Introduction

Background

Until its closure in October 2017, the Tulare Local Healthcare District (district) operated the Tulare Regional Medical Center (medical center), an acute care hospital that had served approximately 170,000 residents of the city of Tulare and the surrounding areas of Tulare County for more than 60 years. While the medical center is closed, residents are being referred to three neighboring medical centers, the nearest of which is 15 miles from the district’s medical center.

Key Guiding Principles for Selecting an Affiliate Partner

Financial strength and operational expertise
Access and willingness to provide capital to the district
Commitment to ensuring completion of the medical tower expansion
Commitment to maintaining key hospital services

Source: The district’s board resolution 832, adopted April 17, 2013.

The district—and its medical center—are governed by a board of directors (board), the members of which are elected by district voters on a rotating schedule to serve four-year terms. Each director represents one of five geographic areas of the district. Although historically the board had hired a chief executive officer (CEO) to manage its medical center operations, in early 2013, a year after the district suffered an operating loss of $10.6 million, the board began exploring the possibility of aligning with a strategic partner that had the financial strength and organizational expertise to promote the long‑term financial and operational viability of the medical center. In February 2013, the district’s then-CEO gave a presentation to the board about the impact of upcoming changes resulting from health care reform, the challenges rural hospitals would face as a result of the reform, and the benefits of aligning with another entity or hospital network (affiliate partner). After three board meetings on this topic, in April 2013 the board adopted a resolution to start a formal process to explore the viability of such an affiliation and to seek a potential affiliate partner. The resolution cites key guiding principles that the district indicated would guide it in selecting an appropriate affiliate partner, as shown in the text box. In April 2013, with the assistance of a consulting firm, the district issued a request for proposal (RFP) for parties interested in managing the hospital. In December 2013, the district selected Healthcare Conglomerate Associates (HCCA) over five other firms as its affiliate partner.

HCCA began managing the medical center in January 2014 and continued to do so until November 2017. In September 2017, the district filed for Chapter 9 (municipal) bankruptcy and the following month asked the bankruptcy court to rescind its management contract with HCCA, which the court granted. In response to these actions, HCCA issued a notice to employees in October 2017 that it planned to temporarily suspend operations at the medical center. The same day, the district’s board voted to suspend its medical center license, and the medical center closed the following day. In November 2017, the district contracted with a consulting firm to assist in reopening the medical center. The consulting firm is providing the district with a CEO, chief financial officer (CFO), chief administrative officer, and controller to assist in its bankruptcy process and in improving its current financial situation. In this report, we refer to this consulting firm as the interim management consultant.

In the bankruptcy filing, the district declared a fiscal emergency, citing HCCA’s inability to make payroll for the medical center and the district’s inability to pay vendors critical to the operation of the medical center, which had caused vendors to discontinue service to the medical center. The district estimated that it had accumulated claims totaling $27.5 million when it filed for bankruptcy; it estimates that it has generated another $9 million in debt subsequent to the filing. As part of its bankruptcy proceedings, the district must file a plan for an adjustment of its debts, but as of August 2018 it had not done so. The district requested that the bankruptcy court set another status conference for January 2019 to discuss progress.

Legal Issues With the Hospital’s Medical Executive Committee

State law establishes a right of self-governance for medical staff, and the district’s medical staff operated independently from the medical center’s administration. The medical staff bylaws established a medical executive committee (MEC), which governed the medical staff and was responsible for monitoring and supervising the medical staff to ensure that all patients admitted to the hospital received services and care at a level of quality that was consistent with generally accepted medical standards. The MEC was also responsible for ensuring the accountability of the medical staff to the district’s board.

In January 2016, the California Department of Public Health (Public Health) conducted a validation survey—an inspection of the medical center to determine compliance with Medicare participation requirements—and reported to the federal Centers for Medicare and Medicaid Services (CMS) serious deficiencies, including some related to duties involving the board and some related to the medical center’s MEC. For example, Public Health reported that the medical center did not have a system in place to ensure that it was following medical staff bylaws, rules, and regulations, and to ensure that medical staff were regularly evaluated. It also reported that there were no means to ensure that medical staff were professionally qualified for the positions to which they were appointed and for the privileges they were granted. In January 2016, the board voted to replace the MEC and the medical staff bylaws with another medical staff organization (and thus a new MEC) and a new set of bylaws. After the board removed the MEC, the medical staff filed a lawsuit. In July 2018, the district settled the lawsuit with the medical staff and agreed to reinstate the MEC.

Licensing and Other State and Federal Requirements for Hospitals

Eight Required Basic Service Areas

• Medical	• Nursing
• Surgical	• Anesthesia
• Laboratory	• Radiology
• Pharmacy	• Dietary

Source: California Code of Regulations, title 22, section 70005.

Public Health assesses whether a hospital meets state regulations before issuing a license for it to operate in California. In broad terms, a hospital must have a governing body with overall administrative and professional responsibility and an organized medical staff that provides 24-hour inpatient care, including the eight basic services shown in the text box. Most service areas have requirements related to staffing, space, equipment and supplies, and policies and procedures, and the requirements range in specificity, such as maintaining set staffing-to-patient ratios or maintaining adequate supplies. In addition, all licensed hospitals must meet requirements pertaining to administration and the physical plant.

State requirements largely mirror federal requirements, which are administered by CMS. By following federal and state requirements, hospitals can receive payment for services rendered to patients who are covered by Medicare and Medi-Cal, the term used to refer to Medicaid in California. Patient service revenue from Medicare and Medi-Cal patients was approximately 80 percent of the medical center’s net revenue for fiscal year 2015–16, so compliance with federal and state requirements is crucial to the reopening of the medical center and to its financial viability.

Three of the basic services that state and federal regulations require hospitals to provide to receive a hospital license—pharmacy, laboratory, and radiology services—require additional licenses from separate oversight entities. The California State Board of Pharmacy enforces regulations that pharmacies must comply with in order to operate in California, while Public Health’s Laboratory Field Services and Radiologic Health branches enforce regulations that laboratories and public health functions associated with administering radiology services must comply with in order to operate in California. The medical center needs licenses from all three of these entities.

In addition, a medical center must comply with state regulations on seismic safety before Public Health will issue it a license to operate in California. California’s Office of Statewide Health Planning and Development (OSHPD) monitors the construction, renovation, and seismic safety of hospitals in California. The Seismic Compliance Unit within OSHPD enforces seismic compliance requirements.

After closing the medical center in October 2017, the district voluntarily suspended its medical center license, providing a period of one year for the district to relicense the medical center. The medical center may seek to either reinstate its license during this one‑year period, allow the license to expire, or request an extension of the suspension period.

Bond Measure and Hospital Expansion

In 2005 district voters approved a measure that increased the property tax rate so that the district could issue $85 million in general obligation bonds to expand and renovate the medical center, including a new tower project. Initial estimates for the tower project were approximately $120 million. The district issued the first $15 million in bonds in 2007 and the remaining $70 million in 2009. It used part of the bond proceeds to reimburse itself for nearly $1.6 million in construction expenditures that it had paid before receiving the first bond proceeds in 2007, and then it spent the remaining bond proceeds through September 2014. According to the most recent audited financial statements, as of the end of fiscal year 2015–16, the district had spent $138 million, including the $85 million in general obligation bonds, on its tower expansion and other smaller renovation projects. However, these projects remain incomplete. The fiscal year 2015–16 financial statement audit stated that the remaining costs would be approximately $55 million, for a total of $193 million, with an estimated completion date of 14 to 16 months after the district secures additional financing. The district attempted to obtain voter approval for $55 million in additional general obligation bonds in August 2016, but the measure failed.

Scope and Methodology

The Joint Legislative Audit Committee (Audit Committee) directed the California State Auditor’s Office to examine the district and its oversight of the medical center and HCCA. The Audit Committee requested that we examine five specific audit objectives to accomplish this task. Table 1 describes the Audit Committee’s objectives and our methodology for addressing each one.

Table 1
Audit Objectives and the Methods Used to Address Them
Audit Objective		Method
1	Review and evaluate the laws, rules, and regulations significant to the audit objectives.	Reviewed relevant laws and regulations.

2	Review and evaluate the district’s spending and monitoring of its bond proceeds. At a minimum, perform the following:	Our access to and review of documentation for this objective was limited to what we, in conjunction with current district staff, were able to locate in the district’s archived files. Key staff who were involved in the spending and oversight of the bond proceeds are no longer employed at the district.
	a. Assess the district’s process for spending bond proceeds related to the medical center, including HCCA’s role in spending these funds.	Interviewed district staff to understand their process for spending bond proceeds. Judgmentally selected 30 invoices from between 2007 and 2014 paid for using bond proceeds. Obtained invoices and other supporting documentation to determine district adherence to bond spending restrictions and the district’s invoice approval process. Interviewed district staff and reviewed invoices to identify HCCA’s role in spending bond proceeds. In 2015 the district, under HCCA management, canceled an equipment contract the district had entered into and paid for with bond proceeds and received a refund for $4.6 million. The refund was used to offset construction costs paid for using other district funds. We selected five invoices that were included in the offset expenditures for review, and did not identify issues with the transactions.
	b. Identify the oversight structure in place for monitoring bond proceeds and assess the adequacy of this oversight.	Interviewed district staff and reviewed key documentation to determine the entities performing oversight of bond expenditures. Interviewed district staff and reviewed invoices to determine if the district management appropriately approved invoices for payment. Reviewed bond oversight committee (committee) meeting minutes to determine if the committee fulfilled its oversight and reporting duty, as defined in its charter. Interviewed former district staff to determine the extent to which the district used the information generated from its external bond audits.
	c. Determine whether expenditures related to bond proceeds were for allowable activities and were reasonable.	Identified and reviewed documentation from the district’s $85 million in general obligation bonds, including legal documents and board resolutions, to determine the allowable purposes of the proceeds as approved by the voters. Reviewed invoices to determine whether bond proceeds paid for allowable uses.

3	Assess the district’s oversight of HCCA’s management of the medical center from fiscal year 2014–15 through October 2017 including the following:
	a. Identify and evaluate the district’s revenues and expenditures related to its operation of the medical center, including identifying significant trends and their causes.	Used audited financial statements and other relevant documents and performed an analysis of operating revenue and expenditures and identified causes for significant revenue and expenditure trends. Identified categories of revenues and expenditures contributing to the closure of the medical center and obtained documentation supporting trends in those categories. Interviewed current and former district employees for perspective and explanations regarding identified trends.
	b. Examine the management structure of the district and the medical center. Determine whether the structures and changes within them, including management and executive turnover, affected sound operational and financial practices.	Obtained and reviewed available district organizational charts from 2015 through 2017. Obtained and reviewed the MEC’s charge and responsibilities. Reviewed district election results and board meeting minutes to document changes in key positions—CEO, CFO, and board members—from 2014 through 2017. Documented changes in physician levels. Reviewed board meeting minutes to identify the board’s decision to seek an affiliate partner for managing the medical center. Interviewed former board members to understand their rationale for change to the management structure. Reviewed audited financial statements for fiscal years 2012–13 through 2015–16.
	c. Identify the key events leading to the closure of the medical center, including the rationale behind key district actions.	Reviewed board meeting minutes from 2014 through 2017, identifying key events and when possible, the rationale behind key decisions. Obtained and reviewed the district’s RFP for a strategic partner, and requested the proposals the RFP generated. Only two proposals were available for our review. Reviewed HCCA’s contract with Southern Inyo Healthcare District (Inyo) to identify key differences between its contract with the district and with Inyo. Reviewed the January 2016 CMS report, board minutes, and additional documentation to identify circumstances leading to the district’s replacement of the MEC. Interviewed three former board members who took part in selecting HCCA to ascertain their rationale for certain decisions.

4	To the extent possible, identify steps the district could take to reopen the medical center.	Reviewed federal and state regulations regarding requirements to obtain a hospital license. Reviewed other requirements to reopen the medical center. Obtained and assessed the adequacy of the district’s plans to address requirements to obtain a hospital license and address other requirements to reopen the medical center. Documented relevant district perspective on its time frames and plans for meeting hospital license requirements and other requirements the district needs to address before reopening the medical center.

5	Review and assess other issues that are significant to the audit.
	a. Determine whether HCCA management had conflicts of interest in their roles between the district and Inyo.	Reviewed Inyo’s board minutes from 2016 and 2017 to identify and document any substantive input by district board members and HCCA management. Reviewed the district interim controller’s analysis and estimates of the cost of management and staff paid for by the district but working at Inyo. Obtained job descriptions and other relevant documents for key positions to determine if concurrent employment at the district and Inyo was allowable.
	b. Identify potential conflicts of interest by the district board members and HCCA management.	Obtained the district’s conflict‑of‑interest policy. For 2014 through 2017, reviewed district board members’ statements of economic interests to determine whether any had disclosed potential conflicts. The district could not provide any statements of economic interests for HCCA employees, and we were unable to successfully contact HCCA to address our requests.

Source: Analysis of the Audit Committee’s audit request number 2018‑102, as well as information and documentation identified in the column titled Method.

Assessment of Data Reliability

In performing this audit, we relied on various electronic data files that we obtained from the district. The U.S. Government Accountability Office, whose standards we are statutorily required to follow, requires us to assess the sufficiency and appropriateness of computer-processed information that we use to support findings, conclusions, or recommendations. In performing this audit, we obtained the district’s accounting data to identify trends in revenue and expenditures. To evaluate this data, we performed electronic testing of the data, reviewed existing information about the data and systems, and interviewed district officials knowledgeable about the data. However, because of issues discussed in Chapter 1, we found the data to be of undetermined reliability. Although this determination may affect the precision of the numbers we present, there is evidence in total to support our audit findings, conclusions, and recommendations.