Los Angeles County Department of Health Services July 25, 2004

1. Los Angeles County Department of Health Services July 25, 2004 Observations Regarding Contracting Out/Privatizing the Operations of King/Drew Medical Center SHATTUCK HAMMOND PARTNERS LLC

2. Table of Contents • Our Understanding of the Situation • Interviews Conducted • Gating Issues Regarding a Contracting Approach or Public/Private Partnership for KDMC • Preliminary Discussions with DOC and CHW • Conclusions and Recommendations

3. Our Understanding • Navigant Consulting, Inc. (“Navigant”) was engaged by the County of Los Angeles Department of Health Services (LAC DHS) beginning Nov. 1, 2004, to provide interim management, assess and implement a turnaround plan to address major quality issues at King/Drew Medical Center (“KDMC”), and assist in recruiting a permanent management team. • Navigant completed its assessment in February, identifying more than 1,000 recommended changes and developing an action plan for each recommendation. • The depth of the problems at KDMC, their longstanding nature and the challenge of recruitment in such a public crisis have created concern that the problems at KDMC may be too deeply embedded for the current turnaround plan to succeed under the current structure or that the structure itself prevents the success of a qualified management team. • The Board of Supervisors passed a motion at their May 10th, 2005 meeting directing the LAC DHS to investigate the feasibility of contracting with a third party for the operations of KDMC (substantially “privatizing” the operations) as a potential backup, or alternative, option to the turnaround plan currently being implemented.

4. Shattuck Hammond Engagement • LAC DHS engaged Shattuck Hammond to review discussions that have occurred with LAC DHS and other provider organizations; meet with DHS, Navigant, KDMC senior staff and others to determine potential issues regarding a KDMC outside contract arrangement; review relevant reports; engage in preliminary discussions with two interested provider organizations; and prepare a written report to LAC DHS. • Upon completing our initial set of interviews with, among others, LAC DHS, and KDMC and Navigant personnel, it became apparent that there are a series of complex “gating” issues that the County must investigate before it is possible to proceed in determining the viability of a contracting arrangement with a third party or other “privatizing” option. For these reasons, it would be impossible to provide the Board with an assessment of the feasibility of a private contracting option by August 2nd. We believe that the process to investigate fully, structure, negotiate and ultimately execute such a solution with a third party would take six to twelve months. • As a result, David Janssen and Dr. Garthwaite asked Shattuck Hammond to suspend our engagement after completing meetings with two potential partners and prepare this summary report of our observations.

5. Interviews Conducted Shattuck Hammond met with the following individuals: County of Los Angeles • Dr. Thomas Garthwaite and Paula Packwood (DHS Director and Chief of Staff) • David Janssen and Sharon Harper (CAO and Chief Deputy) • Leela Kapur, Ed Morrissey (County counsel) • Anita Lee, Sheila Shima and Allan Wecker (CAO, County Counsel, DHS CFO Office) Navigant Consulting • Hank Wells (Interim CEO, KDMC) • Kae Robertson (KDMC Project Manager) King/Drew Medical Center • Tony Gray (CFO) Drew University • Thomas Yoshikawa (Provost & Acting President) King/Drew Advisory Board • Hector Flores, MD (Chair)

6. Interviews Conducted (cont’d) In addition, we had very preliminary conversations regarding a potential contracting or other strategic arrangement for the operations of KDMC with the following representatives from Daughters of Charity and Catholic Healthcare West: St. Francis Medical Center/Daughters of Charity (“DOC”) • Gerald Kozai (CEO of St. Francis) • Conway Collis (Chief Gov’t Affairs Officer for Daughters of Charity) Catholic Healthcare West (“CHW”) • Wade Rose (VP, Public Policy & Advocacy) • Susan Hollander (VP, Public Policy & Advocacy) • Gary Connor (VP, Financial Operations Group) • Tom Hennessy (VP, Operations) • Mary Roos (Health Management Associates, consultant to CHW) • Steven Perlin (Health Management Associates, consultant to CHW) • Doug Elwell (Health Management Associates, consultant to CHW)

7. “Gating” Issues Regarding a Contracting Approach As noted above and summarized on the following pages, there are series of complex issues that we believe the County must understand and take a position on before the feasibility of a third-party contracting approach or other partnership structure can be assessed or pursued. • Legal Issues • Financial Issues • Employee Issues • Medical Staff • Ethical Religious Directives (“ERDs”) • Transition of Operations In short, before the County can engage in meaningful discussions with other parties who potentially would consider contracting or partnering to operate KDMC in its entirety, the County must first have an clear understanding of what legal, financial other hurdles exist, and have an explicit understanding of what its own objectives are in such an arrangement (e.g., what basket of services would be provided and precisely what population the private partner would be responsible for; what the financial pro forma for the entity would look like and what kind of financial risk the County is prepared to bear, etc.)

8. Legal/Statutory Issues Legal Issues • County counsel outlined for Shattuck Hammond a number of potential legal issues regarding a potential contracting approach based on their research to date. • Of the items they discussed with us, we believe the County’s obligation under Section 17000, and the ambiguities associated with that obligation, represent a potential gating issue for the County. Under virtually any scenario in which a third party would contract with the County to provide care for the indigent and Medi-Cal populations, we think it will be necessary for the County to identify specifically what basket of health services will be provided and what population will be covered under the contract. Doing so will require explicitly defining the nature of the County’s obligation under Section 17000. • A more detailed analysis of the legal structure for a public/private partnership or contracting arrangement is required.

9. Financial Issues Financial Issues • The structuring and negotiation of a viable contracting arrangement or other public/private partnership with a third party will require the development of a reliable set of financial pro formas for the restructured operations of KDMC as well as an assessment of the financial impact on the County’s budget. To accomplish this, the County will need to gauge how much it will pay for the services, and what the nature of its ongoing financial commitment will be. • Furthermore, given the state of flux of the current Medi-Cal payment system, as well as the complexities and uncertainties regarding the structure of future DSH payments, the County needs to determine how much it will be paid in the future for the care of KDMC’s patients, and what impact a proposed contracting arrangement or other public/private structure will have on the County’s funding. • Based on our discussions, we believe the proposed contract arrangement will have to insulate the private partner substantially from financial risk associated with the operations of KDMC. • Moreover, we understand that KDMC requires significant capital investment for deferred maintenance as well as compliance with SB 1953 (seismic upgrade). The potential capital range is between $60 and $150 million. It is clear that no third party contractor will assume this responsibility and that LAC will have to fund this requirement.

10. Other Potential Gating Issues Employee Issues • Any private partner will require the ability to determine on an employee-by-employee basis who among the current staff at KDMC it will hire. The private partner will need to be able to hire according to its own wage and benefit structure, outside of the civil service employment system, and the County will need to carry any costs for the termination of employees not hired by the private partner. Medical Staff • A few individuals believed that KDMC in any form should remain an academic-associated institution. Part of this comes from the community history of the institution and part of this comes from the practicality of attracting/securing physicians to KDMC. In summary, it was very clear that there needs to be a structure in place to secure attending physicians, and an academic affiliation might be part of that solution. Having said this, it is not clear from our discussions whether Drew University is key to a KDMC solution. • One individual did share his view that a private management and improved quality of care at KDMC could actually help Drew University.

11. Other Potential Gating Issues (cont’d) Ethical Religious Directives (“ERDs”) • The County should be aware that Catholic-sponsored organizations like DOC and CHW must operate their hospitals in accordance with established ERDs. How this might impact the services that could be provided under a contracting or private/public partnership structure are unclear, but this is an important issue that the County must get clarity on early in the process. CHW noted that it has addressed this issue successfully with a number of non-Catholic community-based hospitals in its system. Transition of Operations • Depending on what decisions are made regarding employees and medical staff, as well as decisions regarding the future clinical footprint at KDMC, it may be necessary for the private partner substantially to close the facility for a period of time and then incrementally re-open departments and programs once staff have been hired and new policies and procedures are implemented. The potential disruption in the provision of care and to the student and residency programs of Drew University may represent a gating issue for the County.

12. Preliminary Discussions with DOC and CHW Based on initial discussions with representatives of St. Francis (DOC) and CHW, we can make the following observations regarding their initial interest and concerns. • Both DOC and CHW have a vested interest in finding a solution for KDMC. CHW has several hospitals in the market (California Hospital Medical Center, San Gabriel Valley Medical Center and St. Mary Medical Center – Long Beach), and the DOC St. Francis facility is less than 3 miles from KDMC. Both parties are motivated not only by a strong sense of mission but also by the practical consideration that if KDMC were to close outright it could have negative financial and operating consequences for their facilities. We have heard the view that closure of KDMC could create a cascading effect across the County, potentially forcing the closure of other private facilities that form part of the safety net for the indigent. The representatives from St. Francis also made the observation that they view Drew University as an important source for bringing physicians into the community, and that the closure of the Drew program could have a material negative impact on their ability to recruit and retain physicians in the community. • Therefore, both DOC and CHW are certainly interested in discussions regarding potential options, although both organizations require much more information and neither is prepared to take on any significant additional financial risk. • DOC/St. Francis requested that the County prepare an outline of the key terms of a proposal for them to consider. • CHW has indicated an interest in discussing a variety of options with LAC-DHS and has assembled an internal task force that is prepared to work with the County on a potential solution for KDMC.

13. Preliminary Discussions with DOC and CHW (cont’d) • From both DOC’s and CHW’s perspective, any solution for the operations of KDMC will (i) need to allow the partner to operate the facility and hire employees under their employment and benefit structure, (ii) have an apolitical governance structure, and yet (iii) will involve the County continuing to have some financial accountability for the operations of KDMC.

14. Conclusions & Recommendations • It is clear to us, based on the interviews we have conducted and the gating issues described above, that it will not be possible to identify and develop a definitive set of viable options for the Board of Supervisors to consider by August 2nd. • If the County wishes to pursue a contracting or public/private partnership option further, it will need to define explicitly its objectives and expectations regarding the gating issues outlined in this report. It should then move quickly to engage potential partners in a collaborative dialogue with the objective of identifying a preliminary structure and set of terms for the proposed partnership. • The County should recognize that it will likely take 6-12 months to reach a definitive agreement and consummate a transaction and that there may be other qualified parties that would be interested in exploring a contract arrangement or other partnership structure with the County to assume the operations of KDMC. • The County should move quickly to engage both Sacramento and CMS in discussions, if it has not already done so, regarding Medi-Cal reimbursement redesign and the allocation of DSH monies and related subsidies so that the redesign effort does not preclude potential alternative delivery structures to meet the health care needs of the County’s indigent, such as a public/private partnership. • The County needs to recognize that pursuing this option may potentially hamper Navigant’s ability to continue making improvements at KDMC, and will certainly make it more difficult to recruit permanent management. • Finally, if the County is going to pursue negotiations for the contracting of KDMC operations or other partnership structures, the Board will need to implement a process that allows for confidential discussions and negotiations with third parties.