County Supervisors Agree to Inject Up to $8.2 Million into Doctors Medical Center

In a 4-1 vote Tuesday by the Contra Costa County Board of Supervisors, they agreed to transfer up to $8.2 million in General Fund to the West Contra Costa Healthcare District.

Tuesdays action marks the fourth transaction between the County and the Healthcare District to help the healthcare needs of West Contra Costa County—2006, 2011, and 2013.

Pursuant to prior Board authorization, the County has provided assistance to the District in the total amount of $29 million, and the District has executed agreements authorizing the transfer of $34.6 million of District ad valorem property tax revenues to the County. District property tax revenues are transferred to the County at the rate of approximately $3 million per year. The sum of $17,096,223.18 remains to be transferred to the County under the previous agreements.

The goal of Tuesday’s action was to buy time for the District to come up with a plan to become sustainable in a downsized model—possibly for emergency room services only.

Supervisor John Gioia has been the biggest supporter of trying to find a way to keep Doctors Hospital open in one form or another but noted that finding a way to make it work financially is the challenge.

“Clearly the fear of what a new model is or needs and we all know that and understand that but I feel confident that during this interim period there will be a development of a new structure which may not serve the needs what we all want to see but it will see the greatest need for the west county,” said Gioia. “We understand the need for realism and compromise and that it’s really about how do we serve the greatest number of healthcare needs that is in West Contra Costa County through this facility.”

Supervisor Federal Glover shared that this does not impact only West County, but all of Contra Costa County and its the boards responsibility to find a solution.

“I think one of the things that we as a board have to continue to consider is we have an obligation to all the citizens of this county and although this closure will have more of a major impact in West County it will have a countywide impact,” said Glover. “To be able to look at a model that may be sustainable that there are other partners that are willing to come to the front and to play a role in assuring that it has an opportunity to provide the services that are needed through continued ER services has the ability to continue to save lives are a huge part of the responsibilities of what this board has.”

Glover also explained that the people of West County have spoken, but the Board need to look deeper in terms of the responsibility of this board is.

“If there were not willing partners willing to look at this, I would not continue to say that I think the board is making a mistake in kicking the can down the street,” said Glover. “But because these are guaranteed revenues that will be coming back to the County and that we have an opportunity to be helpful in doing what our responsibility is and that is to provide services, I am going to support this effort.”

Supervisor Candace Andersen, who at the last meeting did not support polling for a countywide sales tax, stated she could support this action because the money is a loan and the County will be repaid.

“I do care very deeply that we do have medical services available throughout the County, especially emergency medical services, and I am appreciative of the various stakeholders who came to look at this an examine this and come up with a new way to make this medical facility viable to serve the very essential needs but also find a way to live within its means which it has to operate,” said Andersen. “I agree that we should not have it close immediately as I see some serious issues that hinder our ability to come together to reinvent Doctors (Hospital) into the model.”

Andersen explained that if it closes, you would be losing future funding from Medicare payments, provider numbers as well as the parcel tax already in place and get that revenue coming forward.

“I am concerned as always anytime we take money from the General Fund, in this case its not just a transfer from the General Fund, it is a loan and an advance in their Property Taxes and fully secured and we will be paid back,” said Andersen. “I am looking forward to seeing the innovative solutions with what we come up with.”

Supervisor Mary Piepho could not support this because there is not a plan yet and the Board of Supervisors have already approved significant funding in the past.

“I will not be supporting the action today,” said Piepho. “I support the efforts and the outline plan but there really is no plan yet and I realize there is a lot of things in process. Even our own County Counsel indicated that if the District files bankruptcy or goes through another proceeding again that we hope they wouldn’t alter the repayment plan but there is no guarantee. I don’t think that is a very high legal standard and I don’t see us as a County with significant debt and obligations ourselves putting additional money above and beyond the significant amount of money we have already put forward for this District.”

Piepho stated that if the State sees this as important to them, then increase the Medicare and Medical rates and have a true system of reimbursement that does cover the cost throughout the state and not just one healthcare District fighting over another.

“We need to actively advocate for increased revenue reimbursement for the cost of care being provided to our patients in our County,” said Piepho. “I regretfully say I will not support this. I have supported this in the past but I am hopeful that there is a successful outcome of the leadership within the District and the community itself, but there is not enough there to continue to put my name, leadership and responsibilities behind to represent all the taxpayers and citizens within Contra Costa County.”

Supervisor Karen Mitchoff said the action allows the time needed to come up with a new model and find a new way of providing medical care.

“One of the things that you learn in Public Service is you have to be flexible and look at new ways. It’s what the public has demanded of us. I realize the employees want us to take over Doctors Hospital, that is just not going to happen because we do not have the resources and cannot do that in good conscious,” said Mitchoff. “There will have to be a new restructuring, but I look at that issue as an opportunity to change how this hospital does business and Contra Costa has been a leader in so many things. It’s happening here to us and can be a leader on this issue to have the State willing to look at a new structure for how we provide healthcare services to this District.”

Mitchoff further explained this does not just impact West County, but all of Contra Costa County.

“I am of the personal opinion and believe that we have a moral obligation to help those who are less fortunate than we are,” said Mitchoff.

Via the Staff Report:

A. Initial Property Tax Transfer: October 2006.

Doctors Medical Center (DMC) is operated by the District. This 247-bed facility is located in the western portion of the County, which has a population of approximately 250,000. Many families in this area are low income. Doctors Medical Center provides medical services to the general public, including low income families, and is a critical component of the County Emergency Medical Services system.

In September 2006, the District declared a financial emergency and authorized the filing of a bankruptcy petition in an effort to keep the hospital open. On September 19, 2006, and September 26, 2006, the Board of Supervisors received reports from the District discussing the possibility that the hospital would close. On October 1, 2006, the District filed a voluntary petition for Chapter 9 bankruptcy protection. On October 31, 2006, the Board of Supervisors approved the general structure of a recovery plan (the “Recovery Plan”) to maintain services at Doctors Medical Center. The participants in the Recovery Plan were the County, the District, the physician groups that independently admit patients to the hospital, the State and the bankruptcy court, all of whom approved the general structure. The Recovery Plan included, in part: (i) execution of a JPA to establish the Doctors Medical Center Management Authority (the “Authority”), on which the County had majority representation; (ii) execution of an agreement between the County and the State of California Department of Health Services for the transfer, in installments, from the County General Fund, through June 30, 2007 of up to $10 million to the State’s General Fund, which funds were matched by the federal government and used by the State to provide enhanced Medi-Cal payments in the amount of $20 million to Doctors Medical Center; and (iii) in consideration of the County’s transfer discussed in (ii) above, reallocation to the County of District ad valorem property tax revenues, commencing with the Fiscal Year beginning July 1, 2007, in the total amount of $11.5 million (approximately $2.5 million annually for four successive years), as specified in the West Contra Costa Healthcare District Agreement for Property Tax Transfer to Contra Costa County, dated October 31, 2006 (the “Initial Transfer Agreement”). As of June 30, 2007, the County had transferred all $10 million to the State’s General Fund. $3 million was transferred on November 3, 2006, $3 million on December 5, 2006 and $4 million on February 15, 2007.

During the period between July 1, 2007 and September 30, 2008, the Authority worked with management (on-site consultants) to implement a number of initiatives in the following areas: Revenue Cycle: to improve billing and collections; Labor: to achieve right size staffing with hospital volume and need; Non-Labor: to renegotiate pricing arrangements and vendor contracts (better pricing on products and services provided to the hospital). These initiatives yielded $9.7 million in cost savings.

The Authority then negotiated a three year “bridge funding” Medi-Cal contract increase in the amount of $36 million with the California Medical Assistance Commission (CMAC); a $12 million three year grant with Kaiser Permanente and a $3 million three year grant from John Muir Medical Center which eliminated the annual $29.7 million structural deficit of Doctors Medical Center.

On June 3, 2008, the District filed a “Disclosure Statement Plan for the adjustment of debt” in the United States Bankruptcy Court, Northern District of California. On August 14, 2008, the Plan was approved without objection and the District emerged from bankruptcy. The bankruptcy Plan called for payments to creditors over a three-year time period of $12 million. The final payment was made on March 10, 2011. No further action on the part of the District is required by the Bankruptcy Court.

Pursuant to the Initial Transfer Agreement, tax transfers by the District to the County were made as follows: $3.4 million during fiscal year 2007/08; $3.4 million during fiscal year 2008/09; $3.0 million during fiscal year 2009/10; and a final transfer of $1.7 million on March 10, 2011. Total payments received amount to $11.5 million. No further tax transfers are due.

B. Second Property Tax Transfer: April 2011.

In 2011, the District requested additional funding from the County to alleviate a cash deficiency. The request involved transfers of up to $10 million from the County to the District, to be made up of an initial transfer of $2 million, and two subsequent transfers in the amount of $2 million and $6 million. The agreement between the County and the District specified that no transfer would be made unless the Health Services Director had first determined that the District was in full compliance with the requirements of the Second Agreement at the time of each transfer. The County reserved the right to stop the transfers at any time if the Board of Supervisors determined that the District was not demonstrating sufficient progress toward the establishment of the Hospital Governing Body or was not otherwise in compliance with the Second Agreement. The full $10 million in County transfers subsequently were made.

In exchange for the foregoing transfers and other specified consideration, the District authorized a reallocation to the County of all ad valorem property tax revenues that would otherwise be allocated to the District commencing with the Fiscal Year beginning July 1, 2011, until the total tax transfers to the County reach $11.5 million. In addition, the District consented to the participation by County officers and/or other County personnel on a committee of the District Board being formed for the purpose of assuming overall administrative and professional responsibility for Doctors Medical Center, to serve as the “Governing Body” of Doctors Medical Center as that term is used in Section 70035 of Title 22 of the California Code of Regulations (respecting licensure and regulation of acute care hospitals).

C. Third Property Tax Transfer (Amended and Restated Second Agreement): July 2013.

In 2012 DMC again found itself facing a significant financial gap. The Board of Directors declared that the current delivery model was not sustainable in the long run, particularly with the direction of health care delivery under the Accountable Care Act (ACA). The Board of Directors determined that a strategic partner must be found to ensure long-term survivability. Understanding that the search for such a partner would take time, the organization again worked to identify immediate initiatives essential to secure the time necessary for implementation of a longer term strategy. These included another round of expense reductions, a new parcel tax, and another debt financing.

In November 2011, the District proposed a new parcel tax to District residents. Measure J was passed with approximately 74% voter approval. This new tax provided the District with an additional $5 million per year, closing approximately 30% of the operating loss gap. In December of 2011, the DMC management team finalized $40 million in additional debt financing to support operations. These funds were used to pay hospital expenses. In 2012 and 2013 the DMC management continued to reduce expenses. More than $6 million was cut from an already tight operating budget for calendar year 2013.

In 2013, the District requested and received a $9 million transfer from the County. In exchange for the transfer, the District authorized an additional $11.6 million reallocation of District ad valorem property tax revenues to the County. The total amount of District property tax revenues that remain to be reallocated to the County pursuant to the Amended and Restated Second Agreement is $17,096,223.18.

D. Proposed Fourth Property Tax Transfer: June 2014.

Continued reductions in revenue make it increasingly challenging to cut expenses at pace with revenue declines. For example, in April of 2013 Medicare payments were cut by more than $1 million annually as part of the budget sequestration. In 2014, further changes in Medicare will reduce payments by nearly $3 million – despite the fact that DMC will care for the same volume of very sick patients, while experiencing general inflation increases in the cost of drugs and supplies to care for those patients.

Simultaneous with DMC’s measures to control costs – and therefore the operating losses – the organization has actively sought a strategic partner at the local, state and national level. In the spring of 2012, contact was made with nearly two dozen organizations to discuss potential partnerships. Little if any interest has been expressed, but the Governing Body and DMC management continue to pursue options.

On May 6, 2014, Measure C, a District parcel tax measure that would have generated approximately $20 million in annual funding, failed to achieve the necessary two-thirds voter approval, although it received a majority vote. The District had widely and repeatedly informed the community and all stakeholders that DMC would be unable to continue operations without approval of that ballot measure. Cash flow projections estimate that the District will be in a negative liquidity position by the end of July 2014, with an estimated $6 million total negative cash flow through September 2014. Without support, DMC will likely be forced to once again plan for closure in the near future.

The District has requested a $6 million allocation of funds from the County. In exchange for this funding, the District will authorize a reallocation to the County of District ad valorem property tax revenues in the amount of $8.2 million. In addition, County representatives will continue to serve on the DMC Governing Body. If, between July 1, 2014, and December 31, 2014, the Health Services Director determines that the full $6 million should not be transferred to the District, either because it is clear that the District is going to close despite the new funding, or for any other reason, the Health Services Director will return to the Board for further direction. This will allow this Board to consider whether the transfer of funds to the District should be terminated and, if appropriate, provide direction to the Auditor-Controller to reduce the amount of property tax revenue to be transferred to the County based on less than the full $6 million being transferred to the District.

The Health Services Department asked Foley & Lardner, LLP, special counsel to the County Health Services Department, whether the reallocation of tax revenues provided by the Third Transfer Agreement might be set aside if the District were to be the subject of an additional bankruptcy proceeding. According to Foley & Lardner, while bankruptcy courts have broad equitable powers to rearrange and restructure a debtor’s obligations, they believe that this arrangement presents a negligible risk that the transfer would be set aside by a bankruptcy court, owing to the fact that the County is transferring value to the District, and the District’s reallocation of property tax revenues to the County is being done contemporaneously with the County’s transfer. In addition, while there is a lack of precedent on the issue, the reallocation of property tax revenues is distinguishable from an agreement to transfer future revenues, because it is not an agreement to make a transfer in the future but, rather, is a present agreement to change the allocation of property tax revenues between the County and the District, such that the reallocated tax revenues never become the property of the District.

E. The Future of Doctors Medical Center.

The purpose of the most recent request for County funding is to support operations until a new model of care can be implemented at DMC. In evaluating potential new models for the District’s delivery system of the future, the following goals will be driving the District’s deliberations:

• Community Need – It may not be possible to continue DMC as a full service community hospital. The current goal is to utilize its limited resources on those services of greatest need to the community with a focus on emergency services.

• Financial Sustainability – The model must demonstrate long term sustainability and essentially eliminate the continuing deficit experienced with the existing full service hospital. An important consideration in achieving financial sustainability is to ensure that existing parcel tax revenue available to support operations continues to support the future model. The 2004 parcel tax generates approximately $5.9 million annually in revenue. Of this total, approximately $4.3 million is used for debt service on the 2004 and 2011 Certificates of Participation, and $1.6 million is available to support the new model. All of the approximately $5.2 million of 2011 parcel tax revenue is presently available to support operations of a new model.

If DMC cannot transition to a new delivery mode and is required to close, neither the $1.6 million of annual 2004 parcel tax revenue nor the $5.2 million of 2011 annual parcel tax revenue will be available to support the new model. In the case of the 2004 parcel tax revenue, all proceeds would go to retire the existing debt as required in the governing bond documents. In the case of the 2011 parcel tax revenues, discontinuation of both the hospital and emergency department will result in automatic sunset of the tax.

In addition to retention of the parcel tax, closure of the hospital will result in an automatic termination of the Medicare provider number, and terminate DMC’s ability to bill Medicare for emergency room services for the foreseeable future. The process to obtain a new Medicare provider number would take between 12 and 24 months.

The parcel taxes discussed above are separate and distinct from the ad valorem tax transfer under current consideration. The ad valorem property tax of approximately $3 million per year is currently dedicated to the repayment of the County transfers being made under the Amended and Restated Second Agreement.

Doctors Medical Center and the Hospital Council of Northern California, under the direction of the Health Services Department, have begun to assess a new sustainable delivery model for DMC. The assessment is funded by the Hospital Council and has extremely tight time frames. The outline of the assessment includes:

Scenario A: Reduced Beds  

Reduce general acute hospital beds to a minimal number of beds. The number and type of beds is to be determined and will take into account licensure requirements and space/operational/staffing considerations. Tentative date to begin reductions is August 1, 2014, depending upon legal notice to employees. Census reduction will occur over a few weeks/months.

Reduce or eliminate other services to be determined, in connection with the bed reduction.

Maintain the Emergency Department (ED) but at a reduced volume (potential variations for program flexibility, e.g. to allow RNs to staff both the ED and acute beds, but not a pre-condition for bed reduction).

Analysis will focus on cash needs through December 31, 2014, while also determining financial sustainability as an ongoing operation.

To be completed in 30 days (July 14, 2014)

Scenario B: Freestanding Emergency Department 

Concurrent with Scenario A, complete the legal analysis of the regulatory feasibility of converting to a freestanding ED (to be completed within 30 days (July 14, 2014).

Assuming the legal analysis affirms that a freestanding ED is possible, perform the financial and operational analysis (to be completed in 45 days (September 1, 2014)).

Analysis will focus on cash needs through the time of conversion while also determining financial sustainability as an ongoing operation.

If either the legal analysis or the financial analysis concludes that a freestanding ED is not practical, move on to a new review of the cost of converting and operating an urgent care center. All financial modeling will be done on a monthly basis and will cover the period from August 1, 2014 through the first full fiscal year of stabilized operations (Most likely Fiscal Year Ending FYE December 31, 2016). We will prepare projected statements of income and cash flows. Upon completion of the assessment an optimal future service configuration, that is financially sustainable, should be known.

F. The Documents – Summary Points.

The transaction requires that the Board of Supervisors approve: (1) an appropriation adjustment; (2) a resolution under Revenue and Taxation CodeSection 99.02; and (3) a property tax transfer agreement.

Resolution

Tax transfer agreements entered into pursuant to California Revenue and Taxation Code Section 99.02 permit the reallocation of general property taxes among taxing agencies. Before entering into a tax transfer agreement, both agencies are required to hold a public hearing to consider whether the agreement will result in any changes to other sources of revenue.

On June 16, 2014, the District held a public hearing and adopted a resolution requesting a tax transfer agreement with the County and approving the execution of the Second Tax Transfer Agreement. The District has determined that (1) revenues are available for this purpose; (2) the transfer will not result in any increase in the ratio between the amount of revenues of the transferring agency that are generated by regulatory licenses, use charges, user fees, or assessments and used to finance services provided by the transferring agency; (3) the transfer will not impair the ability of the transferring agency to provide existing services; and (4) the transfer will not result in a reduction of property tax revenues to school entities.

Based on the information presented, if the Board of Supervisors concurs in the determinations of the District and has found that no other taxing agencies will be adversely affected, the District may, by resolution, agree to the transfer o\f property tax revenues to the County.

Tax Transfer Agreement.

General property taxes otherwise allocable to the District would be transferred to the County during the period the Third Transfer Agreement remains in effect, but not until the $17,096,223.18 outstanding under the Amended and Restated Second Agreement has been transferred by the Auditor-Controller to the County.

Under the Third Transfer Agreement, the County will transfer funds to the District in an amount not to exceed $6,000,000. All transfers under the Third Transfer Agreement will be made at the discretion of the Health Services Director to facilitate continued operations of DMC. All transfers of funds by the County will be made within six months of the July 1, 2014, the effective date of the Third Transfer Agreement. If all $6,000,000 is transferred to the District, the Auditor-Controller will transfer $8,200,000 of District ad valorem property taxes to County. If less than $6,000,000 in funds is transferred by the County to the District, the Auditor-Controller will transfer a pro rata amount of property taxes to the County; i.e., if the County transfers $3,000,000 in funds to the District, the Auditor-Controller would transfer $4,100,000 in property taxes to the County.

The Amended and Restated Second Transfer Agreement provided for the County’s ongoing support of the delivery of health care services at Doctors Medical Center through the participation by County officers and/or other County personnel on the DMC Governing Body, which participation will continue until County has received the transfer of all property taxes due under the Third Transfer Agreement.

The Third Transfer Agreement provides that the Board of Supervisors will determine if transfers of funds from the County to the District should be terminated during the six month period following the effective date of the Third Transfer Agreement. The Board’s determination will be based on a report from the Health Services Director.

CONSEQUENCE OF NEGATIVE ACTION:

Doctors Medical Center will be subject to closure.