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North Bay Business Journal

Tuesday, June 19, 2012, 10:45 am

Marin General gets $21 million in Sutter Health arbitration

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    GREENBRAE — Marin General Hospital today was awarded $21.5 million from arbitration in the long-running dispute between the hospital and Sutter Health, which operated the facility until it ceded control nearly two years ago.

    Rebecca Westerfield, a retired circuit court judge from Kentucky, issued the ruling today after 11 weeks of arbitration stemming from a lawsuit filed by Marin General Hospital Corp. The lawsuit alleged that Sutter escalated the amount of transfers after a severance deal was brokered between the two sides in 2006. That deal ultimately returned the hospital to control of the Marin Healthcare District in late June 2010.

    At the center of the dispute was whether Marin General is entitled to a claim of nearly $300 million relating to what are known as “equity transfers” and other issues that Marin General, which is overseen by the Marin Healthcare District, said caused financial harm as the hospital ended a protracted divorce from Sutter in 2006.

    Sacramento-based Sutter has long maintained the transfers were perfectly legal, arguing that the money is considered “excess working capital” that it pools with its other hospitals throughout Northern California.

    With the ruling, both sides are claiming victory and both traded barbs via press statements.

    Marin General says the award proves what it has said all along: Sutter’s cash transfers were “improper.”

    The arbitrator “found that Sutter willfully and purposely failed to meet their contractual duties,” Lee Domanico, chief executive officer of Marin General, said in a statement. “This ruling validates our longstanding contention that in the years leading up to the transition, Sutter did not operate Marin General in a manner consistent with the best interests of our community. Instead they diverted funds for the benefit of Sutter and the detriment of the people of Marin.”

    Sutter points out that the award was a fraction of what Marin General was seeking.

    “We were always confident that we met our fiduciary obligations to Marin General Hospital, invested an appropriate amount of capital and left the hospital in a strong financial position,” said Pat Fry, Sutter Health president and chief executive officer in a statement.

    Sutter said the arbitrator awarded the district a fraction of its total claim of nearly $300 million and more than half the amount awarded — approximately $11.3 million — includes payment for over-funding the Marin General employee pensions.

    “Other findings by the arbitrator relate to the contractual application of the transfer agreement and provide MGH with modest amounts for physician recruitment, reimbursement for a cost of capital charge previously paid and monies associated with the information systems conversion,” according to a statement from the health care organization.

    Mr. Domanico shot back:

    “Sutter also was found to have breached its duty of good faith and fair dealing by charging MGH for ‘cost of capital’ despite providing no capital to MGH and forced Marin General Hospital to make contributions to the Sutter Health Retirement Plan greatly in excess of Marin General Hospital’s fair share for its employees.” The judge “also found that Sutter failed to make reasonable efforts to cooperate with the IT transition at the Hospital and failed to pay its agreed share of IT training costs.”

    The district at the time alleged that Marin General also was removed from an “obligated group,” meaning it could not benefit from Sutter cash transfers yet could still be targeted for funds. It also long contended that it was entitled to at least a portion of the revenues generated in Marin County. A judge later ordered the case to arbitration.

    “Our focus remains the same as it has been since the time of transfer — to modernize our facility, improve the level of care and maintain Marin General Hospital as a center of medical excellence for the citizens of Marin,” hospital spokeswoman Jamie Maites said.

    Such efforts include what the hospital has said is a $500 million rebuild of the hospital to make it seismically safe; it has long contended that Sutter’s financial equity transfers ultimately undermined that effort.

    Ms. Maites said the hospital would be establishing specific plans over the next several weeks to use these funds to support modernization efforts.

    Judge Westerfield also ruled that the health care district “interfered with Sutter’s sublease of space in 1350 S. Eliseo in Greenbrae, finding the conduct to be illegal and ordering they immediately cease and desist,” denying the district’s attempt to claim property via eminent domain, according to the ruling.

    “Sutter Health not only met the fiduciary requirements outlined in the Transfer and Settlement agreement with the Marin Healthcare District, but also returned a high-quality, well-run hospital that, at the time of transfer, generated revenue well in excess of its monthly expenses,” Mr. Fry of Sutter added.

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