November 19, 2001
Hon. Bill Lockyer
Attorney General of California
Department of Justice
1300 I Street, Suite 125
Sacramento, CA 94244-2550
Via Fax: (916) 445-6749
Re: Daniel Freeman Hospitals
Dear Attorney General Lockyer:
We are writing to urge you to take the full 105 days allotted you under CA Corporations Code § 5915[1] to review the sale of Daniel Freeman Memorial and Marina Hospitals to Tenet Healthcare Corp. We urge you to not yield to the request of Tenet to issue your decision in this transaction by November 26, when the statute gives you until December 10 to make your decision. As we understand it, you received notice from the applicant on August 27 (although it was dated August 24); Monday, December 10 is exactly 105 days after Monday, August 27.
We make this request for two reasons. First, you do not yet have all of the information necessary to make a decision on this transaction. Second, violations of the regulations and statute applying to hospital transactions have hampered the public’s ability to evaluate and respond to this transaction. We therefore think it is critical that you not issue an early decision in this case.
I. We are very concerned that critical pieces of information are still missing, including an independent appraisal of the Marina Del Rey real estate and accurate information about the amount of charity care historically provided by Daniel Freeman. We do not believe you can fulfill your mandate to protect the public without this information. Following is a discussion of the missing pieces of information and the statutory requirement that they be provided.
A. An independent appraisal of the real estate to ensure the assets are being sold at fair market value has not been conducted, as required by CA Corp. Code § 5917(c). When we met with you in September, we discussed the importance of obtaining an independent appraisal of the Marina Del Rey real estate to insure that the fair market value for this property is obtained. You seemed to agree that there was a good possibility that Tenet would end up closing the Marina facility and selling the land to a developer. Since then, your staff has indicated this remains a likely outcome of this transaction.
1.
The independent
valuation commissioned by the Attorney General did not appraise the real
estate.
Unfortunately, three weeks before the statutory deadline for your decision, no
one has done an independent appraisal of the Daniel Freeman real estate. At
the October 18 hearing, and also in a letter sent by a coalition of community
advocates in July, we raised questions about the value of the real estate,
questions we trusted would be answered by the independent valuation you
commissioned. But Houlihan Lokey, the firm you retained to conduct an
independent valuation of the assets, did not do an independent appraisal of the
real estate. Instead, they appear to have taken the information provided by
the parties, information that we all had access to, and concluded that selling
to Tenet was a much better option than liquidating the assets.
In conducting the liquidation analysis, the valuation simply adopts the
appraisal of the land submitted to Daniel Freeman by CBIZ Valuation Counselors.
Houlihan Lokey took the lowest estimate available of the value of the Marina property -- $21 million -- then discounted it to $17.3
million for reasons that are not clear. Without an independent valuation of
the Marina real estate, by far the most valuable
asset Daniel Freeman owns, no one knows if Tenet is paying fair market value
for the hospitals.
2. Estimates of the value of the real estate provided by Daniel Freeman are in conflict with one another. Daniel Freeman Hospitals commissioned two valuations – one by CBIZ; the other by Cushman Realty Company. As stated above, the CBIZ valuation puts the value of the Marina Del Rey facility at $21 million. The Cushman valuation says the same property is worth $27 to $30 million.
3. The best valuation submitted by Daniel Freeman, which appraises the Marina real estate for future use as a residential facility, is based upon faulty information. The Cushman valuation appraises the Marina property for use as a multifamily residential facility, but does so in a way that raises major questions. As part of its analysis, Cushman submitted “comparable” sales in the area. Yet, those “comps” are not comparable. We are told that five out of six of the properties cited by Cushman are much farther inland than the Marina facility. Most of them list acquisition values that are three and four years old. If you were going to sell your house, and were deciding on a listing price, you would not go back three and four years to determine the appropriate value. Likely, you would maximize the value of your assets by listing the house at a price comparable with recent sales in your neighborhood. You would owe it to your own financial health to do this. In your role as the regulator charged with protecting Daniel Freeman’s charitable assets, you owe a similar duty to the community to ensure Daniel Freeman Hospitals receive fair market value for these assets. We do not see how you can move forward with this transaction without getting an independent appraisal of the real estate at its highest and best use.
B.
Sufficient
information regarding charity care to evaluate the health impact of this
transaction on the public is not yet available, as required by Corp. Code §
5917(g). Daniel Freeman Hospitals were required to provide sufficient
information in order for you to be able to evaluate this transaction’s
potential effects on the public.
Daniel Freeman has failed to provide sufficient information as to the actual
dollar level of charity care that was provided to the public. Tenet has agreed
to provide charity care in an amount equivalent, in the aggregate, to the
average annual charity care that Daniel Freeman provided in the three full
fiscal years ended June 30,
2000, as reported in Daniel
Freeman’s audited financial statement. Yet, the consultant you hired to
evaluate the health impact of this transaction, The Lewin Group, found “an
under-reporting of traditional charity care charges in the audited financial
statements.”
1. In establishing Tenet’s charity care obligation, you can only rely upon OSHPD data. Given this “under-reporting” in the audited financial statements, that data does not form an appropriate basis for Tenet’s obligation. You can therefore only rely upon data submitted by Daniel Freeman Hospitals to the Office of Statewide Health Planning and Development (OSHPD) in establishing Tenets’s charity care obligation. This data from OSHPD comes in two forms: “initial reports” and “revised reports.” The “revised reports” traditionally show more charity care and have, therefore, become the subject of some dispute.
2.
The Lewin Group
has presented conflicting and incomplete reports regarding charity care. For its November 1, 2001 report, The Lewin Group concludes
that the revised charity care amounts reported to OSHPD included : services
provided to Medi-Cal patients, but denied payment to the hospital by Medi-Cal;
services provided to patients who were believed to be Medi-Cal eligible, but
later found not to be eligible; and “charges for specific patient care programs
for ‘vulnerable populations’ [] reclassified to charity care.” We would agree
that all of these services are appropriately classified as charity care and
that, assuming the revised charity care numbers come from the services listed
above, you should rely upon the revised OSHPD data when establishing Tenet’s
charity care obligations.
Yet, at the November 15 hearing in Inglewood, Keith Hearle from The Lewin Group
testified that the conclusions drawn in his November 1 report were incorrect,
and that the revised OSHPD numbers actually included amounts that were not
properly attributable to charity care. Mr. Hearle told us he learned about the
error from a Daniel Freeman consultant, although in earlier interviews for the
November 1 report, “Memorial’s OSHPD Disclosure Report consultant” claimed that
the revised OSHPD data appropriately represented charity care. In its November
1 report, the Lewin Group cites this consultant for the assertion that “[t]hese
community benefit programs [were] allowed to be assigned to charity care by
OSHPD because they [were] designed for vulnerable, low-income patients.”
In addition to the fact that this eleventh hour revelation completely
contradicts information previously gathered, it also does not specify what the
allegedly improper expenditures do represent. There has been no
information released as to the composition of the allegedly inappropriate
charity care expenditures. We are therefore not able to evaluate which version
of the truth is correct.
3. Daniel Freeman received additional funding form the state, based on its revised OSHPD data. We will point out that Daniel Freeman Memorial Hospital submitted these revised amounts to OSHPD and obtained additional funding from the state as a Disproportionate Share Hospital (DSH) based on these filings. If, in fact, the OSHPD revisions are inappropriate, there should be an investigation as to how much additional money was obtained by Memorial as a result. Either the data submitted to OSHPD accurately represents charity care, and Tenet should be held to this level in the future; or Daniel Freeman inaccurately represented its charity care programs to OSHPD and received additional DSH funding as a result.
4. We urge you to either use the revised OSHPD data or find better data in the time remaining. In order to minimize the health impact of this transaction, it is critical that Tenet be held to a charity care obligation that reflects what Daniel Freeman has historically provided to the community. We recommend that you either use the revised OSHPD data or find out whether or not, and by how much, that data overstate charity care. The community should then be given an opportunity to respond to these new numbers, if any. The fact is, the November 1 Lewin Report provides the most comprehensive explanation yet of what the revised OSHPD data contain. Lewin concluded this data includes an array of direct services to vulnerable populations. Tenet should continue to provide these services at a level commensurate with that reflected in the revised OSHPD reports.
II. Violations of the procedural regulations and statute have hampered the public’s ability to evaluate and respond to the health impact of this transaction, making it all the more important that you not issue an early decision in this case. We find the following violations of California Code of Regulations § 999.5:
A. The public had no opportunity to respond to the “completed” health impact statement prepared by The Lewin Group, in violation of the ten-day notice requirement of CCR § 999.5(e)(3)(D). [2] At the November 15 hearing, The Lewin Group presented information regarding the level of charity care provided by Daniel Freeman that completely contradicted its November 1 health impact statement. See discussion above. The report was not “completed” until Keith Hearle of The Lewin Group “corrected” the November 1 report at the November 15 hearing.[3] The regulations require that the public be given at least ten days to review the completed health impact statement prior to the public meeting. Given that the public did not learn about this information until the hearing, it was given no notice whatsoever. It therefore cannot be said that the public had the requisite ten-day notice of the completed health impact statement as required by CCR § 999.5(e)(3)(D). To mitigate this violation of the regulations, we urge you to take the full time allotted to you by the statute to make your decision, thus allowing the public an opportunity to respond to this new information.
B.
The public
received virtually no information about the health impact of the application of
the Ethical and Religious Directives for Catholic Healthcare Services to
Tenet. This information is necessary for you to evaluate the effect of this
transaction on the availability or accessibility of health care services, as
required by CA Corp. Code § 5917 (h).[4] Questions were raised at the October 18, 2001 public hearing about the application of the ERD’s to a
for-profit, secular company, and about Tenet’s ongoing ability to contract with
entities not bound by those requirements. However, these questions were not
addressed in the Lewin report. In its report, The Lewin Group first describes
the provision and enforcement of the Ethical and Religious Directives (ERD’s)
in the proposed agreement.[5]
The Lewin Group then states, regarding the obstetrical volume “competition
among hospitals and local physicians, as well as compliance with the Directives
affects these care patterns.”[6]
(emphasis added). These care patterns and the impact on them by the ERD were
not, however, detailed in any specific way.
The Lewin Group then concludes, “The application of the prohibition in the APA
on abortion, assisted suicide and euthanasia to partnerships and joint ventures
involving Tenet lacks clarity.[7]
(emphasis added). The Attorney General needs more specific information
about the actual effect of application of the ERD’s on the provision of a full
range of medical services, including the effect of the ERD’s on Tenet’s ability
to contract with other providers. This information is necessary to allow you
to evaluate the impact of this transaction on health care in the Marina Del Rey
and Inglewood communities. This is yet another reason
why you should take the full time allotted you under the statute to make your
decision.
C. Daniel Freeman has failed to provide an adequate description of charity care for five years at each facility, as required by CCR § 999.5(d)(5)(B) [8]. The filing is deficient in the following ways:
· there was not a description of the inpatient, outpatient and emergency room charity care spending for five years (only two years was provided);
· there was not a description of how the amount of charity care spending was calculated for each of those five years (this information was not provided);
· there was not an accounting of the annual charity care inpatient discharges, outpatient visits, and emergency visits over those five years (only two years was provided);
· there was not a description of the types of charity care services provided annually for those five years (this information was not provided).
We
urge you to The value of the Daniel Freeman Hospitals to the community may be impossible to
quantify. Other issues such as the value of the Marina
land and the historical level of charity care are not impossible to measure.
We urge you to use all of the time allowed under Corp. Code §5915 to consider
these critical issues, to gather as much information as possible, and to allow
the public to respond to newly disclosed information. If we can be of further
assistance on these or any other issues, please do not hesitate to contact us.
Sincerely,
Barbara Gorham Leslie Bennett
Staff Attorney Staff Attorney
West Coast Regional Office West Coast Regional Office
cc: Dennis Eagan
Chet Horn
Mark Urban
Tricia Wynne