Hospitals and Charity Care in Santa Cruz County

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. See the Appendix. Hospitals and Charity Care - 7 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 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 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 - 10 Hospitals and Charity Care 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

Uncompensated Care Incurred by the Hospitals in SCC 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

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). - 14 Hospitals and Charity Care

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.

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. Hospitals and Charity Care - 15 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 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.

Eight days later, the HSA and the Board of Supervisors accepted the terms of the letter.

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. - 16 Hospitals and Charity Care 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. 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.

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.”

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.

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.

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.

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. 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. This list is a sample of the many community services Dominican Hospital provides. Hospitals and Charity Care - 17 F. Dominican RotaCare: Joint venture with the Santa Cruz Rotary Club.

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.

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.

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 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

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 11 The Health Services Agency allowed Sutter Hospital’s carry forward. 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. - 18 Hospitals and Charity Care any amount will help us to uphold the high standards of medical care that so many people in our community depend upon.”15 Conclusions