Thursday, August 2, 2012
After a failed courtship with some of the country’s biggest health care providers, Salinas Valley Memorial Healthcare is left with looming massive financial obligations it has to face alone.
The hospital needs to be rebuilt by 2030 to comply with state seismic standards, a $500 million venture that won’t be easy to finance. “That’s taking precious capital, and the return is zero,” says Jim Moloney, managing partner at Cain Brothers, SVMH’s consultant on the would’ve-been merger.
Moloney’s disappointed the hospital is still stand-alone, after casting a wide net for prospective partners that ended with only one final proposal: a merger with the county’s public safety net hospital, Natividad Medical Center, which the board rejected with a 4-0 vote on July 26. Cain Brothers stood to earn a minimum of $900,000 if a sale went through, according to their contract.
The Hospital Corporation of America, the country’s largest health care company, backed out at the last minute with little explanation, and did not respond to repeated requests for comment. Moloney says the cost of operating SVMH was just too high to be an attractive investment for HCA.
That’s partly because SVMH’s single biggest line item – labor – accounts for 63 percent of the annual operating budget, compared to an average of 45 to 50 percent for comparably sized hospitals, Moloney says.
“It became abundantly clear that the cost and revenue structure is a concern,” SVMH spokeswoman Adrienne Laurent says of lessons from the affiliation process.
Laurent says hospital management will propose a publicly inclusive, transparent process to make that financial structure more sustainable, knowing it could mean some painful labor cuts.
The hospital’s disproportionately high labor costs first came to light when former CEO Sam Downing retired last year with one of the largest pension plans in California. Public outcry sparked an audit by State Auditor Elaine Howle, which prompted an ongoing criminal investigation into Downing and board treasurer Harry Wardwell, the regional president of Rabobank.
The District Attorney has ongoing investigations into conflict of interest allegations and whether Downing and Wardwell improperly benefited from banking transactions.
Wardwell and Downing are also both under investigation by the California Fair Political Practices Commission, which launched another investigation last week into board chair Jim Gattis.
On his financial interest disclosure forms, Gattis reports receiving more than $100,000 a year from Ottone, Leach, Olsen and Ray – the same firm that provides legal counsel to SVMH. Gattis is half-owner of the Gabilan Street building the law firm rents. Gary Ray, the hospital’s attorney, says he was unaware of the investigation.
“I don’t understand the basis of [FPPC’s] allegation,” Gattis says.
In a July 24 letter, FPPC Chief of Enforcement Gary Winuk wrote Gattis was being investigated for “closed door negotiations over the terms of a contract leasing a building you own to the Salinas Valley Memorial Healthcare system.”
Gattis says he’s never leased property to SVMH, and the contract with the law firm took effect in the ’50s, well before he was appointed to the board in 2005.
Of FPPC’s approximately 400 open cases at any given time, about half concern conflicts of interest. “Under our new chair [Ann Ravel], we have a renewed focus on more serious violations of the Political Reform Act, including conflict of interest,” Winuk says.
For more coverage, visit www.mcweekly.com/svmh.