Hospitals and Charity Care in Santa Cruz County Synopsis

A Summary of the Access to Medical Care Reports: Sutter, Dominican and Watsonville hospitals had to submit yearly reports to be in compliance with the Access to Medical Care Agreement. A summary of these reports follows in this section. The Grand Jury found most of the computational errors to be minor in the reports. However, some of these errors resulted in a deficit rather than an excess.8 The corrected figures were used in the charts. A more detailed listing of the financial data is in the Appendix. Sutter Hospital Sutter Hospital 1996 to 2002 Performance Summary Total Agreed Upon Uncompensated Care 1996 - 2002 $5,052,356 Actual Expenditures to Meet Agreement 1996 - 2002 $3,701,931 Percentage Attained 1996 - 2002 73.27% Fiscal Year 2002 2001 2S000u#t#t#er H1o99s8pi1t9a97l 1996 2002 to 1996 Gross $39,850,799 ##### ##### ### ######### ###### #### ########## Net $13,966,391 ##### ##### ### $9,017,921 ###### #### $73,811,050 Agreed $977,647 ##### ##### ### $631,254 ###### #### $5,052,356 $1,000,000 Actual $54,208 ##### ##### ### $75,031 ###### #### $45A4g,8r5e1ed Upon A$c8tu0al0 ,000 $842,506 ##### ##### ### $478,579 ###### $0 $3,27 U 5 n ,3 c 4 o 3 mpensated Care (7% Uncompens $0 $0 $0 $0 $49,460 ###### (Note 1) $0 Except 1996 @ 5.5%) Actual $896,714 ##### ##### ### $603,070 ###### #### $4,317,609 $600,000 Cost to 45.96% ##### ##### ### 53.57% 69.00% #### N/A C$o4st0 o0f ,000 $412,130 ##### ##### ### $323,065 ###### #### $2,29A4c,7t5u0al Expenditures to Contribution $469,528 ##### ##### ### (Note 2) (Note (Note $1,40M7,e1e8t1 Agreement (Cost of A$c2tu0al0 ,000 $881,658 ##### ##### ### $323,065 ###### #### $3,70P1r,o93vi1ding Care + Commitmen ($95,990) ##### ##### ### ($308,190) ###### #### ($1,35C0,o42n5tr)ibutions) $0 02 01 00 99 98 97 96 8 See the Appendix. - 8 Hospitals and Charity Care Sutter Hospital Yearly Performance 2002 through 1999 Fiscal Year (Ending Dec 31) 2002 2001 2000 1999 Gross Revenue $39,850,799 $31,564,372 $31,818,412 $30,779,800 Net Operating Expense $13,966,391 $12,070,278 $11,451,133 $10,255,111 Agreed Upon Uncompensated Care (7% Except 1996 @ 5.5%) $977,647 $844,919 $801,579 $717,858 Actual Uncompensated Charity $54,208 $66,996 $122,582 $75,195 Actual Uncompensated Bad Debt $842,506 $998,947 $240,585 $308,146 Uncompensated Care Write-Off (No Clarification) $0 $0 $0 $0 Actual Uncompensated Total (Bad Debt + Charity+ Other Uncompensated) $896,714 $1,065,943 $363,167 $383,341 Cost to Charges Ratio 45.96% 49.29% 46.17% 44.12% Cost of Providing Care (Cost Ratio X Actual Uncompensated Total) $412,130 $525,403 $167,674 $169,130 Contributions to Exempt Organizations and Community $469,528 $415,600 $358,754 $163,299 Actual Expenditures to Meet Agreement (Cost of Providing Care + Contributions) $881,658 $941,003 $526,428 $332,429 Commitment Excess (Deficit) ($95,990) $96,084 ($275,151) ($385,429) Sutter Hospital Yearly Performance 1998 through 1996 & Total Fiscal Year (Ending Dec 31) 1998 1997 1996 2002 to 1996 Totals Gross Revenue $22,705,186 $18,005,934 $11,165,252 $185,889,755 Net Operating Expense $9,017,921 $9,422,345 $7,627,871 $73,811,050 Agreed Upon Uncompensated Care (7% Except 1996 @ 5.5%) $631,254 $659,564 $419,533 $5,052,356 Actual Uncompensated Charity $75,031 $38,314 $22,525 $454,851 Actual Uncompensated Bad Debt $478,579 $406,580 $0 $3,275,343 Uncompensated Care Write-Off (No Clarification) $49,460 $537,955 (Note 1) $0 $587,415 Actual Uncompensated Total (Bad Debt + Charity+ Other Uncompensated) $603,070 $982,849 $22,525 $4,317,609 Cost to Charges Ratio 53.57% 69.00% 85.16% N/A Cost of Providing Care (Cost Ratio X Actual Uncompensated Total) $323,065 $678,166 $19,182 $2,294,750 Contributions to Exempt Organizations and Community (Note 2) $0 (Note 2) $0 (Note 2) $0 $1,407,181 Actual Expenditures to Meet Agreement (Cost of Providing Care + Contributions) $323,065 $678,166 $19,182 $3,701,931 Commitment Excess (Deficit) ($308,190) $18,602 ($400,351) -$1,350,425 Note 1 - This was reported as $475,211 but "uncompensated care" is not allowed under the 5.5% alternative. Note 2 - This was reported as $631,704 in 1996, $613,507 in 1997, and $544,738 in 1998 but "Unpaid Costs of Government Programs" are not allowed. Hospitals and Charity Care - 9 Dominican Hospital Dominican Hospital 1996 to 2002 Performance Summary Total Agreed Upon Uncompensated Care 1996 - 2002 $24,179,454 Actual Expenditures to Meet Agreement 1996 - 2002 $29,408,253 Percentage Attained 1996 - 2002 121.62% Fisc 2002 ## ## ## 1998 1997 1996 2002 to Dominican Hospital Gros $456,841,306 ## ## ## $250,938,722 ####### ######### ####### Net $64,239,883 ## ## ## $42,522,518 ####### ######### ####### Agre $4,496,792 ## ## ## $2,976,576 ####### $2,900,600 ####### $d8,000,000 Actu $4,804,515 ## ## ## $1,891,319 ####### $1,631,459 ###A#g##re#ed Upon Actu $9,268,252 ## ## ## $2,804,999 ####### $4,539,076 ###U##n#c#ompensated Care $6,000,000 Actu $14,072,767 ## ## ## $4,696,318 ####### $6,170,535 ###(#7#%##) Cost 29.62% ## ## ## 42.22% 43.88% 43.80% N/A $Co4s,t0 00,000 $4,168,354 ## ## ## $1,982,785 ####### $2,702,694 ####### Cont $2,055,000 ## ## ## $1,006,000 ####### $1,539,000 ###A#c##tu#al Expenditures to $Ac2tu,000,000 $6,223,354 ## ## ## $2,988,785 ####### $4,241,694 ###M##e#e#t Agreement (Cost Com $1,726,562 ## ## ## $12,209 ####### $696,977 ###o#f# P##roviding Care + $0 Contributions) 02 01 00 99 98 97 96 - 10 Hospitals and Charity Care Dominican Hospital Yearly Performance 2002 through 1999 Fiscal Year (Ending June 30) 2002 2001 2000 1999 Gross Revenue $456,841,306 $330,472,517 $289,437,497 $272,662,515 Net Operating Expense $64,239,883 $46,725,331 $55,309,811 $51,081,651 Agreed Upon Uncompensated Care (7%) $4,496,792 $3,270,773 $3,871,687 $3,575,716 Actual Uncompensated Charity $4,804,515 $2,523,092 $2,611,204 $2,374,819 Actual Uncompensated Bad Debt $9,268,252 $7,212,450 $4,327,984 $3,739,328 Actual Uncompensated Total (Bad Debt + Charity) $14,072,767 $9,735,542 $6,939,188 $6,114,147 Cost to Charges Ratio 29.62% 36.46% 40.41% 40.44% Cost of Providing Care (Cost Ratio X Actual Uncompensated Total) $4,168,354 $3,549,579 $2,804,126 $2,472,561 Contributions to Exempt Organizations and Community $2,055,000 $415,600 $1,641,000 $1,357,000 Actual Expenditures to Meet Agreement (Cost of Providing Care + Contributions) $6,223,354 $3,965,179 $4,445,126 $3,829,561 Commitment Excess (Deficit) $1,726,562 $694,405 $573,439 $253,845 Dominican Hospital Yearly Performance 1998 through 1996 & Total Fiscal Year (Ending June 30) 2002 to 1996 1998 1997 1996 Totals Gross Revenue $250,938,722 $244,016,884 $235,816,649 $2,080,186,090 Net Operating Expense $42,522,518 $44,104,443 $41,437,136 $345,420,773 Agreed Upon Uncompensated Care (7%) $2,976,576 $3,087,311 $2,900,600 $24,179,454 Actual Uncompensated Charity $1,891,319 $3,046,679 $1,631,459 $18,883,087 Actual Uncompensated Bad Debt $2,804,999 $2,955,040 $4,539,076 $34,847,129 Actual Uncompensated Total (Bad Debt + Charity) $4,696,318 $6,001,719 $6,170,535 $53,730,216 Cost to Charges Ratio 42.22% 43.88% 43.80% N/A Cost of Providing Care (Cost Ratio X Actual Uncompensated Total) $1,982,785 $2,633,554 $2,702,694 $20,313,653 Contributions to Exempt Organizations and Community $1,006,000 $1,081,000 $1,539,000 $9,094,600 Actual Expenditures to Meet Agreement (Cost of Providing Care + Contributions) $2,988,785 $3,714,554 $4,241,694 $29,408,253 Commitment Excess (Deficit) $12,209 $627,243 $696,977 $4,584,681 Hospitals and Charity Care - 11 Watsonville Hospital Watsonville Hospital 1996 to 2002 Performance Summary Total Agreed Upon Uncompensated Care 1996 - 2002 $7,089,917 Actual Expenditures to Meet Agreement 1996 - 2002 $7,527,237 Percentage Attained 1996 - 2002 106.17% Watsonville Community Hospital 2002 to 1996 Fiscal 2002 2001 2000 1999 1998 1997 ### Totals Year $2,50G0r,o0s0s0 $0 ##### ##### ####### $0 ####### ### $802,797,026 Net $0 ##### ##### ####### $0 ####### ### $101,284,522 Agreed Upon $2,00A0g,0re0e0 $0 ##### ##### ####### $0 ####### ### $7,089,917 Actual $0 ##### ##### $653,169 $0 $753,698 ### $5,3U6n9c,9o7m7pensated Care Actual $0 ##### ##### ####### $0 ####### ### $14,6(747%,1)49 $1,500,000 Actual $0 ##### ##### ####### $0 ####### ### $20,017,126 $1,00 C 0 o ,0 st 0 0 0.00% ##### ##### 41.16% 0.00% 49.83% ### Actual Expenditures to Cost $0 ##### ##### ####### $0 ####### ### $7,5M27e,e2t3 7Agreement (Cost of $50C0o,0nt0ri0 $0 $0 $0 $0 $0 $0 $0 Providing Care + Actual $0 ##### ##### ####### $0 ####### ### $7,5C2o7n,2t3ri7butions) Com$0 $0 ##### ##### ####### $0 ####### ### $437,321 02 01 00 99 98 97 96 - 12 Hospitals and Charity Care Watsonville Hospital Yearly Performance 2002 through 1999 Fiscal Year (Ending Dec 31) 2002 2001 2000 1999 Gross Revenue $0 $254,350,140 $195,929,361 $141,120,162 Net Operating Expense $0 $25,488,782 $21,596,081 $20,361,845 Agreed Upon Uncompensated Care (7%) $0 $1,784,215 $1,511,726 $1,425,329 Actual Uncompensated Charity $0 $1,634,719 $1,057,600 $653,169 Actual Uncompensated Bad Debt $0 $4,967,008 $3,519,779 $3,165,288 Actual Uncompensated Total (Bad Debt + Charity) $0 $6,601,727 $4,577,379 $3,818,457 Cost to Charges Ratio 0.00% 29.27% 33.26% 41.16% Cost of Providing Care (Cost Ratio X Actual Uncompensated Total) $0 $1,932,325 $1,522,436 $1,571,677 Contributions to Exempt Organizations and Community $0 $0 $0 $0 Actual Expenditures to Meet Agreement (Cost of Providing Care + Contributions) $0 $1,932,325 $1,522,436 $1,571,677 Commitment Excess (Deficit) $0 $148,111 $10,711 $146,348 Watsonville Hospital Yearly Performance 1998 through 1996 & Total Fiscal Year (Ending Dec 31) 1998 1997 1996 2002 to 1996 Totals Gross Revenue $0 $108,060,744 $103,336,619 $802,797,026 Net Operating Expense $0 $17,046,592 $16,791,222 $101,284,522 Agreed Upon Uncompensated Care (7%) $0 $1,193,261 $1,175,386 $7,089,917 Actual Uncompensated Charity $0 $753,698 $1,270,791 $5,369,977 Actual Uncompensated Bad Debt $0 $2,016,985 $978,089 $14,647,149 Actual Uncompensated Total (Bad Debt + Charity) $0 $2,770,683 $2,248,880 $20,017,126 Cost to Charges Ratio 0.00% 49.83% 49.81% N/A Cost of Providing Care (Cost Ratio X Actual Uncompensated Total) $0 $1,380,631 $1,120,167 $7,527,237 Contributions to Exempt Organizations and Community $0 $0 $0 $0 Actual Expenditures to Meet Agreement (Cost of Providing Care + Contributions) $0 $1,380,631 $1,120,167 $7,527,237 Commitment Excess (Deficit) $0 $187,370 ($55,218) $437,321 Hospitals and Charity Care - 13 Response: Santa County Board of Supervisors PARTIALLY AGREES. The charts presented by the Grand Jury have been moved to Attachment A of this response. Many of the “computational errors” the Grand Jury noted were essentially rounding errors. Depending on the number of decimal places used in recalculating the charity care reports, the end results will vary. The Grand Jury used two decimal places to recalculate reports while the hospitals used five decimal places (or more) when they prepared the reports. When multiplying numbers in the millions of dollars by percentages, rounding differences can total several hundred dollars or more. The Grand Jury’s charts apparently do not include Sutter contributions for uncompensated care in 1997 and 1998 or the unpaid costs of government programs for applicable years (the difference between the actual cost of providing care and the reimbursement from MediCal, Medicare, and Medicruz). These costs were approved and certified by the independent auditors overseeing hospital reports on compliance and accepted by the prior Health Director through 2000. Watsonville Hospital’s initial report in 1996 failed to place brackets around the final computation indicating that the hospital was in surplus rather than deficit. The auditor’s letter accompanying the reports attested to the accuracy of the computations. HSA should have required the hospital to correct the error. Because these agreements were unique, some of the categories of expenditures assisting the uninsured provided by the hospitals were not addressed in the original agreement or forms. These types of expenditures were put in various categories or new lines were added to the reports. HSA has worked with and will continue to work with the hospitals on these issues for possible revision in updated agreements. - 14 Hospitals and Charity Care

Uncompensated Care Incurred by the Hospitals in Santa Cruz County Total Uncompensated Countywide Hospital Bad Debt Dollars 2002 - 1996 Domin$ic3an,27W5a,t3so4n3ville Sutter Actual $18,883,087 $5,369,977 $454,851 Actual $34,847,129 $14,647,149 $3,275,343 $14,647,149 Dominican Watsonville Sutter $34,847,129 Total Uncompensated Countywide Hospital Charity Dollars 2002 - 1996 $454,851 $5,369,977 Dominican Watsonville Sutter $18,883,087 Response: Santa Cruz County Board of Supervisors PARTIALLY DISAGREES. The Grand Jury reports above are a summary of their revised reports deducting uncompensated care and unpaid costs of government programs and with their slightly different calculation basis. The most serious error in the Grand Jury charts, however, is the implication that all the hospitals are the same and should Hospitals and Charity Care - 15 have equal contributions when in fact they are very different in numbers of beds and gross budgets. In addition, the Grand Jury’s charts include the following errors: • The charts above do not adjust for the fact that Watsonville had submitted only 5 years of data instead of 7. This a significant issue when displaying a chart that says 1996-2002. Adjustments for relative size are critical to fairly compare contributions, and the Grand Jury’s chart misrepresents the relative contribution of each institution. • The Grand Jury’s charts did not include the uncompensated care and unpaid government program costs from Sutter 1996-2000 and thus do not reflect the independent auditors’ reports certified and submitted to the County. • Cost to chart ratios are significant in determining actual costs, and all direct services, billed or not, should have cost to chart ratios applied to them. Cost to chart ratios do not appear to have been considered in the charts or calculations of the Grand Jury. The following chart presents the cost to charge ratios of the three hospitals. The higher the percentage, the closer the charges are to actual costs of service delivery. Cost to Charge Ratios - Santa Cruz County 90.00% 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% 1996 1997 1998 1999 2000 2001 2002 DHSC SMSC WCH - 16 Hospitals and Charity Care • To accurately reflect the relative contribution of each hospital, it is necessary to take into account their different sizes and budgets, which the Grand Jury did not do. • Watsonville reports have not been audited since the new administration purchased the hospital. • The Grand Jury charts do not include the independent auditors certified expenditures for Sutter as discussed above, but do include Dominican’s certified expenditures including categories called “other contributions to the poor and broader community”. In summary, there are significant problems with the summary charts of the Grand Jury which are continued in findings 3 and 4. Below are the certified expenditures for the hospitals as submitted by the independent auditors. Final Auditor Community Certified Hospital FY END Method Required Provided Benefit Ex/(Def) DSCH 6/95 CC&BD $2,425,772 $3,122,749 N/A $696.977 6/96 CC&BD $2,900,600 $2,702,896 $1,539,000 $1,341,296 6/97 CC&BD $3,087,311 $2,633,802 $1,081,000 $627,491 6/98 CC&BD $2,976,576 $1,982,899 $1,133,000 $139,323 6/99 CC&BD $3,575,716 $2,472,713 $1,357,000 $253,997 6/00 CC&BD $3,871,687 $2,803,860 $1,641,000 $573,173 6/01 CC&BD $3,270,773 $3,549,867 N/A $279,904 6/02 CC&BD $4,496,792 $4,168,392 $2,055,000 $1,726,600 SMSC* 12/96 CC $419,534 $1,051,328 N/A $631,704 12/97 CC&BD $659,564 $1,291,673 N/A $632,109 12/98 CC&BD $631,254 $867,803 N/A $236,548 12/99 CC&BD $717,858 $169,148 $740,856 $192,246 12/00 CC&BD $801,579 $167,660 $661,700 $27,780 12/01 CC&BD $844,919 $525,385 $415,600 $96,066 12/02 CC&BD $977,647 $412,132 $469,528 ($95,987)** WCH 6/95 CC&BD $1,070,287 $1,347,785 N/A $277,498 6/96 CC&BD $1,175,386 $1,120,101 N/A See 6/97 6/97 CC&BD $1,193,261 $1,380,548 2 YR. AVG. $132,002 6/98*** N/A 12/99 CC&BD $1,425,329 $1,571,609 N/A $146,280 12/00 CC&BD $1,511,726 $1,522,620 N/A $10,894 12/01 CC&BD $1,784,215 $1,932,221 N/A $148,006 12/02 CC&BD $1,888,754 $1,942,092 N/A $53,338 CC&BD = Charity care and bad debt option selected *The methodology and interpretations used by Sutter Maternity and Surgery Center (SMSC) in the preparation of their reports submitted through December 2000 was Hospitals and Charity Care - 17 questioned in 2001. The methodology was settled and the outcome approved by the Board of Supervisors on October 18, 2001. **SMSC brought forward the 12/01 excess contribution to the 12/02 period to offset the remaining deficit after community benefit activities were credited. ***Watsonville Community Hospital changed ownership in September 1998. The new ownership changed the hospital’s fiscal year to end on December 31. Under the hospital’s new contract with the county, the charity care reporting obligation began with the fiscal year ending 12/99. Because of the change in ownership, no report was available for the fiscal year ending June 1998. The preceding table summarizes the reports submitted by the three local contract hospitals since the inception of their obligations to provide specified levels of care, bad debt, and community benefit activities. All hospitals have reported being in compliance with their obligations although both Dominican Hospital and Sutter Maternity and Surgery have had to rely on community benefits activities as well as charity care and bad debt. As can be seen from the above data, with the exception of Dominican Hospital in the 6/01 reporting period, the hospitals have demonstrated increasing inability to meet their obligations through the provision of charity care and bad debt alone. In fact, satisfying the obligation by using the option to provide 5.5% of net operating costs in charity care has never been effectively used by any of the hospitals.

In 1996 Sutter Hospital selected the 5.5% option, which allowed only charity care to be deducted under the terms of the AMCA. It reported exceeding the agreed- upon charity care requirement by $631,704. However, it achieved this excess by means of two violations of the terms of the AMCA. First, Sutter Hospital wrote off $613,507 for the unpaid costs of government programs (Medicare, Medi-Cal, Medi-Cruz), which was not allowed. Second, it deducted $475,211 for “uncompensated care write-offs,” which was not allowed under the 5.5% option. If these deductions were factored out, the final calculation resulted in a non- compliance deficit of ($400,353). Response: Santa Cruz County Board of Supervisors PARTIALLY AGREES. The independent auditor’s certified report for 1996 accepted by the Health Administrator included uncompensated care and unpaid costs of government programs. Later clarification by Sutter indicated that the uncompensated care services were bad debt. The Health Administrator also accepted $1,786,000 in unbilled services for Dominican based on the certified auditor report. It is unclear whether these charges were adjusted based on the cost to charge ratio and whether these would be more accurately characterized as charity care, bad debt or - 18 Hospitals and Charity Care community benefit. Given the unique nature of these agreements, some of the hospital activities provided by all three hospitals to the community did not fit neatly into the format and categories in the agreement. HSA worked with the hospitals to understand their differing expenses related to community activities to find the best fit within the agreement. HSA acknowledges there were several issues in dispute until the Board approved the revised services plan in 2001. The most significant issue concerned counting the unpaid cost of government programs. In 2001, the County Health Department under new leadership began working with the new Sutter administrator to increase direct services and access to services for the uninsured. The systems are now in place and are reviewed quarterly. Since the new services were approved by the Board in 2001, unpaid costs for government payors was not included in any reports. In addition, each specific item under community benefit is reviewed by HSA.

In 1997 and 1998 Sutter Hospital chose the 7% AMCA option, which allowed deductions of both charity and bad debt. The hospital deducted amounts for charity and bad debt, but again deducted.“uncompensated care write-offs” with no clarification. In 1997 and 1998 these unexplained “uncompensated care write-offs” amounted to $537,955 and $49,460 respectively. In 1997 and 1998, Sutter Hospital again did not adhere to the terms of the AMCA by deducting the unpaid costs of government programs. In 1997 and 1998 these deductions totaled $613,507 and $867,738 respectively. By deducting the unexplained “uncompensated care write- offs” and the unpaid costs of government programs, the hospital reported exceeding the agreed-upon uncompensated care requirement in 1997 by $632,109 and in 1998 by $659,564. When the unpaid costs of government programs are factored out for 1997, it exceeded the requirement by a much smaller amount of $18,603. Using the same type of deductions for 1998, rather than exceeding the AMCA requirement, Sutter Hospital was non-compliant with a deficit of ($308,189). Additionally, when the unexplained “uncompensated write-offs” are factored out for 1997 and 1998, Sutter Hospital was non-compliant with deficits of ($519,352) and ($357,649) respectively. Response: Santa Cruz County Board of Supervisors PARTIALLY AGREES. With the 7% methodology, the issues remain essentially the same as the previous response to item 3. Uncompensated care and unpaid costs of government programs were the hospital costs approved by the independent auditor and certified to HSA as appropriate and which were consistent with industry standards for health care financial reporting in California. All the hospitals used respected independent auditing firms to review their compliance and certify expenditures to the Health Services Agency Administrator, including Seghetti & Waxler, Ernst & Young LLP, Arthur Anderson and Deloitte & Touche LLP. All of these firms have extensive Hospitals and Charity Care - 19 health finance expertise. Also, it should be mentioned that all the auditing firms increased both costs and level of detailed analysis and consultation with the County related to contract interpretation after the Arthur Anderson accounting scandal related to ENRON. These firms audit hospital cost reports for Medicare and other requirements and are quite familiar with health finance requirements.

In 2001 the HSA and Sutter Hospital met to discuss the hospital’s non-compliance with the AMCA. On October 15, 2001, the hospital wrote a letter to the HSA to change the terms of the original agreement. The letter stated, “If accepted this letter would settle all differences between the County and the Hospital for all years prior to 2001, and would provide an agreed-upon interpretation” between them over certain provisions of the Agreement for 2001 and all years thereafter. “This letter would not constitute an amendment of the Agreement in any way.” The Sutter Hospital and Santa Cruz Medical Clinic (SCMC) physicians offered the following services: A. High-risk pregnancy services worth $4,000 x 17 patients, even if 17 patients were not treated. SCMC pediatricians will provide post-natal care until 18 years of age, but if not reimbursed, would refer these children back to the county clinic. B. The county will approve Sutter Hospital’s requests for prior approval of specific community benefit activities. C. The community clinics in North County could sign up patients for education programs and patient education supplies for credit under charity. D. The hospital will provide up to $10,000 a year of laboratory services for hepatitis C. E. The county and the hospital will determine what kind of physician specialists, “including but not limited to urologists and orthopedists” are needed and the hospital’s relocation program will be credited to community benefit for a maximum of $100,000 plus moving costs for each 4 year recruiting agreement. These physicians will agree to see Medi-Cal and Medi-Cruz patients. F. The hospital will donate at least $25,000 to the Youth Resource Bank on a restricted use basis to pay insurance premiums for Healthy Families eligible clients. G. Medi-Cruz patients will obtain $50,000 in free care at the Hospital. The hospital will receive a credit for uncompensated care of 200% of what - 20 Hospitals and Charity Care Medi-Cruz would have paid for these services. SCMC physicians will see pre-screened Medi-Cruz patients for non-hospital services as an obligation under the Access to Medical Care Agreement. H. The county will not hold the hospital liable for its deficits in earlier AMCA reports. Response: Santa Cruz County Board of Supervisors PARTIALLY AGREES. The new services and contributions to indigent care and the safety net programs were designed to provide a clear mechanisms for compliance without relying on an emergency department for patient referrals. The County worked extensively with the new CEO of Sutter to identify the best ways for the hospital to meet the needs of the safety net clinics, the uninsured, and also provide required levels of services and expenditures under the agreement. The list of services was developed collaboratively. Hospital services are provided to uninsured patients who did not meet MediCruz qualifications or needed a service not covered by MediCruz. MediCruz is the County program for individuals who are uninsured and is limited in coverage to individuals up to 100% of federal poverty with some share of cost clients up to 200%. Sutter covers individuals up to 300% with no cost and up to 400% with a share of cost. The community benefit services proposed by SCMC leadership were needed by the County and Safety Net Clinics for indigent patients. This proposal was not a contract amendment, but was an addendum to improve compliance to the original goals of the agreement. The teamwork with the Sutter and SCMC leadership in proposing this addendum to the agreement was a significant turning point in developing a partnership to serve the uninsured patients of the County and the Safety Net clinics. One of the most significant features is access to specialists who dedicate part of their practice to safety net patients for their first four years in the community. This has been a very valuable asset for access to needed specialist talent to complement the primary care of the safety net clinics. The County believes that the Grand Jury has not recognized the significance of this improved set of services and believes that litigation would be a costly and uncertain course of action. Instead, services have been improved and partnerships strengthened. Not withstanding the disappointment with the initial interpretation related to the unpaid costs of government programs, the current system for insuring the agreement is met has exceeded County expectations and met the initial goals for the agreement.

Eight days later, the HSA and the Board of Supervisors accepted the terms of the letter. Response: Santa Cruz County Board of Supervisors AGREES. Hospitals and Charity Care - 21 In addition, other hospitals were notified that these types of services would be accepted as part of the community benefit component of the agreement. In addition, the County clarified that it would not count duplicative services or services not of value to overall community health.

In 2001 as a condition of accepting Sutter Hospital’s lack of adherence to the terms of the AMCA, the Board of Supervisors stipulated that indigent patient healthcare services should be given priority. The HSA required Sutter Hospital to submit a list of community benefits for approval. Sutter Hospital submitted lists of activities to gain approval with the following non-healthcare activities: A. Collected trash for Adopt a Highway: $10,494. B. Cleaning up the San Lorenzo River: $312. C. Donated surgical supplies/equipment to a local veterinary hospital: $232. D. Provided a meeting room for Kol Tefillah support group: $8,000. The HSA did not approve the above items because they were “not related to healthcare for low-income, uninsured or community health at large.” Examples of what the HSA approved include the following: A. Cash donation to the Santa Cruz County Women’s Commission: $35. B. Donated used linen to local crisis support and shelters: $1,087. C. Collected toys for Loaves and Fishes Toy Drive: $810. D. Encouraged staff to donate to United Way Campaign: $243 E. United Way Golf Tourney: $200. F. Welfare to Work Program: $2,187. The HSA approved the above activities, despite the fact they were “not related to healthcare for low-income, uninsured or community health at large.” In 2001 the HSA approved Sutter Hospital’s provision of a meeting space for a variety of groups, which also were not related to healthcare. A. Seniors Commission: $2,150. B. Mothers of Twins Club: $2,500. C. Stepfamily Association/Foster Parents: $2,900. In 2002, Sutter Hospital included meeting spaces for: A. “Temple Beth El” for study and meditation: $4,800. B. California Association for Marriage and Family therapists: $4,050. - 22 Hospitals and Charity Care In 2003 Sutter Hospital submitted items, which also had no relationship to healthcare, but the HSA approved them. Examples included the following: A. Participated in fundraising efforts of United Way: $1,307. B. Provided meeting space for senior groups: $300. Response: Santa Cruz County Board of Supervisors DISAGREES. The County has clarified the basis for approval and submission of activities. When Sutter began submitting activities to the County for Access to Care consideration, they included all the activities approved as allowable under community benefit reporting by the California Office of Statewide Health Planning and Development (OSHPD). The State does not require community benefit activities to be healthcare only, and all the hospitals count and track these types of items for OSHPD reporting. As the quarterly process of review has progressed, Sutter’s reports for the County agreement eliminated those items from the County reports. The County approved United Way donations because United Way is doing a significant community assessment project which includes health care. It is a large and expensive project which creates an annual community report card on health and other issues. This activity has led to many positive improvements in health and should be supported. The County approved support activities and donations for foster parents due to the number of disabled and traumatized children they serve that are of great concern to the HSA and Social Services. Without support, these children often end up in expensive hospitals and group homes for mental health issues. The Women’s Commission has been focusing on mental health issues for women and therefore the $35 donation was approved. Crisis support for women and victims of domestic violence is a mental health service and therefore this donation was approved. Loaves and Fishes provides needed food and nutrition support for the poor which directly relates to general health and therefore the $810 was approved. Welfare to Work programs are core County programs assisting low income parents in mental health, substance abuse, and other health needs as well as helping with jobs and therefore this donation was approved. Hospitals and Charity Care - 23 Twins support group was approved due to needs of this population particularly for post delivery depression and stress. Senior programs were also approved because of the many needs of frail and at risk seniors of concern to the County Health Department and their desire to strengthen the safety net for this group. Sutter presents an excellent annual senior health fair which provides exams and consultation on numerous health issues and also provides visiting nursing services through their visiting nurse program. County records indicate that the request for space used by Temple Beth El was denied. If this use was approved by the County, it was done so in error.

Despite the free testing of hepatitis C patients offered by Sutter Hospital and the free medication available,9 the HSA refuses to treat Hepatitis C patients. The Grand Jury heard testimony from the HSA that the “difficulty is the high cost of the work up, the number of appointments, the lab tests are very, very expensive.” Furthermore, the people seen in the clinic with the diagnosis of hepatitis C “are current substance abusers.” Response: Santa Cruz County Board of Supervisors DISAGREES. The County routinely provided Hepatitis C treatment to patients with MediCal and other coverage. The inclusion of Hepatitis C treatment to MediCruz patients required significant evaluation by the department. The County HSA has continued to work with community groups to develop two programs for individuals with Hepatitis C. One program for community clinic patients and uncomplicated patients identified by the County is a special lab and treatment access program through Dr. William Morris at the Hepatitis C Center. This is now in place and the County is providing free lab services to those patients. In addition, the County has initiated a pilot program through MediCruz for 20 patients with complex illnesses and Hepatitis C.

Despite the specific mention of recruitment of an orthopedist in Sutter Hospital’s letter, nothing has been done. The county clinic patients have to travel to Santa Clara County to receive orthopedic care because the Santa Cruz Medical Clinic orthopedists refuse to see them. Response: Santa Cruz County Board of Supervisors DISAGREES. The Santa Cruz County Health Services Agency Physicians Association reported the lack of treatment for hepatitis C patients to the Board of Supervisors on November 18, 2003. It also reported that free medication was available. - 24 Hospitals and Charity Care Sutter has been working with the County to expand local orthopedic capacity by trying to recruit new specialists in this field of medicine. While many Sutter recruitments of specialists desired by the County have been successful, this has not. Competition among communities for orthopedic surgeons is very difficult, in part since orthopedists are increasingly sub-specializing, e.g., hand, shoulder, hip, knee, thereby requiring a larger population base to sustain their practices. Consultation with local hospitals and other counties has shown this to be a highly competitive specialist market. Most orthopedic specialists in Santa Cruz County have a full caseload of patients, and most of them - not just those associated with Santa Cruz Medical Clinic - have limited their acceptance of new patients. All of those with hospital privileges are obligated to and do care for uninsured patients as part of the hospital emergency on-call system. The difficulty with hospital access is primarily with elective orthopedic surgical services and, in recent months, an increasing volume of outpatients with urgent problems. The County Clinics have expanded their outpatient orthopedic services from a half-day a week three years ago to two full days a week at present, and the demand continues to increase. Currently the County has two part-time orthopedic specialists doing outpatient procedures. For hospital procedures, the County's contract orthopedists are able to refer patients to Santa Clara Valley Medical Center for elective surgery. However, even that tertiary care center with a full-scope orthopedic residency training program is nearing capacity. There are long waits for access for elective procedures. Because of the many new procedures and the aging population coupled with a local shortage of orthopedists, this specialty is overwhelmed with referrals. While the County will continue to work with Sutter and other health leaders to expand access in this area of medicine, the most helpful thing would be to resolve the locality 99 Medicare issue because it impacts so many of the patients referred to orthopedics. Physicians completing their residency training in orthopedics and other specialties carefully consider these rates when deciding where to locate their practices. Notwithstanding a Rand Corporation report in 1998 of an impending national surplus of orthopedists, the situation is quite different in smaller communities like ours with a rural reimbursement formula. Santa Cruz County’s current Medicare Geographic Adjustment Factor lags behind Santa Clara County’s reimbursement levels by 18%. This will increase to 25% in 2005. Santa Cruz County cannot effectively compete with our neighboring counties for specialists in high demand.

As anticipated, Sutter Hospital’s amount of bad debt and charity are much smaller than Dominican or Watsonville Hospitals’ because of Sutter Hospital’s lack of an emergency room. Response: Santa Cruz County Board of Supervisors AGREES. Hospitals and Charity Care - 25 Sutter is a much smaller hospital with only 30 licensed beds and no emergency department so it would be anticipated that it would have less bad debt and charity care. It is less than one-third (28%) the size of Watsonville hospital (106 licensed beds). Sutter also cannot take acute and unstable patients, which limits the number of patients who can be admitted.

The AMCA required an auditor’s report to accompany all the hospitals’ reports to the HSA. The reports given to the Grand Jury by the HSA had only two auditor’s reports, which were submitted by Dominican Hospital in 1995 and 1996. However, the auditors’ letters, which accompanied Sutter Hospital’s reports, allowed the unpaid cost of government costs to be deducted. They also stated that the reports were not audited. Response: Santa Cruz County Board of Supervisors PARTIALLY AGREES. All of Sutter's and Dominican’s reports have been audited by reputable audit firms. Watsonville has had problems producing independent audits since the new owners assumed responsibility for the hospital. Since the Arthur Anderson scandal related to ENRON, all of the auditors have increased rates to the hospitals and have been consulting with the County on details of contract compliance. While the new attention to detail and consultation has been good, another solution for all three hospitals would be to have the County Auditor Controller conduct the audits. They would be done consistently and at reasonable rates. This will be discussed with the hospitals as an option for compliance in future years.

Although Dominican Hospital also reported AMCA deficits, it complied with the terms of the AMCA by providing additional healthcare services to the poor. Dominican Hospital has a variety of free clinics for the poor as listed below.10 A. Dominican Pediatric Program. B. Dominican Prenatal Program. C. Tattoo Removal Service for Former Gang Members. D. Kidsmart in Schools Program. E. Dominican Pediatric Subspecialty Clinics: A joint venture with the Lucile Salter Packard Children’s’ Hospital at Stanford. F. Dominican RotaCare: Joint venture with the Santa Cruz Rotary Club. Response: Santa Cruz County Board of Supervisors AGREES. This list is a sample of the many community services Dominican Hospital provides. - 26 Hospitals and Charity Care Dominican has done some very innovative and positive activities to support the health of the community, and the staff and leadership deserve positive recognition for these efforts.

Dominican Hospital and Watsonville Hospital did not deduct the unpaid costs of public programs, as Sutter Hospital did for many years. Neither Dominican Hospital nor Watsonville Hospital carried forward the excess in one year to remove a deficit in the following year as Sutter Hospital did in 2002.11 Dominican Hospital and Watsonville Hospital also never deducted “uncompensated care write-offs” as Sutter Hospital did from 1996 through 1998. Response: Santa Cruz County Board of Supervisors PARTIALLY AGREES. Dominican and Watsonville did not deduct the unpaid cost of government programs in their reports. Averaging is permissible in the agreement and available to all hospitals. It is not a contract violation as implied by the Grand Jury. Watsonville did average (carry over a deficit) from 1996 to 1997. All of the hospitals provide services which do not neatly fit into the categories on the County form, but these activities are still positive community health services which meet the intent of the agreement.

Watsonville Hospital has not had a deficit, except in 1996 when it appeared compliant because the hospital and the HSA did not find the computational error. According to the HSA, Watsonville Hospital’s late 2002 report will have a deficit and the hospital has asked whether the taxes that it pays could be used in exchange for its charity obligation. Response: Santa Cruz County Board of Supervisors PARTIALLY AGREES. Watsonville is working on its reports, but audited reports have not arrived. The County will enter into discussions with Watsonville Hospital upon receipt of the 2002 and 2003 reports if there are shortfalls to be addressed. Ongoing audit problems will be addressed.

Sutter Hospital’s relationship to the Santa Cruz Medical Foundation and the Santa Cruz Medical Clinic cannot be fully understood without explaining the financial benefits of a medical foundation. Starting in 1978 the concept of the Medical Clinic Foundation model developed primarily in California. The medical foundation was “a technique for complying with the California corporate practice of medicine laws while at the same time establishing hospital ownership of medical practice assets. Typically, the Foundation is established as a tax-exempt organization and used by 11 The Health Services Agency allowed Sutter Hospital’s carry forward. Hospitals and Charity Care - 27 tax-exempt hospital systems.”12 “Their tax- exempt status presents definite advantages relative to income, financing, and contributions.”13 The medical foundations are also exempt from licensure by the state Department of Health Services. The Santa Cruz Medical Clinic falls under the following regulation. Clinics and facilities exempt from licensure include: A. A clinic operated by a non-profit corporation is exempt from federal income taxation under paragraph (3) of subsection C of Section 501 of the Internal Revenue Code of 1954, as amended, or B. A statutory successor thereof, that conducts medical research and health education and provides health care to its patients through a group of 40 or more physicians and surgeons, who are independent contractors representing not less than 10 board-certified specialties, and not less than two thirds of whom practice on a full-time basis at the clinic.”14 Response: Santa Cruz County Board of Supervisors AGREES. Regulation of medical group practices is not within the scope or authority of the County. Many medical groups have gone bankrupt in the last decade and are trying to find ways to stay solvent with rapidly changing health financing pressures. The Santa Cruz Medical Clinic physicians were not party to the Access to Care Agreement. Sutter hospital is the party with which the County contracts. The physicians with Sutter hospital privileges are both SCMC and non-SCMC doctors. Sutter has developed incentives to assist with physician-linked access to hospital services. Under the current leadership, a smooth system has been developed which shares the responsibility over many physicians and also includes new specialists requested by the County with dedicated time for indigent patients.

Although Santa Cruz Medical Foundation charges patients and has a tax-exempt status, it recently sent out a letter stating that “Today, through our affiliation with the Palo Alto Medical Foundation, Sutter Santa Cruz serves as a true community- based, not-for-profit health care provider. Each year, we give back to our community. Now, we are asking our community to give back to us. Your gift in any amount will help us to uphold the high standards of medical care that so many people in our community depend upon.”15 Response: Santa Cruz County Board of Supervisors CANNOT RESPOND. 12 “Avoiding the Legal Minefields of Integrated Systems,” Medical Clinic Foundation, LexisNexis search. Gregory Georges, “Nonprofit Medical Foundations-A Corporate Practice of Medicine Problem?” LexisNexis search. Deering’s California Health & Safety Codes Annotated (section 1206, Matthew Bender & Company, Inc., 2003) LexisNexis search. Sutter letter to the community in December 2003. - 28 Hospitals and Charity Care The County did not receive this letter and cannot comment on this finding. Conclusions