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Tulare Local Healthcare District
Past Poor Decisions Contributed to the Closure of the Medical Center, and Licensing Issues May Delay Its Reopening

Report Number: 2018-102

October 9, 2018 2018-102

The Governor of California
President pro Tempore of the Senate
Speaker of the Assembly
State Capitol
Sacramento, California 95814

Dear Governor and Legislative Leaders:

As requested by the Joint Legislative Audit Committee, the California State Auditor presents this audit report concerning the Tulare Local Healthcare District (district) and its oversight of the Tulare Regional Medical Center (medical center) and Healthcare Conglomerate Associates (HCCA). This report concludes that poor decisions by the district’s previous board of directors (previous board) contributed to the closure of the medical center, and that licensing issues may delay its reopening.

In September 2017, after nearly four years of medical center management by HCCA, the district filed for bankruptcy and in October 2017 voted to suspend the medical center’s license, and the medical center closed. The previous board did not act in the best interest of the district and the community it serves when it selected HCCA to manage the medical center in 2013. The documentation shows that the previous board selected HCCA against the advice of the consulting firm it had engaged to assist in the selection process and evidence that HCCA might not be the most qualified. The same board also negotiated contract terms with HCCA that were expensive and unfavorable, including a monthly management fee of $225,000 or $2.7 million a year, and provisions to become the exclusive employer of the medical center personnel, which required the district to lease the employees at a cost of 130 percent of their salaries and wages. This provision resulted in HCCA earning an additional $2.5 million in fiscal year 2015–16. Operating revenue fell under HCCA management, caused in part by the previous board’s removal of the medical center’s medical executive committee—the body that governs the medical staff—and the subsequent reduction in the number of physicians choosing not to renew their privileges or resigning from the medical center, and an accompanying reduction in patient service revenue. The district’s cash position also decreased under HCCA as it failed to pay vendors that provided billing services and to collect on services billed.

The district plans to reopen the medical center in mid-October 2018. Its new board of directors contracted with an interim management consultant in November 2017 to work toward the reopening. Additionally, in September 2018, the district signed a management services agreement with a new affiliate partner to manage the medical center. Although the district has made progress toward reopening the medical center, it faces licensing issues that make it unclear whether the medical center will reopen in mid-October as planned. Finally, the district could have been more effective in its oversight of its use of $85 million in bond proceeds for its expansion of the medical center.

Respectfully submitted,

California State Auditor

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