Side-By-Side Analysis of Proposed Sale of Nonprofit Queen of Angels Hospital in Los Angeles to For-Profit Tenet Health Care Corp.

May 11, 1998

Contact:
Julio Mateo, Consumers Union,
415/431-6747
Consumers Union West Coast Regional Office

Side-By-Side Analysis of Proposed Sale of Nonprofit Queen of Angels Hospital in Los Angeles to For-Profit Tenet Health Care Corp.

Any proposed sale must meet the health care deficits identified in the original health impact analysis prepared by the Lewin Group. If the proceeds from the sale and the assets of Queen of Angels cannot meet those gaps, then Tenet must agree to fill those gaps by legally enforceable guarantees. If Tenet Health Care Corp. or Queen of Angels are unable or unwilling to fill those health care deficits, then by definition and under law, the impact of this transaction will be adverse and not in the public interest. As demonstrated by the following side-by-side analysis, the modified sale terms do not mitigate the health care deficits identified in the original Lewin Report, and the Attorney General should not approve this transaction.

Original Terms AG Brokered Terms Health Impact

Indigent Care: Tenet to provide a total of $15,123,000 in customary charges for: 1) charity; 2) indigent, and 3) other community benefits annually.

Tenet to provide at total of $15,123,000 in customary charges for medically indigent patients annually.

This term translates into an increase in Tenet’s indigent care commitment over the original terms. On the other hand, this commitment could be reduced by any increase in Tenet’s customary charges. In addition, the real value of indigent care to the community will diminish over time since the required amount is fixed, not a percentage of gross revenues, and without any inflationary increase.

Emergency Room (ER): Tenet to keep ER open for 5 years, provided no substantial reduction in Medi-Cal reimbursement.

Tenet to keep ER open for 6 years, and this guarantee is binding on any future buyer. Tenet must also maintain ER visits and 911 services at a level not less than 90% of the volume currently provided by Queen.

Tenet has agreed to spend $4 million on a new ER and obtain certification that the new ER will have the capability of providing the same level and type of ER services as currently provided by Queen.

This provision allows Tenet to effect an immediate 10% cut in ER services upon closure of the deal.

This provision only requires Tenet to provide a certificate from an architect that the new ER will have the “capability” to provide the same types of ER services. There are no specific guarantees regarding capacity and staffing levels.

In addition, the agreement does not prevent Tenet from shutting down the entire hospital, including ER.

AIDS Services: No provision was made to safeguards AIDS services.

Queenscare, the foundation which will result from the sale, has agreed to provide a $2 million fund for such services.

According to Lewin, approximately $100,000 will be granted by this fund in its first year of disbursements. Queen currently operates the Chalet, one of the few facilities in L.A. which accepts Medi-Cal insured HIV/AIDS patients and maintains 87 staffed skilled nursing beds. Tenet has made no guarantees to continue to provide these services. Queen operates the Chalet at a loss.

Charitable Uses Plan: Queen proposed to use retained assets and sale proceeds for discretionary grants by the Queenscare board.

Retained assets and sales proceeds to be placed in an Investment Fund, which in turn are divided into (13) Expenditure Trust Funds for certain specified purposes. These funds ostensibly correlate to the health care deficits likely to result from the deal, identified by Lewin in its March report.

Retained assets and proceeds are currently estimated to be $272 million. According to Lewin, with an estimated 5 percent payout from this fund each year, the community will benefit from approximately $13.6 million in grants annually. According to Queen’s 1996 Community Benefit Report, however, Queen provided more than $14 million in financial and in-kind support to community benefit programs annually.

In addition, the funds set aside for the Queenscare foundation are insufficient for adequate service provision, given that the funding levels established for these funds are based on past subsidy amounts, and there are no guaranteed service provisions in the agreement, other than Tenet’s provision of basic emergency room care.

New and Independent foundation: No provisions.

New and Independent foundation: No provision.

AG rescinds prior consulting contracts with executives; AG’s approval required prior to Queenscare paying any remuneration to members of corporate parent (St. Joseph’s).

Queenscare board to serve fixed 1-year term and removable only for cause.

Anti-nepotism provisions incorporated into by-laws of Queenscare.

Allowing some of the current Queen of Angels board members to serve on the board of Queenscare jeopardizes the integrity of the funds. Based on potential breaches of fiduciary duty by these board members, questions remain about their judgment and capacity to administer these funds in the interests of the community.

In an April 10, 1998 letter to the AG, we identified at least 14 potential breaches of fiduciary duty by the Queen and St. Joseph’s board. These breaches included the Queen board’s approval of consulting contracts totaling $360,000 per year with executives involved in the negotiation of this deal – contracts rescinded by the AG. In an April 16, 1998 letter, we requested that the AG require as a condition for approval the removal of all past and present board members who participated in possible breaches of fiduciary duty from membership on any successor foundation (Queenscare). The AG has claimed that he has no authority under which to take such action. The plain language of the law, however, Consumers Union believes gives the AG this authority. The Bill’s author has also said the AG has this power.

The one year term limitation on board membership is insufficient because the member may be re-appointed for an indefinite number of one-year terms. No penalty results should there be a violation of the anti-nepotism provision. Such a structure ensures that the Queenscare foundation will not be representative of the community it serves.

DSH Funding: Tenet to make “reasonable commercial efforts” to qualify for DSH funding. Tenet, however, to give 75% - 85% of DSH revenues in year 1 and 75% in years 2-3 to Queenscare. Queenscare, however, to assume risk of any reduction in DSH payment.

No change in these terms.

Queen and Tenet acknowledge that DSH payments may be substantially reduced prior to the expiration of the DSH sharing period. These terms raise significant concerns about Tenet’s long terms plans for the hospital. Tenet’s willingness to forego DSH payments could force changes in the hospital’s patient mix. Without DSH payments as an incentive to serve the hospital’s substantial Medi-Cal population, Medi-Cal patients could be displaced. This will provide a challenge to Tenet to maintain the present patient mix. The Lewin Report fails to do this analysis and cost out the possible displacement of Medi-Cal patients.

Clinics: No express provision for maintenance of Franciscan Clinics and Greater Hollywood Health Partnership (“GHHP”).

Queenscare to provide two separate funds to subsidize operation of clinics and partnership at “current level” with inflationary value.

The Lewin Report failed to consider the financial impact on the cost of operating these facilities and programs independent of the hospital. According to Queen’s 1996 Community Benefit Report, Queen “provides financial and in-kind support to a variety of community outreach programs.” Specifically, Queen is “the primary funding source for the GHHP.” Queen also “allocates administrators, nurses, and grant officers to assist this program.” With respect to the clinics, Queen provides “physician support and administrative oversight” to the clinics, and some Queen “specialists” provide the clinics “with services at reduced or no charge.” These are costs and in-kind services which were not addressed by Lewin. Therefore, the projected funding levels may not be adequate to ensure the continued availability of these programs to the community.

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May 11, 1998	Contact: Julio Mateo, Consumers Union, 415/431-6747 Consumers Union West Coast Regional Office

Original Terms	AG Brokered Terms	Health Impact
Indigent Care: Tenet to provide a total of $15,123,000 in customary charges for: 1) charity; 2) indigent, and 3) other community benefits annually.	Tenet to provide at total of $15,123,000 in customary charges for medically indigent patients annually.	This term translates into an increase in Tenet’s indigent care commitment over the original terms. On the other hand, this commitment could be reduced by any increase in Tenet’s customary charges. In addition, the real value of indigent care to the community will diminish over time since the required amount is fixed, not a percentage of gross revenues, and without any inflationary increase.
Emergency Room (ER): Tenet to keep ER open for 5 years, provided no substantial reduction in Medi-Cal reimbursement.	Tenet to keep ER open for 6 years, and this guarantee is binding on any future buyer. Tenet must also maintain ER visits and 911 services at a level not less than 90% of the volume currently provided by Queen. Tenet has agreed to spend $4 million on a new ER and obtain certification that the new ER will have the capability of providing the same level and type of ER services as currently provided by Queen.	This provision allows Tenet to effect an immediate 10% cut in ER services upon closure of the deal. This provision only requires Tenet to provide a certificate from an architect that the new ER will have the “capability” to provide the same types of ER services. There are no specific guarantees regarding capacity and staffing levels. In addition, the agreement does not prevent Tenet from shutting down the entire hospital, including ER.
AIDS Services: No provision was made to safeguards AIDS services.	Queenscare, the foundation which will result from the sale, has agreed to provide a $2 million fund for such services.	According to Lewin, approximately $100,000 will be granted by this fund in its first year of disbursements. Queen currently operates the Chalet, one of the few facilities in L.A. which accepts Medi-Cal insured HIV/AIDS patients and maintains 87 staffed skilled nursing beds. Tenet has made no guarantees to continue to provide these services. Queen operates the Chalet at a loss.
Charitable Uses Plan: Queen proposed to use retained assets and sale proceeds for discretionary grants by the Queenscare board.	Retained assets and sales proceeds to be placed in an Investment Fund, which in turn are divided into (13) Expenditure Trust Funds for certain specified purposes. These funds ostensibly correlate to the health care deficits likely to result from the deal, identified by Lewin in its March report.	Retained assets and proceeds are currently estimated to be $272 million. According to Lewin, with an estimated 5 percent payout from this fund each year, the community will benefit from approximately $13.6 million in grants annually. According to Queen’s 1996 Community Benefit Report, however, Queen provided more than $14 million in financial and in-kind support to community benefit programs annually. In addition, the funds set aside for the Queenscare foundation are insufficient for adequate service provision, given that the funding levels established for these funds are based on past subsidy amounts, and there are no guaranteed service provisions in the agreement, other than Tenet’s provision of basic emergency room care.
New and Independent foundation: No provisions.	New and Independent foundation: No provision. AG rescinds prior consulting contracts with executives; AG’s approval required prior to Queenscare paying any remuneration to members of corporate parent (St. Joseph’s). Queenscare board to serve fixed 1-year term and removable only for cause. Anti-nepotism provisions incorporated into by-laws of Queenscare.	Allowing some of the current Queen of Angels board members to serve on the board of Queenscare jeopardizes the integrity of the funds. Based on potential breaches of fiduciary duty by these board members, questions remain about their judgment and capacity to administer these funds in the interests of the community. In an April 10, 1998 letter to the AG, we identified at least 14 potential breaches of fiduciary duty by the Queen and St. Joseph’s board. These breaches included the Queen board’s approval of consulting contracts totaling $360,000 per year with executives involved in the negotiation of this deal – contracts rescinded by the AG. In an April 16, 1998 letter, we requested that the AG require as a condition for approval the removal of all past and present board members who participated in possible breaches of fiduciary duty from membership on any successor foundation (Queenscare). The AG has claimed that he has no authority under which to take such action. The plain language of the law, however, Consumers Union believes gives the AG this authority. The Bill’s author has also said the AG has this power. The one year term limitation on board membership is insufficient because the member may be re-appointed for an indefinite number of one-year terms. No penalty results should there be a violation of the anti-nepotism provision. Such a structure ensures that the Queenscare foundation will not be representative of the community it serves.
DSH Funding: Tenet to make “reasonable commercial efforts” to qualify for DSH funding. Tenet, however, to give 75% - 85% of DSH revenues in year 1 and 75% in years 2-3 to Queenscare. Queenscare, however, to assume risk of any reduction in DSH payment.	No change in these terms.	Queen and Tenet acknowledge that DSH payments may be substantially reduced prior to the expiration of the DSH sharing period. These terms raise significant concerns about Tenet’s long terms plans for the hospital. Tenet’s willingness to forego DSH payments could force changes in the hospital’s patient mix. Without DSH payments as an incentive to serve the hospital’s substantial Medi-Cal population, Medi-Cal patients could be displaced. This will provide a challenge to Tenet to maintain the present patient mix. The Lewin Report fails to do this analysis and cost out the possible displacement of Medi-Cal patients.
Clinics: No express provision for maintenance of Franciscan Clinics and Greater Hollywood Health Partnership (“GHHP”).	Queenscare to provide two separate funds to subsidize operation of clinics and partnership at “current level” with inflationary value.	The Lewin Report failed to consider the financial impact on the cost of operating these facilities and programs independent of the hospital. According to Queen’s 1996 Community Benefit Report, Queen “provides financial and in-kind support to a variety of community outreach programs.” Specifically, Queen is “the primary funding source for the GHHP.” Queen also “allocates administrators, nurses, and grant officers to assist this program.” With respect to the clinics, Queen provides “physician support and administrative oversight” to the clinics, and some Queen “specialists” provide the clinics “with services at reduced or no charge.” These are costs and in-kind services which were not addressed by Lewin. Therefore, the projected funding levels may not be adequate to ensure the continued availability of these programs to the community.