, Annual Financial Statements at 9.

View Files Sorted By Office: Consumers Union OPI, New York - Washington DC Office
West Coast Regional Office - Southwest Regional Office - Consumer Policy Institute

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