Lompoc Valley Medical Center's Champion Center

Conclusions 12

• CL1
  At this point only the income from Lompoc Valley Medical Center operations is available to service the debt obligations of the Cal-Mortgage revenue bond, which will require at least a $1 million per year repayment until 2042.
• CL2
  The Lompoc Valley Medical Center leadership did not provide a full explanation to its constituents for the failure of the Champion Center.
• CL3
  the reliance on only one chemical dependency recovery hospital to validate their decision to proceed;
• CL4
  the failure to engage in appropriate market research to determine the potential number of patients;
• CL5
  the lack of a comprehensive risk assessment to examine what could go wrong, instead relying on a feasibility study to determine the District’s ability to repay the bond debt that based financial projections on the same sole chemical dependency recovery hospital; and
• CL6
  the decision not to retrofit seismically, which caused delays for licensing and insurance coverage. 7 2017-18 Santa Barbara County Grand Jury LOMPOC VALLEY MEDICAL CENTER’S CHAMPION CENTER Furthermore, the Jury found it disturbing that the Lompoc Valley Medical District leadership interviewed who were involved with the startup process stated that no mistakes were made and they had no need to explain the failure of the Champion Center to its voters. FINDINGS AND RECOMMENDATIONS Finding 1 At this point only the income from Lompoc Valley Medical Center operations is available to service the debt obligations of the Cal-Mortgage revenue bond, which will require at least a $1 million per year repayment until 2042.
• CL7
  Disagree Wholly with an explanation
• CL8
  Disagree Partially with an explanation Responses to Recommendations shall be one of the following:
• CL9
  Has been implemented, with a brief summary of the implemented actions
• CL10
  Will be implemented, with an implementation schedule 8 2017-18 Santa Barbara County Grand Jury LOMPOC VALLEY MEDICAL CENTER’S CHAMPION CENTER
• CL11
  Requires Further Analysis, with an explanation of the scope and parameters of an analysis or study and a completion date of less than 6 months after the issuance of this report
• CL12
  Will not be implemented because it is not warranted or reasonable, with an explanation of why. Lompoc Valley Medical Center Board of Directors– 90 days Findings: 1 and 2

Observations 3

• OB1
  For projections on insurance coverage regarding estimated Champion Center patients, the study “relied upon AMS’ experience and the scope of benefits covered by each payer type.”
• OB2
  “The potential volume that could be captured by the CDRH was estimated in the Market Analysis section of this report and was based on service area trends, projected use rates, and interviews with members of the [District] Management team, the Board, and representatives of AMS.”
• OB3
  “The net patient revenue for the CDRH was developed using a combination of AMS’ experience with the two centers it currently manages and anticipated Medicare rates.” Thus, key judgments regarding the performance of the Champion Center were based on input from the District and AMS, the two key stakeholders in the proposed project. District officials confirmed to the Jury that no other independent risk assessments were conducted either before or after the District decided to pursue the project. 3 2017-18 Santa Barbara County Grand Jury LOMPOC VALLEY MEDICAL CENTER’S CHAMPION CENTER Management Contracts The CEO, with the Board’s approval, began discussions with AMS about a business relationship with the District. The District and AMS agreed that AMS would manage the program. In the original contract, in accordance with Cal-Mortgage’s stipulations, AMS would provide and pay for specialized chemical dependency counselors, a resident manager, administrative duties for patient registration and intake as well as marketing the Center’s services to organizations that might be a source of patient referrals. The District in turn would provide and pay for the medical staff, accounting, IT support, facility maintenance and housekeeping services including utilities. As compensation, AMS would receive 44% of the adjusted gross revenue for the first year, and 32% in the second year. The original contract was signed in November 2014. This contract underwent three subsequent amendments. The final amendment in 2017 adjusted AMS compensation to a fixed, flat management fee of $96,506 monthly, and the entire AMS staff was paid from this fee. Licensure The AMS license in Hemet to conduct chemical rehabilitation services was based on operating as a service under the Hemet Valley Medical Center’s general acute care license. AMS physical facilities were not required to implement seismic retrofitting because of its relationship as a service provider under the hospital’s license. This led senior District staff to proceed with the plan to operate the AMS program in the same way at the Champion Center. A lengthy dialogue with officials at the Public Health Licensing and Certification Division ensued. Ultimately, Public Health refused to license the Lompoc facility under the general acute care license of the new hospital, because it contended that the Center had to be seismically retrofitted. Finally, in August 2011, after an unsuccessful meeting to persuade them otherwise, a decision by the District’s CEO, its attorney, the architect, and the Chief Information Officer was made to abandon the idea of having the facility licensed under the District’s general acute care license and to pursue a license for the facility as a freestanding CDRH. The Center received its license as a CDRH in August 2014. In the end, the decision to not seismically retrofit but to seek licensure as a freestanding CDRH was ironically the cause for CMS to deny the Center certification as a Medicare provider in July 2016 because detoxification treatment in a freestanding CDRH was not a covered service by CMS. Insurance Contracts Medicare When the Center opened its doors in November 2014, neither Medicare nor other insurance contracts were in place. The first contact with CMS that the Jury was made aware of was a 2012 letter to CMS in which the District sought confirmation that the Center did meet the specific “conditions of participation” for certification of the Center, operating as an acute inpatient (non- surgical) hospital. The Jury learned that a District official had a telephone conversation in 2012 with the CMS San Francisco office to determine if CMS could certify the proposed Center as a Medicare provider. 4 2017-18 Santa Barbara County Grand Jury LOMPOC VALLEY MEDICAL CENTER’S CHAMPION CENTER The CMS representative indicated that it was conceptually possible that the proposed project could be certified, but that it was only an opinion and was no guarantee of approval. The next contact with CMS that the Jury is aware of is a letter from the District’s attorneys, dated August 17, 2015, two-and-a-half years after its inquiry about “conditions of participation.” The Jury was not provided any other communications between CMS and the District from 2012 to 2015. The letter argues that Public Health was under the impression that a CDRH can qualify for Medicare certification because a CDRH provides acute medical detoxification services. In a January 28, 2016 letter, CMS replied to the District’s attorneys August 2015 letter but noted that neither CMS, Public Health, nor Noridian (a Medicare administration contractor) had any record of an application for Medicare certification. CMS gave the District thirty days to produce the application submission or risk rejection and/or denial. Three months later, in a letter dated May 6, 2016, the District’s attorneys thanked CMS for considering a “clean” application for Medicare certification as an acute hospital and argued that the Center was a provider of acute hospital services. In a letter dated July 14, 2016, CMS notified the District that it denied certification for the Center as an acute care hospital because Public Health had designated it as a CDRH, which CMS does not recognize as a category for Medicare coverage. The District’s attorneys inquired about the appeals processes, but the District decided not to pursue it. Other Insurance Carriers The Center had to be accredited in order to obtain private insurance contracts. For that to happen, the Center had to hire a full staff and accept patients to show that it had a viable and responsible program. Some of the first patients went through the program without paying, as there were no insurance contracts in place. Once accredited by CIHQ (in March 2015), Center staff could turn its attention to contracting with insurers. Although it was projected to take six months to obtain insurance coverage, the time lost was much greater than expected. As a new, separately licensed freestanding facility, the Center could not obtain insurance contracts under the District’s general acute care license. The Center’s staff had to apply for all new contracts. However, the Center was in the midst of attempting to obtain Medicare certification and, according to a District official, insurers prefer that Medicare already be in place before issuing contracts. This made working with the insurance providers difficult. Between March 2015 and December 2016, the Center worked through many delays securing insurance contracts. For example, the first insurance contract was signed in June 2015, but the Center was not loaded onto its system until eight months later. Other insurers had a three-month waiting period before coverage could become effective in addition to another six-month delay to load the Center into their systems. After opening in November 2014 without insurance contracts, operating more than sixteen months without a full complement of insurance payers created continued operational losses. By 2016, the Center had an average of 20-25 patients in the facility at all times, yet this represented only a 40 percent occupancy rate. Tricare, a government insurance program for military families, 5 2017-18 Santa Barbara County Grand Jury LOMPOC VALLEY MEDICAL CENTER’S CHAMPION CENTER did not become available until September 2016. Medi-Cal did not become available until 2017, just as the District closed the Center. Marketing The owner of AMS drew on his experience in treating personnel from the Los Angeles Police Department and Vandenberg Air Force Base for post-traumatic stress disorder (PTSD) in addition to its standard detox treatment for chemical dependency. He convinced the District that the Center program could serve military personnel, police officers and first responders suffering from PTSD. The new facility was named the Champion Center to honor these men and women. Unfortunately, very few referrals came from the Los Angeles Police Department or Vandenberg Air Force Base. The marketing of the Center was the AMS owner’s responsibility. His efforts consisted of meeting with potential referral sources but none resulted. The District hired a marketing person in February 2015 and created a marketing budget of $240,000 to bolster their efforts, to include television, radio and print ads. To intensify its marketing efforts, an outreach person was hired in October 2016, eight months before the Center closed. Operating Losses The Center missed every occupancy target. It had neither enough patients nor the insurance reimbursements to cover the costs of operating a complete drug rehabilitation program. The monthly $300,000 losses were beyond what had been projected. The losses totaled over $10 million in the two-and-a-half years the Center was open. Staffing was the biggest expense. In all, AMS and the District employed a staff of 54 for the Center. In order to accept patients, they had to have a licensed and certified staff available at the minimum ratio of one nurse to five patients and two licensed nurses present at all times, regardless of the number of patients. The Center always had to be ready for any potential patients, especially for those needing detoxification. Furthermore, to attract new patients to the full complement of services, the Center needed a number of specialized counselors for the rehabilitation part of the AMS program. Another complication in staffing was that a CDRH facility had to have a physician medical director with specialized training in addiction medicine. There were five medical directors in two years of operation. When the last medical director resigned in May 2017, this vacancy, combined with operating losses, resulted in the closure of the Center. The District leaders claim that the Center was never overstaffed, and that all those who worked there were always busy. The program itself was staff intensive, with patients in the latter two stages of the program going to multiple counseling sessions daily. Even at its highest occupancy, including self-paying and insured patients, the income was not covering the expenses. For example, in March 2016, the total insurance income was $317,970, but the expenses totaled $609,192. Ultimately, it took over a year and a half for the District to acknowledge that the operation was not and would not meet its projected expectations. Consequently, the Center had to close. 6 2017-18 Santa Barbara County Grand Jury LOMPOC VALLEY MEDICAL CENTER’S CHAMPION CENTER Although the forecast was for a first year loss of $1,900,000 and a second year of $411,000, the actual operating loss for the first fiscal year (2014-15) was $2,400,000 and $3,900,000 each for the second and the third fiscal years. In the end, the District had invested roughly $21 million ($18.75 million bond and $2 million cash reserves) in the facility, and incurred an additional $10 million in operating losses. Even though the Center continued to receive hopeful feedback from the healthcare community and some of its former patients, the District could not continue to sustain the financial losses. In July 2017, the District Board closed the Center after its last patient completed the program. The Aftermath The proposal to close the Center was a quiet one. No public announcements to explain the closure were ever made and the closure only appeared on the District’s agenda of a specially called meeting, which was posted as required. The Board members and senior District staff who were interviewed did not explain their actions to the public. All senior staff and Board members interviewed who were involved in the startup of the Champion Center stated that no mistakes were made in the development or operation of the Center. As an independent special district, principal oversight of the District rests with its Board. In addition to startup costs of $2 million and underwriting the more than $10 million operating losses of the Center, the District remains responsible for the repayment of the $18.75 million loan. Since July 2017, the Champion Center facility has stood vacant except for a small portion currently used by the District for laundry services. The District leadership told the Jury that they are confident that the District can repay the remainder of the loan even as it struggling with diminishing reimbursements. The District has offered the Center for sale at an appraised value lower than the remaining bond debt and has also has considered leasing the Center. It is uncertain how the Center will be used or generate income. Its debt service on the bonds, which is a little more than $1 million per year, will continue until 2042.

Agency Responses 1

Government agencies' official responses to this report's findings and recommendations. Click on a response to see the structured breakdown.