Eyeing the Money Trail in Hospital Sale

SANTA ANA —  When United Western Medical Centers sold its nonprofit hospitals late last year, it promised that more than $40 million of the proceeds would be set aside in a new foundation to support health care for the poor, elderly and other needy Orange County residents.

Now officials say the amount may be only about $25 million. They blame much of the gap on honest mistakes officials made in public statements on the day the hospitals were sold to for-profit health-care giant OrNda Corp.

“We really didn’t intend that people would interpret it that the entire $40 million would be available,” said Western Medical’s chairman, Marven Howard.

Under California law, any organization that switches to for-profit status must compensate the public for the benefits derived from having operated as a tax-exempt institution.

But consumer advocates say officials deceived the community, throwing out the $40-million figure when at the time they knew only about $29 million would be available for charity care. And now, the amount has been reduced further by the costs of resolving lawsuits, obligations and other business matters.

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Activist Harry Snyder of the Consumers Union said Western Medical left the community with the impression that it would get more than it has from the sale--and that the relatively small amount for charity would have raised eyebrows if it had been disclosed at the outset. “It’s a shell game,” he said.

Separately, critics question why Western Medical executives received about $1 million in bonuses shortly before the sale. Some also criticize possible ties between the former Western Medical organization and the new foundation and how former Western Medical officials wound up running the foundation.

Western Medical officials defend the bonuses, saying they were in line with the organization’s long-standing policies. Officials also say the foundation’s board, comprising directors from the prior nonprofit organization and some community representatives, is well suited to determine health-care needs of the community.

Such controversies have become commonplace amid the nationwide wave of consolidations involving nonprofit hospitals. In the last several years, scores of charity hospitals have sold out to for-profit chains, leaving charitable work to hastily formed foundations.

Although the portion of sales proceeds left over after liabilities and other business matters are settled varies widely, experts say it’s common for the foundation’s kitty to end up with less money than expected.

Now Western Medical’s foundation board is making big plans. But it could be months, maybe a year, before officials can sort out what the foundation will receive from the sale or how it will use the proceeds.

“I’m waiting for the money,” says Charles Mack, the former Western Medical chief operating officer who is the foundation’s interim executive director. “I’ve got an investment committee with nothing to invest.”

Western Medical, the county’s oldest hospital organization, opened its first hospital in 1902. Started by a doctors group in a two-story house on Washington Street in Santa Ana, the hospital would become a favorite cause for local business and community leaders.

After multiple expansions, the organization built a modern facility on Tustin Avenue and moved hospital operations there in 1975. Throughout the rest of the 1970s and much of the 1980s, Western Medical expanded rapidly, trying to keep up with the growing county and rising competition.

Much of the expansion, including the purchase of a bankrupt hospital in Anaheim, was funded with millions of dollars of tax-free bonds issued through the state and the cities of Santa Ana and Anaheim.

Central Orange County communities grew accustomed to a broad range of services provided by Western Medical--maternal and pediatric care, clinics for sleep disorders and heart problems, breast and cancer screenings, Meals on Wheels for senior citizens and disabled persons, rehab services, medical care for inmates at the county jail. Overall, the organization provided tens of millions of dollars a year in free care.

But Western Medical’s bottom line sagged as medical costs soared, reimbursements from government and private insurers tightened, and competition intensified. In 1988, the board hired Alpha Partners, a contract management firm, to restore financial stability.

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Alpha Partners’ Douglas Drumwright and Mack slashed costs, cut payroll, refinanced debt and restored Western Medical’s bottom line. Still, it fell further behind better-heeled rivals--such as St. Joseph, Long Beach Memorial and Hoag Memorial Hospital Presbyterian--in the competition for managed care contracts, and faced a chronic shortage of working capital, according to board documents.

Early last year, Western Medical put itself up for sale, and several for-profit companies saw a chance to expand in Orange County.

According to regulatory filings, OrNda placed the winning bid of $184.7 million, including an estimated $47.4 million for the foundation. Columbia/HCA Healthcare Corp. offered to pay $124 million for the hospitals, while Tenet Healthcare Corp. submitted a bid of $115 million. Tenet has since acquired OrNda.

On Dec. 4, two weeks before the deal was set to close, Western Medical’s board agreed to give bonuses totaling $1.1 million to nine key executives. About half of the amount was a reward for helping with the sale, according to regulatory filings.

Alpha Partners--Drumwright and Mack’s partnership--received bonuses totaling $675,000--about half of it stemming from helping with the sale, according to the filings. Yardley, Western Medical’s chief financial officer, received $100,000; Andrea S. Kofl, executive vice president, $90,000; and Thomas Toland, its chief development officer, $60,000, according to regulatory filings.

Yardley’s bonus included $40,000 for helping with the sale, and Kohl’s total included $30,000 for managing the organization through the transition.

Experts in nonprofit hospital conversions say bonuses of that magnitude at a nonprofit organization generally aren’t proper. They particularly frown on special awards to executives for orchestrating the sale of nonprofit assets.

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Such payouts represent “a breach of a public trust in the managers and trustees of a nonprofit,” said Nancy Kane, a lecturer in management at the Harvard School of Public Health.

Western Medical officials say the company historically paid bonuses to award executive performance. Its contracts with executives provided for both regular and special bonuses. In addition, an outside consultant reported that Western Medical’s compensation levels were similar to those at other hospitals.

Howard also pointed out that OrNda, Tenet and the attorney general’s office, which had to approve the deal, had “full knowledge” of the board’s action.

Drumwright also said Western Medical’s management had done an excellent job.

“We took over the management of Western Medical when it was basically bankrupt and within a couple weeks of missing payroll. Eight years later, we sold it for the highest possible price at a tremendous benefit to the community.

“We sold it to someone who could continue providing health care into the future, and we built a foundation where people who can’t afford health care can get the kind of care we’d like to see delivered in Orange County.”

In the deal, OrNda bought four Western Medical institutions--its hospitals in Santa Ana and Anaheim, a Santa Ana nursing home and a rehabilitation facility in Tustin.

The new owners promised to keep open the hospitals’ emergency rooms and the Santa Ana trauma center for five years. Tenet, which acquired OrNda in January, has since given staff a 3% pay raise, beefed up support for local charities and budgeted $6.5 million to reequip and refurbish the two hospitals by May.

But the community’s foundation didn’t get all that officials had promised. Howard, Western Medical’s chairman, attributes the confusion to the complexities of closing a big transaction. “People had been up to 3 a.m. that morning, signing all the documents--and there was some pressure to get the word out to the public,” he says.

Officials now say that gross proceeds of $47 million to the foundation last December were immediately reduced by $18 million to repay loans, pay off bonds and account for assets that OrNda had planned to buy but Tenet apparently didn’t want.

As a result, the foundation actually received only $29 million in cash in December. Ongoing expenses wrapping up Western Medical’s operations--including legal settlements estimated at $1.7 million to $3.2 million--are expected to reduce the amount to about $25 million.

H. Chester Horn, the deputy attorney general who reviewed the sale, said that in hindsight, “some of the business issues that have arisen surprised us.” He said his office is investigating certain matters, but refused to elaborate.

Several former Western Medical officials involved in management or sale of the hospitals have shifted to the new foundation--positions of continuing influence that raise eyebrows among consumer advocates.

In addition to Mack, the foundation’s interim executive director, six Western Medical volunteer board members landed seats, at least temporarily, on the new foundation’s nine-member board.

Experts on charitable transfers question whether anyone involved in managing a financially troubled hospital organization should determine how the new foundation is set up or how it spends its money.

Consumers Union’s Judith Bell says those involved in running a hospital may lack the fresh perspective to evaluate what the community needs from the new foundation.

Mack said Western Medical board members as well as community representatives were included on the foundation’s transition team to provide broader input. He noted that the plan has been approved by the state and is similar to those used by many other nonprofits involved in similar hospital conversions.

In recent months, foundation officials have polled community leaders about local needs, but can’t spend anything until several issues are resolved.

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Currently, the foundation is locked in negotiations with the state over appropriate uses of funds. The attorney general’s office says the foundation should adhere as closely as possible to Western Medical’s original mission of providing or supporting hospital services.

That would amount to eating crow for an organization that just quit the business. “If we don’t have hospitals anymore, how do we give money to in-patient care?” Howard says. “That means we have to work with other not-for-profit hospitals. Why should we hand over money to people that used to be our competitors?”

Rather, the foundation is exploring other services that might benefit community health care.

Among other things, Howard says, the board is talking about ways to assure good care for children, infants and expectant mothers, thereby preventing complications and costly hospitalizations.

A public meeting on the foundation’s plans is set for 6 p.m. Nov. 19 at the Orange County’s Planning Commission hearing room, 10 Civic Center Plaza, Santa Ana.