Review of state data shows widespread use of equity transfers

MARIN COUNTY — The Marin Healthcare District and many of its allies have accused Sutter Health of singling out Marin General Hospital for the transfer of tens millions of dollars out of the medical facility. But an examination of state data shows such transfers amounting to hundreds of millions of dollars are common for the Sacramento-based health giant and its affiliated hospitals in San Francisco and the North Bay.Money in, money out

Numbers in parenthesis indicate net transfers to Sutter Health and positive numbers indicate net transfers from Sutter Health to the individual hospitals.Equity transfers, California Pacific Medical Center, 2002--2008

2002: ($105,074,610)

2003: ($118,004,866)

2004: $6,675,664

2005: ($63,879,000)

2006: ($63,214,546)

2007: ($65,505,901)

2008: ($64,750,915)*

*Amended by Sutter to $72,300,207Equity transfers, Marin General, 2002--2008

2002: $2,845,014

2003: ($2,440,444)

2004: ($17,705,874)

2005: $2,517,267

2006: ($11,969,464)

2007: ($38,689,634)

2008: ($49,267,381)*

*Amended by Sutter to $20,300,000Equity transfers, Sutter Medical Center of Santa Rosa, 2002--2008

2002: $10,891,326

2003: $3,951,589

2004: $8,144,825

2005: $16,354,622

2006: $27,474,370

2007: $16,058,395

2008: $3,846,809Equity transfers, Novato Community Hosptial, 2002--2008

2002: $5,657,872

2003: $11,100,562

2004: ($1,755,945)*

2005: ($14,042,627)

2006: ($5,259,999)

2007: ($9,745,267)

2008: ($8,946,362)

*Listed as “Transfer to Affiliates.” Money was still transferred out of hospital, but not to parent company.Equity transfers, St. Luke’s Hospital, 2007--2008

2007: ($109,282)

2008: ($3,092,663)

Source: Office of Statewide Health and Planning Development. Audited Annual Financial Disclosure Reports, 2002 through 2008. See the instructions for interpretation.

Sutter has ardently defended what it describes as a routine practice among large hospital organizations of transferring funds, known as equity transfers, while critics in Marin have levied scathing rebukes of the practice.

“Yes, money has been pooled,” Sutter spokeswoman Kathie Graham said. “That’s part of the Sutter practice. The other thing about the pool is that monies are invested and this really becomes a safety net for some Sutter hospitals that have really struggled.”

But Jon Friedenberg, the Marin Healthcare District’s chief fund and business development officer, said the “money belongs to the patients at Marin General, not Sutter. We have repeatedly called on Sutter to return the money. We’re hoping they see their error.”

According to annual financial disclosure reports submitted to -- and audited by -- the Office of Statewide Health Planning and Development, the Business Journal found the following about Sutter-operated hospitals in the Bay Area:From 2002 to 2008, about $480 million was transferred out of California Pacific Medical Center.From 2002 to 2008, about $120 million was transferred out of Marin General. In 2009, an unaudited $36 million was transferred, which would bring the total to roughly $156 million.From 2002 to 2008, more than $86 million was transferred into Sutter Medical Center of Santa Rosa.From 2002 to 2008, about $55.1 million was transferred out of Novato Community Hospital.From 2007 -- when Sutter took control of St. Luke’s in San Francisco -- to 2008, about $3.2 million was transferred out of that hospital.

Reports before 2002 of the financial disclosures were not available in a digital format on the state health agency’s website.

Exactly where the money is transferred to is not clear, and Ms. Graham said it varies largely upon the financial status of its 26 statewide hospitals. Ms. Graham explained how Sutter equity transfers worked.

“Each Sutter affiliate retains enough cash on hand for 14 days to meet expenses. If they have additional cash, that money is then pooled with all of Sutter. And that’s what equity transfers are,” she said.

The numbers from the state health agency have the potential to cast doubt on arguments made on behalf of the Marin Healthcare District -- though never explicitly from the district itself -- that Sutter has treated Marin General as a personal ATM compared to other Sutter hospitals.

The dispute over the equity transfers has come to a head following the heath care district’s retaking control of Marin General, which occurred about three weeks ago. Mr. Friedenberg has previously told the Business Journal that the equity transfers are “indefensible and not in the best interest of the community.” He recently said the district will explore all options to get the money back.

Mr. Friedenberg said the district expects the equity transfers to eventually reach $180 million. He also pointed to cash reserves left at Marin General in 2007 versus other Sutter affiliates. Sutter’s consolidated audit in 2007 shows the following dollar amounts left at the hospitals: Marin General, $8 million; California Pacific Medical Center, $526 million; Alta Bates Medical Center in Oakland, $223 million; Mills-Peninsula Health Services, $453 million.

“We continue to want to resolve this outside of court, but unfortunately, Sutter won’t discuss it,” he said. “We don’t have any update regarding any potential litigation. We’re hoping to avoid that and would like to resolve that, but as I’ve said previously, all options are on the table.”

Sutter has long asserted that the equity transfers were a well-known component of the separation agreement between the two sides reached in 2006, and that nothing is unique about the practice.

Critics of Sutter, meanwhile, have pointed out that Sutter rapidly escalated the amount of transfers following the severance agreement, perhaps as a means of building new facilities that could compete directly with Marin General as it ceded control over the county’s only trauma center.

From 2003 to 2006, Sutter transferred a total of roughly $32 million out of Marin General. Between 2007 and 2008, Sutter transferred nearly $88 million, according to the data from the state health agency.

Sutter said it amended the 2008 transfer amount out of Marin General to $20.3 million, which would bring the total from 2007 and 2008 to about $55.5 million. According to the state health agency records, the 2008 transfer amount is about $49.2 million from Marin General, a number that is consistent with what critics of Sutter have cited.

Meanwhile, Sutter said its amended financial disclosures to state officials show the transfers out of Marin General to be far lower than the state agency’s official numbers show, at just less than $80 million between 2002 and 2008. State officials did not confirm the figures and pointed to original data.

By Sutter’s own account, a little over $492 million was transferred out of California Pacific between 2002 and 2008. From 1999 to 2008, the total that Sutter provided to the Business Journal is over $580 million.

Sutter indicated that it also revised the equity transfer in 2008 out of California Pacific Medical Center, from about $64.7 million to $72.3 million.

Sutter said the amount transferred to or from any given affiliate is reflective of its financial performance.

“There are years where Marin General or (California Pacific Medical Center) had sufficient excess revenues to send to the pool” in Sacramento, Ms. Graham said.

While the equity transfers may have been an understood element of the severance deal, Mr. Friedenberg said Sutter has engaged in practices that were not well-known but ultimately harmful to the hospital, calling into question whether Sutter has made good on its claim that it left Marin General in strong financial shape.

“They stopped paying depreciation and significantly reduced investments in technology and new medical equipment. It’s hardly correct to say this was part of the original deal. And it’s wrong and they need to give the money back.”

Lawrence Cooper, legislative director for Assemblyman Jared Huffman, D-San Rafael, said the severance deal contains a stipulation that Marin General cannot benefit from Sutter’s equity transfers from 2006 and onward, yet is still subject to having money transferred out of the hospital. Mr. Huffman has been an outspoken critic of the transfers.

“Sutter has this revenue sharing system with its hospitals, I understand that it’s their business model, but when Marin General signed the severance, they were removed from the obligated group,” he said. “It gave the impression that they were looting the hospital before they left.”

“As I understand it, in a legal sense, (the board’s) duty is to represent the hospital, whereas Sutter has broader corporate interests,” Mr. Cooper said.

Another pointed element of criticism toward Sutter is that Marin General had been disproportionately targeted compared to other Sutter hospitals, most notably California Pacific Medical Center in San Francisco.

That notion gained further traction when the Alliance to Save Our Hospital took out ads in several Bay Area newspapers listing state health agency numbers as a source that indicated that from 1999 through 2008, about $116.9 million was transferred out of Marin General, and zero was transferred from California Pacific Medical Center in the same period.

Those numbers, however, are from a different set of data from the Office of Statewide Health Planning and Development called “Pivot Profiles.” The data serve two different functions, according to the state office.

“In the annual disclosure report Pivot Profiles, the fields showing intercompany receivable and intercompany payable, are balance sheet items, meaning they are amounts due or owed, respectively, to the parent corporation in the next year,” said David Byrnes, information officer for the agency. “They do not represent the amount actually transferred. The annual disclosure reports show actual equity transfers and would be more accurate.”

Jennifer Rienks, a board member on the Marin Healthcare District, said the numbers on the Pivot Profiles are consistent with what has been transferred out of Marin General, and that she found the other set of data, and Sutter’s varying degrees of reporting, to be suspect.

“I can’t explain why it says zero for (California Pacific Medical Center). Somehow they just seem to be different,” she said. “That’s interesting. I don’t know why they’re different. I just know that the numbers are right for Marin General on the Pivot Profiles.”

Ms. Graham said critics of Sutter’s equity transfer practice may be reading the data incorrectly, given that it’s a complex reporting system.

“They think they’re reading the report correctly, but it’s not that easy, regardless of their intent. It doesn’t mean they’re doing something nefarious, but oftentimes the numbers that are reported are incorrect,” she said.

“Affiliates sometimes enter their individual data on different lines,” Ms. Graham continued. “For instance, we understand that (California Pacific Medical Center) entered its data on row 110 and added a description to this line, whereas as (Marin General) reported the equity cash transfers on line 100 -- we believe this is why the Alliance reported (California Pacific Medical Center) as ‘0.’ ”

Mr. Byrnes, the information officer at the state health agency, said in some cases a hospital may place data on different lines of the financial disclosure, but the numbers should all be contained within the disclosure report.

Amidst the criticisms levied by advocates of Marin General, Sutter has purchased over 11 acres of commercial real-estate in central San Rafael, at a cost of nearly $50 million, for yet-to-be determined uses. Much of the land was purchased in 2007 -- one year after the two sides agreed on a severance that permitted the district to regain control of hospital operations.

Ms. Graham said that while no exact plans are in place for the new property, it is likely that Sutter will include outpatient services and that it intends on remaining in Marin County. She said Sutter has no plans to build another acute-care hospital in the region, and that any new facilities will be based on the health care needs of Marin County.

But Mr. Huffman and Marin health board member Ms. Rienks, along with others in Marin, have criticized Sutter’s purchase, arguing that Sutter outpatient services would siphon money away from Marin General at a time the level III trauma center is in need of financial stability as it is now locally run.

“They bought the land in 2007, and I think they did it as a hedge against Marin General,” Ms. Rienks said.

“Whatever outpatient facilities are there, I think there needs to be a demonstrated need for those services,” she said. “In Marin, I hope we can take a look at what we really need, and I would hope Sutter would play a part in that, and not just look at where you can make money.”

Marin General must also meet certain seismic requirements by December 2015, a process that is expected to cost $500 million. The district said it will be seeking a bond to foot the cost of construction in the near future. If it could reclaim the money transferred out of Marin General, the cost of the bond could be reduced significantly, thus saving Marin taxpayers millions in the process.

“Had that money been there, it would have freed up more money for the seismic upgrades,” Ms. Rienks said. “As it is now, the hospital will be able to finance some of the bond, but we’ll need taxpayers to help -- if Sutter hadn’t taken that money, Marin General would probably be able to finance the whole thing.”

The district anticipates the bond it will seek to be about $250 million.

Sutter has countered that it was willing to pay for the upgrades without a bond, by using the very practice that it has come under such scrutiny for -- pooling resources from the parent structure.

In 2009, Mr. Huffman, along with other Marin politicians, called on the attorney general’s office to investigate Sutter’s equity transfer policy, both on a local level and the overall practice, said Mr. Cooper of Assemblyman Huffman’s office.

“The Attorney General is concerned about the situation and continues to monitor it,” a spokeswoman for the attorney general said.