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Suit claims hospital group improperly took $120 million; Sutter calls filing ‘regrettable’

GREENBRAE --Marin General Hospital filed a lawsuit last week claiming Sutter Health, which operated the hospital for more than a decade, improperly transferred more than $120 million out of the hospital between 2006 and June 2010, jeopardizing financial stability after it severed ties with the health care district.More to the story

Read the legal complaint against Sutter Health and previous coverage of the Marin General Hospital equity transfers.

The lawsuit, filed in Marin County Superior Court by the Marin General Hospital Corp., alleges that from 2006 and onward, Sutter disproportionately transferred funds out of Marin General while it sought to build competing facilities in Marin County. Marin General was also removed from an “obligated group,” meaning that it could not benefit from Sutter cash transfers yet still could be targeted for funds.

In a statement, Sutter spokeswoman Kathie Graham said Sutter could not comment on specific allegations because it has not yet had the opportunity to review the complaint.

“However, we can say that it is indeed regrettable that the Marin Healthcare District has elected to pursue legal action, as there is no basis whatsoever for any such action,” she said. “Sutter Health complied in all respects with the legal agreements governing the transfer of Marin General Hospital and extended considerable resources above and beyond what we were required to do.”

Sutter said that it has not violated any terms of the initial severance agreement, and the transfers, known as equity transfers, were a well-known element of the deal. Sutter has also long defended the transfers, describing them as a routine practice among hospital organizations that often serve as a safety net for other Sutter affiliates, of which there are 24 throughout the state.

Sutter operated the 235-bed hospital from 1995 through June of this year, but in 2006 a severance agreement was reached that permitted the healthcare district to regain control five years before Sutter’s initial lease expired.

The 2006 agreement, a “divorce” that began when Sutter sought to end its 20-year management contract, included a provision that said equity transfers could occur, but that Sutter would pay depreciation at Marin General, according to the healthcare district. Sutter has allegedly refused to pay such depreciation, which violates the terms of the agreement. Coupled with the $120 million in transfers, Sutter’s alleged practices severely undermined the hospital, a spokesman said.

“The agreement said that equity transfers can occur. The question is what does that mean and what did it mean?” said Pete Hillan, spokesman for the Marin General Hospital Corp. “In 2006, Sutter stopped paying depreciation and took those funds. Our position is that Sutter and the then-board failed to perform its fiduciary responsibilities. If Marin General knew that Sutter wasn’t going to pay depreciation and that Sutter was going to do the cash sweeps, why would you agree to that? That allows them to have their cake and eat it too, and that’s what they have.”

Sutter was able make the “cash sweeps,” as the suit calls it, by establishing a hospital board “with a clear conflict of interest,” the suit says.  The Sutter-appointed board consisted of Sutter-appointed employees who failed to fulfill their legal responsibility of protecting the financial interests of the hospital by knowingly allowing Sutter to make such transfers as the hospital became independent, the suit says.

According to the suit, an average of $3 million was transferred out of Marin General between 2001 and 2006.

From 2006 to 2010, the suit says, an average of $30 million was transferred out of Marin General.

The Business Journal examined audited financial data from the Office of State Health Planning and Development and found that between 2003 and 2006, Sutter transferred a total of about $32 million out of the hospital. Between 2007 and 2008, Sutter transferred nearly $88 million; in 2009, an unaudited transfer of $36 million occurred at Marin General, bringing the total from 2002 to 2009 to about $156 million.

According to the suit, transfers from Marin General in 2010 total approximately $23 million.

State health agency records are not available in digital format prior to 2002, and only data up to 2008 is available.

The 23-page complaint detailing the allegations against Sutter says the obligated group “is the central financing vehicle for Sutter Health System,” and “without access to the Sutter Obligated Group, and given that the hospital was about to become independent, there was no longer any justification for transferring cash from [Marin General] to Sutter.”

 “The comparisons show that [Sutter] didn’t provide for this hospital’s future, and it was a cold-hearted calculation,” said James Brosnahan, a senior partner at Morrison and Foster, who is the lead attorney for the new board of Marin General.

He said the Sutter-appointed board was obligated to act upon the interest of the healthcare district because it’s a public entity that leased operations – not ownership – to Sutter.

“In terms of standard corporate procedure, the job of that old board was to provide support for the hospital, it’s that simple,” he said. “And when they see $120 million going out the back door to Sacramento, they have to stop it.”

Sutter has previously said that equity transfers out of its hospitals often reflect the strong financial performance of the institution, thus allowing for higher amounts to be placed within the pool. Marin General fit this description, Ms. Graham, the Sutter spokeswoman, has previously told the Business Journal.

“There are years where Marin General … had sufficient excess revenues to send to the pool in Sacramento,” Ms. Graham said in July, pointing to a similar practice at California Pacific Medical Center in San Francisco, where about $480 million was transferred out between 2002 and 2008.

Mr. Brosnahan rejected that line of reasoning, saying that the equity transfers and Sutter’s disinvestment of physician recruitment and technology upgrades placed the hospital in a precarious financial position.

“We’re better off without the $120 million? I don’t get that,” he said. “They were asked to fund a doctor recruitment program, and they refused.”

Nevertheless, Sutter has pointed to numerous hospitals it operates that have struggled. Sutter Medical Center of Santa Rosa, for instance, received more than $86 million from the very same practice, according to state data. Ms. Graham has also in the past pointed to the fact that Marin General’s designation of a level III trauma center came about during Sutter’s tenure.