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Sutter, Town Square Off in Legal Battle

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By Evan George
San Mateo Daily Journal
April 6, 2010

A battle is raging over a small Bay Area hospital, pitting not-for-profit medical powerhouse Sutter Health against a small community.

Sutter plans to close San Leandro Hospital, which serves the small community south of Oakland and its large portion of Medicare patients.

The company says it can't justify subsidizing the facility which it says loses money each year while rebuilding its larger sister hospital, Eden Medical Center in Castro Valley, to comply with seismic requirements.

But a fiery group of nurses fighting the closure say the hospital is putting its market strategy and ratings concerns above patients.

"We're talking about lives here," said Carole Rogers, a San Leandro resident who works as a nurse at a different area hospital. "We're talking about moving crucial care patients out of the area."

Rogers and her union, the California Nurses Association, is backing a last-ditch effort by the area health authority to sue to keep the embattled hospital open. They claim Sutter's motivation for closing the facility is to funnel insured, well-to-do patients to Eden Medical Center and treat fewer Medicare and uninsured patients. They also say the deal was not legitimate because the board members that originally negotiated the closure had a conflict of interest.

At its core, the dispute centers on the cash revenues that large non-profit health systems often cling to. The question is how much is enough and what is too much? And, perhaps more pointedly: what should the mission of a non-profit hospital be?

Sutter Health, one of the country's largest non-profit healthcare systems, cleared $463 million in excess revenue from its hospitals last year, according to financial statements. It holds more than $4 billion in net assets, those records show, and operating revenues of $8.2 billion.

In 2008, Sutter paid its Regional Director for the East Bay $1.3 million in salary and other benefits.

Analysts have estimated the 93-bed facility and its emergency department and intensive care unit together lose about $5.5 million a year. That's not counting a for-profit joint venture surgery center whose profits are kept separate.

"San Leandro loses money when it operates as an acute care facility," said Florence Di Benedetto, Sutter's general counsel. "It has the entire time that we've been operating it."

Di Benedetto said it will cost $300 million to re-build Eden and "without a margin we can't fulfill our mission."

San Leandro won't go away entirely Sutter plans to lease the facility to Alameda County to run a small rehabilitation clinic and urgent care center at that location.

Still, Alameda County health officials said if the hospital closes, San Leandro residents will have farther drives and longer waits for emergency services at one of the five other area hospitals that run emergency departments.

"We are prepared to absorb this, but it's not something we welcome," said Alex Briscoe, director of Alameda County Health Care Services. "We don't like to lose any emergency department."

Briscoe said Sutter has the resources to subsidize San Leandro if its executives wanted to.

"Sure, I believe that Sutter could do that - they have the corporate depth - but Sutter has a responsibility as well to be fiscally viable," Briscoe said.

The turmoil is being played out at the Eden Township Healthcare District.

The district's board in 2007 entered into a deal to hand over San Leandro to Sutter to close it. But newly elected board members have refused to transfer the hospital.

Sutter filed a lawsuit.

Now the board has filed a countersuit to halt the move. Their complaint alleges that a financial "conflict of interest" clouded the original decision because some voting members are tied to Sutter. Rogers is among the angry board members.

Non-profits like Sutter, which runs 26 acute-care hospitals, often cling to wealthy reserves to protect their credit and bond ratings.

Some investor rating agencies have warned that the not-for-profits could be hit hard by health reform despite years of healthy returns. And in March, the New York credit rating agency Moody's anticipated that not-for-profit health providers particularly stand-alone community hospitals "will struggle financially" as they try to deal with reduced payment and increased efficiency demands included in health reform.

But so far Sutter seems unaffected. Earlier this year, Standard & Poor's listed Sutter Health's credit rating as "A+" and stable.

The largest not-for-profit health system in Northern California, Sutter touts having spent more than ever on charity care in recent years. In 2008, the network says it provided $478 million in care to poor patients and in 2009 invested $599 million in "community benefit activities."

Some of that appears to have gone to care at San Leandro.

Over the last three years, Eden Medical Center has thrived while San Leandro has faltered.

In 2006, Eden ended the year with about $6 million in excess revenue, which would have canceled out losses by its sister campus.

That excess climbed to $18.7 million the following year. And in 2009, Eden made more than $20 million.

Sutter claims various factors led to that increase, from insurance settlement payments to changes in services, but that it would not make sense to use that excess income to bail out San Leandro.

Stretching revenue that comes from moneymaking hospitals to subsidize less lucrative facilities is not unheard of, according to other non-profit hospitals.

St. Vincent Medical Center in Los Angeles loses several million dollars every year. But revenue from other hospitals run by the Daughters of Charity, and donations, keep the 381-bed hospital running, said Jesse Guevera, St. Vincent's chief financial officer.

Not all non-profit hospitals have the same priorities, Gueverra cautioned, and he felt uncomfortable commenting on another chain's strategies.

Health care experts also disagree over how much revenue is "excessive" for a non-profit health system, and regulators are mum on the subject.

State regulations require non-profit health plans to have certain minimum financial reserves, but do not set a maximum. The state attorney general, the office in charge of regulating the sale of non-profit hospitals, does not monitor excess revenues.

Nor do state officials take into consideration the revenue totals of a health system when it seeks permission to shutter an under-performing hospital.

Maribeth Shannon, a health policy expert for the California Healthcare Foundation, said Sutter has shown business savvy by closing under-performing hospitals, folding them into larger operations, and using that high volume to its advantage.

But Jerry Flanagan, health policy director for Santa Monica-based Consumer Watchdog, said such business tactics make a system like Sutter non-profit in name only.

"Sutter is renown for taking advantage of its market dominance ... and using that as a way to drive up rates for insurance companies and pay doctors less - to get more money for less health care," Flanagan said.

That's fine for profit-driven hospitals, he added, but "it's a whole other question when you're dealing with a not-for-profit."

In a strong sign that San Leandro could be turned around, the for-profit hospital operator Prime Healthcare Services proposed buying the troubled facility just last year.

The Southern California company, known for scooping up flailing hospitals and making them profitable by canceling health plan contracts, said it could turn San Leandro profitable even without such strategies. The company's controversial founder, cardiologist Prem Reddy, reportedly drew rare applause when he addressed the Alameda County Board of Supervisors last year about buying the hospital.

Sutter sent Prime a letter in response, threatening a lawsuit if it interfered with the contract that allows San Leandro to close.

Controversy and beefs with the union have plagued Sutter in other communities. In the last two years, Sutter has announced its intention to close hospitals in Santa Rosa and San Francisco, which has been fought by the nurses.

In 2009, the system came under scrutiny for transferring approximately $88 million from Marin General Hospital coffers to Sacramento headquarters before its lease to operate Marin ran out. Sutter defended the transactions and also donated $10 million to a Marin health fund.

The California Nurses Association views the closures suspiciously.

"There is a regionalization strategy by Sutter to gain market share and control which services are to be provided at what profitability," said Jim Ryder, a CNA union negotiator. "It's a further fraying of the safety net."

The fight over San Leandro has been brewing for a decade.

For fifty years, the Eden Township Healthcare District had overseen the area's public hospital, Eden Medical Center, through a board whose members are elected.

Then in 1997, that board ceded some authority by creating hybrid ownership over Eden Medical Center between Sutter and the district.

At the time, San Leandro was a for-profit facility run by the Texas-based Triad Hospitals.

Facing demands that all California hospitals be retrofitted to new seismic standards, Sutter approached the district board with a deal: if it purchased San Leandro from Triad, Sutter would re-build Eden Medical Center.

The two parties cut that deal in 2004. Under the terms, Eden Medical Center's leadership agreed to operate San Leandro for 20 years and rebuild the Eden facility.

However, Sutter said in 2006 that rising construction costs made the new hospital impractical.

Instead of filing suit then, the district board entered into negotiations with Sutter.

Key in the negotiations were board members who had a stake in Eden, including the medical center's CEO, George Bischalaney, who made $627,372 in 2007, and the hospital's chief medical officer.

The new deal they struck wiped away all claims against Sutter, and allowed Sutter the option to purchase San Leandro from the county without any cash exchanging hands.

When Sutter decided to move forward with that transfer in 2009, the district refused to hand it over. So Sutter sued last November.

Letting parties with a clear financial interest negotiate the terms of the deal violated California Government Code 1090, according to Rogers and others bringing the countersuit.

"Sutter stands to receive substantial and unwarranted benefits," their lawsuit alleges.

Sutter plans to fight the lawsuit before announcing any details about the hospital closing, Di Benedetto said.

That could take several months, or as long as a year, unless the board again negotiates with the health system.

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