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Healdsburg, Sonoma Valley, Alameda, Santa Rosa, Mammoth, Los Angeles: These and other California communities are rediscovering the virtues of publicly owned hospitals to keep local emergency rooms open, and to keep health care resources — physicians and other caregivers — in the community. To succeed, they are breaking new legal ground, since much has changed since the 1940s, when California first passed laws allowing local voters to create hospital districts. With national debate focused on expanding Medicare to provide prescription drug benefits, few policymakers seem to care that Medicare payments are so low that doctors are leaving the system, and Medicare-dependent hospitals are going broke. Payments under California’s MediCal program are even worse — with no relief in sight as the state is forced to cut billions of dollars to balance its budget. The federal government is preoccupied with military and security concerns. For community hospitals, comprehensive health care reform is but a distant mirage. Yet it is understandable that the plight of hospitals, especially smaller community hospitals, would be nearly invisible to the California Legislature and Congress. Over the past 20 years, new technologies and drugs radically reduced the number and length of hospital stays, leading to the necessary closure of many hospitals. Investor-owned hospital operators like Tenet and ColumbiaHCA and a number of national nonprofit organizations grew dramatically, buying up and closing many smaller facilities. Industry consolidation promised an “integrated health care delivery system.” Across the state, hospital districts, including the Petaluma, El Camino, Mount Diablo, Grossmont and Sequoia Hospital districts, to name a few, sold or leased their facilities, in some cases to these larger, stronger operators; in some cases to local private nonprofit organizations. Others, including the Corcoran and Los Medanos Hospital districts, declared bankruptcy under the little-used Chapter 9 provisions, which allow the elected board to manage the agency’s affairs during the bankruptcy proceedings. But the tide of mergers and acquisitions receded in the face of dramatic increases in the cost and complexity of much hospital care and federal budget balancing that cut federal payments for health care. At the same time, the uninsured population continued to rise. Lacking any other place to go, this population is heavily dependent on available emergency room care, which federal law mandates must be provided free to the medically indigent. Also looming before California hospitals are new state earthquake safety rules which will require California hospitals to spend billions to renovate or rebuild, some as early as 2008. Little wonder that for-profit hospital chains are now selling off smaller community hospitals — often to local nonprofit community groups anxious to see their community health care assets protected. These benevolent citizens have learned the hard way that running a hospital today is a tough business and that philanthropy has its limits. So physicians, business leaders and other community leaders have turned to an old solution to these new forces: the formation of a local public agency which is supported by local taxpayers. Healdsburg General Hospital is an example of this new trend. PROP 13 AN OBSTACLE In Healdsburg, the local hospital was purchased in 1995 by ColumbiaHCA with high hopes. But by 1998, the corporate giant sold the facility to a quickly organized nonprofit corporation supported by community leaders. Nuestro Hospital Corp. struggled for several years to keep the 45-bed facility open before deciding another answer was needed. When the community leaders first looked at forming a hospital district, it didn’t look like a solution. Because of Proposition 13, a new district cannot levy any new ad valorem property taxes to help pay for operating costs — even if voters would approve. Under Prop 13, ad valorem taxes can only be used for capital facilities. The new hospital district’s board could ask the voters to approve a flat per-parcel tax, but it would have no money to pay for the election or operate the newborn district until those taxes were collected. If the voters didn’t approve, another election would be required to dissolve the stillborn district. Virtually untouched and unused for decades, the hospital district law did not seem to allow voters simultaneously to approve forming a new agency and a new parcel tax. Looking more closely at local agency formation laws, it was determined that the Sonoma County Board of Supervisors could act on behalf of the district in formation to call the election. Sensing strong public support for the hospital, the county agreed to cooperate with the community nonprofit corporation and call both elections. In so doing, the county risked bearing the election costs if the measures were defeated. In 2001, Nuestro Hospital Corp. asked the Sonoma County Local Agency Formation Commission to approve the establishment of a local health care district, subject to the approval of a majority of the voters. The commission agreed, on the condition that the new district have a means of balancing its books. It would do so by levying a parcel tax of $85 per parcel that would not only pay for the acquisition of the hospital, but also help pay for ongoing operations. This required a two-thirds majority. Both measures were put on the same ballot, each conditioned on the passage of the other. Faced with the potential closure of the only hospital within an hour’s drive, and following a grass-roots election campaign, more than 84 percent of the electorate approved both measures in November 2001. USING EMINENT DOMAIN A local health care district is governed by a five-member board of directors. Following the election, directors were appointed by the county board of supervisors. Subsequent boards will have to stand for election every four years. As a public body, their meetings must be open to the public, and their books and records are also public records. Like other public agencies, hospital districts are subject to state public records, conflict of interest and campaign finance laws, among many others. For most hospital districts, parcel taxes provide only a small fraction of a hospital’s annual gross revenues — usually 5 percent or less. Yet these taxes bridge the crucial gap between deficits and break-even operations. In Healdsburg, these taxes provided both the capital needed to acquire the hospital and the operating subsidy needed to sustain operations. At its first meeting in Healdsburg, the newly appointed board of the newly formed North Sonoma County Hospital District concluded that the best method of acquiring the hospital was to utilize its power of eminent domain and condemn it — in this case, the building, the land, the equipment, and all other assets necessary to the operation of the enterprise. Within weeks of formation, the district was able to borrow sufficient funds (in anticipation of its parcel tax receipts) to file suit and take immediate possession of the hospital assets. Because the nonprofit corporation had recently had an appraisal of its assets done, and was willing to share it with the district, the new board was able to decide immediately what “just compensation” should be deposited with the court. But it had no money, yet. Again, the cooperation of Sonoma County was essential, as the district’s only asset was the right to collect future parcel taxes. Constitutional restrictions forbade the district from pledging tax revenues to private persons, such as banks and other traditional lenders. The county, on the other hand, could buy a note from the district, secure in its ability to compel the district to levy taxes to make payments. It agreed to do so, and the district was able to fund the condemnation action and make the deposit required for it to take immediate control of the hospital. Within a month of its formation, the district had its hospital and money for ongoing operations. Since eminent domain allowed it to purchase both tangible and intangible assets, real and personal property of the nonprofit corporation, the district got possession of the hospital’s contents. What it did not condemn were the nonprofit’s contracts with suppliers, health care providers, insurers, HMOs and others. Most importantly, it did not acquire the nonprofit corporation’s substantial debts. In Healdsburg, following the transfer of possession of the hospital under eminent domain, the nonprofit corporation declared bankruptcy under Chapter 7 of the U.S. Bankruptcy Code. While the use of eminent domain is unusual in these circumstances, it underscores the inherent power of a public agency in California. On the other hand, a bankruptcy filing is increasingly common for health care facilities in financial distress. Nevertheless, in the aftermath of all the legal steps, the hospital remains open today for the benefit of the community, under the operation and control of the district. EBB AND FLOW Health care districts were first conceived in the aftermath of World War II when Congress saw a national need for new public hospitals, primarily in rural areas. The Hill-Burton bill made federal funds available to build them. California adopted the Local Hospital District Law in 1945 so that locally elected officials could oversee their operations. Dozens of modern hospitals were built this way across the state. Yet, in the succeeding decades, the creation and growth of Medicare, the growth of for-profit hospital chains and the anti-tax, anti-government sentiment in the political realm suggested that new public hospitals were no longer needed or wanted. The thinking seemed to be that the private sector could deliver health care to all, and that government should be reinvented by privatizing health care to the extent possible. No new hospital district was successfully formed in California between the late ’70s and the late ’90s. Following this 20-year hiatus, local communities are once again looking to health care districts to hold their hospitals and to keep their doors open. Creative use of the fundamental governmental powers to condemn and to tax is proving necessary to maintain public access to health care. Local taxpayers will serve an increasingly important role unless and until our state and national governments adopt and implement health care policies and programs — including payments that cover the cost of the services provided — that are more supportive of community hospitals.

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