Breaking Up Is Hard to Do

NorthBay biz Contributing Editor Bill Meagher tries to sort through the accusations and hard feelings surrounding Sutter Health, Inc.’s exit from Marin General Hospital.

To the uninitiated, this may look like two business partners whose private disagreement spilled out onto the front pages in advance of a very public split. But that isn’t even close. The separation involved millions of dollars in revenues taken out of MGH, Byzantine politics, very closed-door negotiations that involved at least three different sides and, in the end, required a referee wearing a black robe and swinging a gavel to bring it all home.

While the Sutter-Marin General pairing has ended in a nasty divorce, the coupling did give birth to a proposed state senate bill. Authored by State Senator Ellen Corbett (D-San Leandro), SB1240 would prevent private companies that manage district hospitals from transferring funds or assets out. It also calls for mandatory audits of district hospitals and any operating entity and that the results be made public.

Taking sides

Once you dig far enough into the mess that is the Sutter-Marin General debacle, you discover nobody wears a white hat. Nobody wants to give you a straight answer. It’s style over substance, every man for himself, and there’s enough spin to make Lance Armstrong pitch head-first over his handlebars.

According to Sutter’s own filings with the state of California, since 2002, it’s pulled about $156 million out of Marin General and transferred it to its corporate coffers. That figure includes $36 million from 2009, which still requires an audit. Sutter calls the funds “equity cash transfers” and, for the record, says they’ve been in place since 1995, when Sutter signed its management agreement with the Hospital Corporation, the legal entity that owns the hospital. Moreover, says Sutter spokesperson Kathie Graham, the money transfers only became a major issue once Marin General wanted out—and, since 2001, Sutter has also transferred $7.5 million to Marin General Hospital.

Marin General officials maintain that, since 2006, when both Sutter and the district agreed to go their separate ways, the funds flowing out of the hospital heading for Sacramento have increased from an average of about $2 million per year to almost $34 million per annum.

With a state-mandated seismic rebuild on tap that will run $500 million, Marin General feels like the money is theirs and would be a nice head start toward that project.

So, if you take Sutter’s side, Marin General is a sore loser that needs to go back to business school and would like some million dollar do-overs. And if you’re of a mind to see things Marin General’s way, Sutter did everything but don masks, pull guns and steal the bed pans on the way out the door.

Oh, for such transparency.

A very expensive history lesson

In 1952, Marin General opened to the public, operated by Marin Healthcare District. In 1985, the district entered into a 30-year lease with the Marin General Hospital Corporation, a newly created entity charged with operating the hospital on a day-to-day basis while the district maintained ownership. The move was made to keep the hospital competitive in a changing health care environment. Board members were elected and charged with looking out for the public interest and protecting the hospital as an asset. To stay competitive, it was reasoned, the board needed to meet behind closed doors with limited contact with the public. To say this sowed a certain amount of mistrust by the public in its board is to say that Sarah Palin may have some doubts about the press.

 The Hospital Corporation soon contracted with California Healthcare Systems to run the hospital and, in 1996, CHS merged with Sutter—thus began the star-crossed relationship between MGH and Sutter.

It got worse after the state mandated that Marin General be upgraded to meet seismic standards. The district took the position that, since Sutter was managing the facility and taking revenue out of the hospital, and the project needed to be completed for the hospital to stay open, Sutter needed to get the work done. Sutter, not surprisingly, felt that since it didn’t own the hospital, it wasn’t crazy about either arranging for the work to get done or paying for the construction. Later, Sutter would offer to do the work in exchange for a longer management agreement. Just how long? Nobody on any side will say. Suffice it to say it was sort of an open-ended deal. The offer was not embraced by the hospital.

By 2006, it was all over except for the shouting as the corporation board, district and Sutter hammered out a settlement and transfer agreement sending control of the hospital back to the board and sending Sutter out the door toting some bags packed snug with agreed-upon cash.

This, of course, begs several questions. In no particular order:

• How much was Sutter Health Inc. pulling down for managing the hospital?

• Was the board of Marin General Corporation representing the interests of the public with vigor?

• Did the district bring its A game to the negotiation table?

• Did Sutter rule the day? (After all, how else do you explain yanking out all that cash when previously you’ve only been pulling out about $2 million a year?)

• Did Marin General actually complain about the cash flowing to Sutter?

• Did Marin General actually attempt to stop the cash coming out?

• What, if anything, did Sutter do regarding Marin General’s unhappiness with the cash outs?

• Will we ever really know the truth?

NorthBay biz endeavored to get to the bottom of these questions with decidedly mixed results. We contacted Bob Heller, chairman of the MGH Corporation board, to better understand just how the board viewed the separation process, how it participated in the negotiations and how he would characterize the give-and-take between the three sides.

Heller owns a serious financial pedigree. In the mid ’70s, he spent four years at the International Monetary Fund, heading up its financial services division. After that it was eight years at Bank of America as a senior vice president of international economic research. He followed that stint with three years as a U.S. Federal Reserve governor. Having served the public, he headed back to the private sector as CEO of Visa USA for two years before ending his career with three years at Fair Isaac as an executive vice president.

If anyone could explain the complicated financial machinations that bedevil Marin General, it would be Heller. Alas, working the telephone apparently is a bit more challenging, because Heller never returned our phone call.

At one time, he told the Marin Independent Journal there was nothing he or the board could do about the money flowing out of the hospital’s front door. This answer failed to convince the Alliance to Save Our Hospital, an organization that supports Marin General Hospital. It took out an ad in the IJ, in which it charged that Sutter had wrongfully taken $117 million. The ad also included Heller’s home phone number and urged people to ring him up and ask him to return the cash forthwith.

This was not the only ad the Alliance ran. On another occasion, it ran an open letter to Sutter Health, Inc. including 34 different elected officials as signatories imploring Sutter to return the funds to the district.

Not to be outdone, Sutter ran its own ads in the IJ and the Tiburon Ark defending its transfer of millions in revenues from Marin General Hospital to Sutter’s coffers and correcting “misinformation that had been published.” In one ad, Sutter Health West Bay Region President Dr. Martin Brotman explained that the district knew about the cash transfer policy and approved it way back in 1996, and that nothing had changed in between that agreement and the one that sent Sutter on its way. Setting the tone in the very first paragraph, Brotman pointed out that he was a doctor, a husband, a father and a grandfather. He also pointed out that some of the information in one of the Alliance’s ads was wrong, and that Sutter had offered to build Marin General a new hospital without using any taxpayer cash, but “disappointingly, the Marin Healthcare District rejected that offer.”

Failure to communicate

The dueling ads give you an idea about the premium placed on image in this Battle Royale of the “Network Healthcare Providers.” Why else would Marin General hire international public relations firm Fleishman-Hillard? Among the firm’s specialty areas are crisis communications and health care. Its advisory board counts Andrew Card, Newt Gingrich and Tom Ridge as members. Card was George H.W. Bush’s chief of staff. A former speaker of the House, Gingrich is largely credited with leading the Republican revolution in 1995. Ridge was the first secretary of the Department of Global Security after 9/11. The District also has Barry Blansett on a retainer to handle the public relations task. Blansett is the former publisher of the Novato Advance.

Sutter is ably represented in Marin County by Kathie Graham, a veteran of the hand-to-hand combat that has become the norm from Sutter and MGH over the years. She handles the press when it comes to the fisticuffs. When it comes to talking about the bright future for Sutter in the North Bay, Sutter executives mix with the media.

Pete Hillan of Fleishman-Hillard is the spokesperson who carries the district’s water when it comes to explaining how Marin General ended up tossing all of Sutter’s stuff out on the front lawn. Hillan, the former business editor at the San Jose Mercury before the paper was neutered, understands communication. “Our position is that Sutter has taken $180 million that belongs to the community. That money could be used for any number of things, not the least of which would be the seismic project.”

Hillan also offers that the hospital asked a number of times for meetings on the subject of the cash coming out and heading to Sutter, and that Sutter refused to talk about it. Graham counters, saying the district was well aware of the equity transfer policy, having agreed to it in 1996 and again in 2002.

We asked Hillan about the negotiations and some specifics about what the contracts between Sutter and the Corporate Board spelled out. How much could Sutter take out of the hospital and how much did Sutter make managing the hospital? “We’re waiting for the district lawyers for some of that. The transparency and communication between Sutter, the district and the board has been a problem.” Hillan then intimates that, because of the bad relationship until the transfer was done, the district hasn’t had access to contracts and accounting, so he can’t really answer my questions.

It isn’t hard to believe that Sutter wouldn’t grant the district access to some documents that the district might not have, given the animosity level between Marin General and Sutter. To say there’s some bad blood between MGH and Sutter is a little like saying Tea Partiers don’t care much for health care reform. The statement is true as far as it goes, but in the end, the bitterness and animosity is much more pronounced than that.

On the other hand, the inability to say how much you paid somebody to manage your hospital for 15 years is just a little bit thick.

The fudge factor was just as strong coming from the Sutter side. Graham was asked why the cash transfers by Sutter grew so large after it was agreed that Marin General and Sutter were no longer an item. Her email reply, “There are times when there are no transfers, times when funds are transferred from Sutter Health to the affiliate, and times when funds are transferred from the affiliate to the Sutter Health pool because the affiliate’s financial status allows it to do so. All of these occurred at MGH. When there were sufficient funds to be transferred to the pool, it was because MGH was being well managed.”

The future’s so bright

Sutter is moving on from the Marin General Hospital situation, Graham reminds us, and she arranges to have Dr. Morris Flaum talk about what Marin health care consumers can expect from his nonprofit. Dr. Flaum heads up the Sutter Pacific Medical Foundation (SPMF), the vehicle that is now shaping Sutter’s efforts to bring more high-quality medicine to the locals. The foundation is actively recruiting new physicians to join the almost 300 doctors who are already members.

Because California law stipulates that hospitals can’t directly employ doctors, physicians usually join a medical group, and the group the aligns with a foundation or some sort of separate entity. Then hospitals contract with that entity for doctors to treat their patients. That’s why Flaum is working hard these days to add new doctors. In the battle for the hearts, minds and checkbooks of Marin County medical consumers, full rosters of doctors are a key piece to the competitive puzzle.

Flaum explains that SPMF’s structure gives doctors the support they need so they can simply concentrate on treating their patients without worrying about expensive overhead. “We’re very good at both recruiting and retaining our doctors,” Flaum says. “We’re working toward substantial growth, as much as 15 percent in 2010.”

The development of the San Rafael property at the 580 exit (currently home to the Marin Square Shopping Center and adjacent auto repair businesses) will be up to Sutter, Flaum explains, not the SPMF. Graham says it’s likely the new facility will include offices for Sutter’s swelling doctors ranks, as well as labs and other services, though nothing is carved in stone right now.

One thing Sutter has tried to make very clear is that the property won’t be used for a new hospital that would compete directly with Marin General. That’s certainly welcome news to Jon Friedenberg, the hospital’s chief fund and business development officer. Friedenberg came to Marin General after CEO Lee Domanico was hired away from El Camino Hospital in Mountain View. The pair worked together at the South Bay hospital and helped to successfully pass a $147 million bond, at the same time turning the hospital into an independent medical facility that competes with Stanford’s famed medical center.

Friedenberg may feel good that Sutter has no plans to build a new hospital, but he’s still worried it could set up profit center services like an orthopedic center or a cancer care facility. “We’re a full-service community hospital with award-winning cardiac care, a well-known cancer center and other strong programs. We also have a full trauma center, labor and delivery services, and community psychiatric care, and those areas all lose money. But we have other programs that make revenue so we can provide all our services.”

Marin General’s strategy to compete is fairly simple to understand—and fairly hard to pay for. Friedenberg says the hospital will provide top-flight care and become the place patients choose. In the meantime, he’s laying plans for a $250 million general obligation bond that will require voter approval. The balance of the $500 million needed for the seismic upgrade will come from a combination of fundraising and revenue bonds that will be paid off with future profits from the hospital. The project will include $400 million worth of new construction and $100 million worth of infrastructure and technology improvements. Besides replacing patient facilities, the project will include a large parking structure and some non-patient structures to transform the hospital into more of a medical campus.

Flaum would would like to attract more doctors, and he’s not alone. Marin General is moving to create a foundation that would include Prima Medical Group as well as Marin IPA Medical Group. MGH has already kicked in $1 million to the new foundation and has committed $4.6 million through 2012. The Hospital District has lined up a $60 million line of credit with Union Bank, the lender that absorbed failed Tamalpais Bank.

The gloves come off

On August 26, Marin General Hospital Corp. filed a 23-page lawsuit against Sutter in Marin Superior Court. The suit alleges that Sutter breached its fiduciary trust to Marin General Hospital by pulling $120 million out of the hospital. The suit claims Sutter’s cash “sweeps” were made possible by a hospital board that included Sutter employees, and that the board was rife with conflicts of interest. The suit also names board members Edward Berdick, David Bradley and Robert Heller.

A statement released to the press by Marin General accused Sutter invested millions in active health care operations in the county in direct competition with the hospital and in violation of its agreements. It also said Sutter sought to lease most of the available medical office space close to Marin General, refused to recruit doctors on behalf of the hospital and even forced the hospital to pay Sutter’s pension obligations.

Marin General has hired Morrison & Foerster, and high-profile litigator James Brosnahan is leading the suit. Brosnahan is the same guy who represented John Walker Lindh, aka the “Marin Taliban.” Turns out Brosnahan was hired six months ago by Marin General and has been researching and preparing the suit for a while.

Sutter’s Graham told the Marin Independent Journal that Sutter couldn’t comment on the lawsuit since they had not read it. And then she proceeded to comment on the lawsuit: “There is no basis whatsoever for any such action. Sutter Health complied in all respects with the legal agreements governing the transfer of Marin General Hospital and expended considerable resources above and beyond what we were required to so as to ensure a smooth transition of the hospital.”

She also said, “While we had hoped to put the contentious relationship of the past behind us, Sutter Health will now vigorously defend itself and will likewise vigorously pursue all claims against the Marin Healthcare District.”

Life moves pretty fast. One minute, you’re moving on and putting contentious stuff in the rear view mirror, and the next, you’re talking about pursuing some claims of your own.

In for a dime, in for $120 million.