B-164031 (4) Social Security Administration Department of Health, Education, COMPTROLLER GENERAL OF THE UNITED STATES WASHINGTON. D.C. 20548 B-164031 (42 Dear Mr q Chairman: In accordance with your Committee’s request of Septem- ber 15, 1970, we have obtained information relating to six hospitals in the State of California which had changed from a propri-etary status to a nonprofit institutional status. Our represen-tatives were informed that the Committee was partic- ularly interested in --whether there was some change in the ownership of the hospitals and --whether the capitalized values of the hospitals’ assets were increased as a result of the changes in status and, if so, whether such increases could result in higher costs to the bledicare program. Our representatives were requested to obtain such infor- mation for the following hospitals located in the State of California. Community Memorial Hospital, Sacramento Doctors Hospital of Santa Ana, Santa Ana Golden Gate Community Hospital, San Francisco Hillside Community Hospital of Ukiah, Ukiah Memorial Hospital, Redding Parkview Community Hospital, Riverside To obtain the requested information, we reviewed records and interviewed officials of the hospitals, the fiscal interme- diaries responsible for paying the reasonable costs of the services rendered to Medicare beneficiaries in these hospitals, and the State hospital licensing bureau. Our review showed that each case involved some degree of change in ownership; in three cases, there appears to have been a complete change of ownership. In five cases, we were advised by hospital officials that the administrators or man- agement personnel had not changed as a result of the changes in status. -- -- %OTH ANNlVERSARY 1921 - 1971 .-_I B-164031 (4) Our review showed also that in five cases at least part of the acquired assets had been revalued as a result of the change from a proprietary status to a nonprofit status. In each of the five cases, the acquiring organizations recorded the acquired assets at the purchase price paid to the former owners; the purchase prices were generally based on indepen- dent appraisals of the value of the assets. In two of the five cases) the acquiring organizations leased the hospital facilities to nonprofit corporations which operated the hos- pitals. In all six cases, the new organizations financed at least part of the cost of the purchase through the issuance of interest-bearing notes payable to the former owners or stock- holders of the proprietary organizations. To the extent that the new organizations provide care to Medicare beneficiaries, the (1) interest expense involved in financing the purchase of the assets, (2) depreciation ex- pense computed on the basis of the increased asset values, and (3) costs of leasing facilities would generally be costs reim- bursable by the Medicare program unless the fiscal intermedi- aries determine that these costs are not reasonable. Medicare regulations, however, provide that costs applicable to services or facilities furnished to a provider by organizations which are related to the provider by common ownership or control be includable in the provider’s cost only at the cost to the re- lated organization. With respect to the six hospitals discussed in this re- port 9 the records of the Social Security Administration, De- partment of Health, Education, and Welfare, showed that, as of March 31, 1971, final settlement of costs reimbursable un- der the Medicare program had been made with one of the hospi- tals for two accounting periods, the last of these periods ended on October 31, 1968. Settlements had not been made with the remaining five hospitals. In view of the above, we were able to determine that additional expenses resulting from the change in status had actually been paid by the Medicare pro- gram in only one case. 2 B-164031 (4) The change by the hospitals from proprietary to non- profit status could also mean a loss of Federal tax reve- nues. However, we did not examine into this matter during our review. Brief summaries of the facts relating to the changes in ownership status for each of the six hospitals for which in- formation was requested are presented on pages 1 through 10 of the report. Where information obtained during our review indicated that the same individuals were involved in both the propri- etary organization and the nonprofit corporation, we brought this information to the attention of the fiscal intermedi- aries for their consideration in making settlements with the hospitals involved. This report, however, has not been made available to the Social Security Administration for its re- view and comment. Since this report contains information, the disclosure of which may be prohibited by the United States Code (18 U.S.C. 1905)) we shall not make the contents of the report available to the public. The code provision referred to above makes it a criminal offense to disclose, among other things, the “amount or source of any income, profits, losses or expenditures” of any person or firm, except as authorized by law. Sincerely yours, Comptroller General of the United States f The Honorable Wilbur D. Mills Chairman, Committee on Ways and Means House of Representatives INFORMATION PERTAINING TO COMMUNITY MEMORIAL HOSPITAL SACRAMENTO, CALIFORNIA The assistant administrator of the Community Memorial Hospital advised us that the original hospital facility with a capacity of 16 beds was built in 1949. In 1954 a group of doctors formed a corporation, Community Medical Center, Inc., which acquired the hospital as a proprietary institution. Dr. W. IS. Eaton, Jr., was the principal owner of the corpora- tion and administrator of the hospital. New wings were added to the original facility in 1961 and 1964 which increased its capacity to 110 beds. The assistant administrator advised us also that the hospital was acquired in March 1967 by the Community Memo- rial Hospital--a nonprofit corporation consisting of 25 mem- bers--for the stated purposes of providing better services to the community and of avoiding local property taxes. The assistant administrator said that three of the stockholders of the former corporation were elected to the board of di- rectors of the nonprofit corporation; Dr. Eaton was not elected as a director of the nonprofit corporation but con- tinued to serve as hospital administrator. The assistant administrator advised us further that the nonprofit corporation had paid about $1.7 million for the assets of Community Medical Center, Inc. The nonprofit cor- poration financed the transaction by assuming the Medical Center's liabilities of about $700,000 and by issuing to the stockholders of the Medical Center notes payable for about $1 million bearing interest at the rate of 4-l/2 percent per annum. The financial statements for the proprietary and the nonprofit corporation showed that the book value of the land and building had been significantly increased as a result of the change in ownership. The book value of the land, build- iw , and equipment as of February 28, 1967, and as of June 30, 1967, was as follows: As of As of February 28, June 30, 1967 (before 1967 (after change in change in status) status) Land $ 58,115 $ 78,000 Building 783,770 P,l72,000 Equipment 312,595 317,920 1,154,480 1,567,920 Less accumulated depreciation 304,857 192,647 Book value $ 849,623 $1.375.273 A representative of the hospital’s accounting firm ad- vised us that the land and building were capitalized on the nonprofit corporation’s books at the purchase price paid by the corporation which was based on an independent appraisal. He advised us also that the equipment was purchased at book value and that the amounts recorded on the books after the change of status did not include any provision for goodwill. The assistant administrator advised us that salaries and fringe benefits of the management officials did not change except for Dr. Eaton’s salary which was increased from $25,000 to $36,000 annually. We were advised by a Social Security Administration (SSA) official that the Medicare fiscal intermediary had made final settlement with the new corporation for the cost of care pro- vided to Medicare beneficiaries for the 8-month period March 1, 1967, through October 31, 1967, and for the succeeding 12- month period ended October 31, 1968. The settlement reports for this ZO-month period ended October 31, 1968, showed that the hospital incurred additional interest and depreciation expenses of about $109,000 over that which would have been in- curred if the change in status had not taken place. Of that amount ) about $32,000 was charged to the Medicare program and was reimbursed by the intermediary. INFORMATIOTJ PERTAINING TO DOCTORS HOSPITAL OF SANTA ANA SANTA ANA, CALIFORNIA The administrator and the assistant administrator of the Hospital of Santa Ana advised us that Doctors Hospital of Santa Ana, a partnership, was organized in 1956 to purchase land and to construct, equip, and operate a 52-bed hospital in Santa Ana. In May 1967 Doctors Hospital of Santa Ana sold its assets to Doctors Associated of Santa Ana, a partnership organized in January 1967 to acquire the hospital and to lease the facility to another firm that would operate and manage it. The partnership agreement showed that Doctors Associated had 31 partners. The agreement showed also that 30 of the partners were active members of the attending medical staff of the hospital and that one partner was an employee of the hospital. Information obtained from the administrator of the hospital indicated that none of the members of the selling partnership had an interest in Doctors Associated, The assistant administrator of the hospital advised us that Doctors Associated had paid about $1.1 million for the assets of the selling partnership. Unaudited financial re- ports furnished to us by the Medicare fiscal intermediary showed that the book value of the land, building, and equip- ment was increased from about $233,000 to about $842,000 as a result of the revaluation incident to the sale. The assis- tant administrator advised us that Doctors Associated had em- ployed an appraisal firm and a CPA firm to establish the value of the land, building, and equipment. Doctors Associated leased the facility to a newly formed nonprofit corporation-- Doctors Hospital of Santa Ana--for a period of 15 years. The assistant administrator of the hos- pital advised us that in May 1967 Doctors Associated sold part of the hospitalss assets--accounts receivable and inven- tories--with a book value of about $247,000 to the nonprofit corporation in return for an interest-bearing promissory note. The nonprofit corporation, which was formed in April 1967, has three directors: the administrator of the hospital who is also a partner of Doctors Associated, the assistant 3 administrator of the hospital, and an attorney who had rcp- resented the original partnership (also known as Doctors hos- pital of Santa Ana) f the partnership which owns the facilities (Doctors Associated) and the leasing corporation (Doctors I-105- pita1 of Santa Ana). The lease agreement provides for an an- nual payment to Doctors Associated of $132,000 by Doctors Hos- pital of Santa Ana. We were advised by hospital officials that the adminis- trator and assistant administrator of the hospital did not change as a result of the change in ownership. Although the fiscal intermediary had not settled with the nonprofit corporation for any periods from the time the corporation was formed, the corporation’s Medicare cost repGist for the period May 11, 1967, through April 30, 1968, had been audited by the fiscal intermediary’s contract auditors. The auditors had made no adjustments to the reported leasing costs. The hospital’s assistant administrator advised us in Feb- ruary 1971 that the Internal Revenue Service, Department of Treasury, had questioned the reasonableness of the hospital!s leasing costs for tax purposes but that the problem had not been resolved. INFORMATION PERTAINING TO GOLDEN GATE COMMUNITY HOSPITAL SAN FRANCISCO, CALIFORNIA Golden Gate Hospital, Inc., a California corporation, owned by a group of 21 stockholders, sold its assets in July 1967 to Golden Gate Community Hospital, Inc., a newly formed nonprofit corporation. Our review showed that four of the directors of the nonprofit corporation had served also as di- rectors of the old corporation. We were advised by the hospi- tal administrator that the change in status to a nonprofit corporation was made to avoid payment of property and income taxes and thereby provide capital for improving the hospital facilities and equipment. The hospital administrator advised us that the hospital’s assets had not been revalued at the time of the conversion and that the nonprofit corporation had capitalized the assets at the book value as recorded on the former corporation’s books. Although the administrator of the nonprofit corporation ad- vised us that there was no change in asset values, the corpo- ration’s balance sheet dated June 30, 1968, showed an amount of $878,266 for goodwill. The Medicare program does not allow amortization of goodwill as a charge to the program. Financial statements obtained from the Medicare interme- diary showed that the nonprofit corporation had paid about $1.5 million for the assets of Golden Gate Hospital, Inc., had financed the transaction by assuming liabilities for about $450,000, and had issued 7-percent notes payable for $1.065 mil- lion. The administrator of the hospital advised us that there had been no changes made in management officials or in the salaries or fringe benefits of key officials at the time of the change in ownership. SSA records show that the fiscal intermediary has not made final settlement with the nonprofit corporation for any periods that the corporation has provided care to Medicare benefi- ciaries e Therefore we were unable to determine the extent that the Medicare program costs will be affected by the sale of this hospital to the nonprofit corporation. INFORMATION PERTAINING -~ TO HILLSIDE COMMUNITY HOSPITAL OF UKIAH UKIAH, CALIFORNIA The administrator of Hillside Community Hospital advised us that the hospital, a 43-bed facility completed in 1956, was originally owned by Dr. Robert Barr. Subsequently, Dr. Barr and 15 other doctors formed a corporation--Hillside Community Hospital Corporation--which operated the hospital and owned some of the hospital equipment. Dr. Barr and some of the 15 doctors who owned the corporation also organized a partner- ship--Hillside Associates --which owned the hospital (land and building) and rented the facility to the Hillside Community Hospital Corporation. In February 1967 Hillside Community Hospital Corporation had 18 stockholder; 15 of them were also partners of Hillside Associates. A new nonprofit corporation-- Hillside Community Hospital of Ukiah--was formed in January 1967. The president and the vice president-treasurer of the nonprofit corporation together held 34 percent of the stock of the Hillside Community Hospi- tal Corporation and a 43 percent interest in the partnership-- Hillside Associates. On March 1, 1967, the nonprofit corporation bought the assets of the Hillside Community Hospital Corporation for about $221,500. The administrator of the hospital advised us that these assets had been acquired at the net book value as shown on the prior corporation’s books. The transaction was financed by the nonprofit corporation by assuming liabilities of about $157,500 and by issuing 7-percent notes payable for $64,000. The nonprofit corporation, on March 1, 1967, also pur- chased the hospital (land and building) from the partnership-- Hillside Associates--for about $694,000. This transaction was financed by the nonprofit corporation by assuming a mortgage of $116,000 on the real property and by issuing 7-percent notes payable to the former owners for about $578,000. Data furnished to the fiscal intermediary in support of the hospital’s Medicare cost report showed that the partner- ship had sold the hospital (land and building) to the non- profit corporation at a price substantially in excess of the 6 partnerships costs f The following table shows the partner- ship’s book value (cost basis) of the hospital (land and build- ing) at the time of the sale and the cost of the hospital to the nonprofit corporation-- Hillside Community Hospj.tal of Ukiah a Cost to Hillside Cost to Hillside Associates Community of Ukiah March 1, 1967 March 1, 1967 Land $ 31,000 $ 72,000 Building 443,000 622,000 474,000 694,000 Less accumulated depreciation 144,000 Book value $330 .ooo $@4,000 The administrator of the hospital advised us that the pur- chase price paid by the nonprofit corporation for the real property had been based on an independent appraisal. The administrator advised us also that there were no changes in management of the hospital or in salaries or Fringe benefits at the time of the change in ownership. According to the administrator) the hospital is controlled by a community board and any residual benefits which might accrue from its operation would go the the Seventh-Day Adventist Church. SSA records show that the Medicare intermediary had not made final settlement with the nonprofit corporation for any periods that the corporation has provided care to Medicare beneficiaries. Therefore, we were unable to determine the extent that the Medicare program costs will be affected by the sale of this hospital to a nonprofit corporation. 7 IKFORMATION PERTAINING TO MEMORIAL HOSPITAL REDDING, CALIFORNIA The assistant administrator of Memorial Hospital ad- vised us that the hospital, a 39-bed facility, was acquired in 1954 by iclemorial Hospital, Inc., a California corpora- tion owned by 17 persons, most of whom were doctors. In May 1967 Memorial Hospital, which had been expanded to a 132-bed facility, was acquired by Memorial Foundation--a nonprofit organization organized in 1962. The hospital retained the name of Memorial Hospital and is operated as a division of Memorial Foundation. The assistant administrator advised us that the hospital had been sold because the former owners did not wish to re- tain ownership since the corporation had not distributed any of its profits. He advised us also that the management of Memorial Hospital had not changed after being purchased by the Foundation and that there were no changes made in sala- ries or fringe benefits as a result of the change in status, Financial statements furnished to us by the controller of Memorial Hospital showed that the real property and equip- ment had been capitalized on the nonprofit corporation’s books at about $771,000 in excess of the book value of the assets as shown on the prior owner’s financial statement. The purchase price of about $3.3 million was financed by the Foundation by assuming liabilities of the prior owners of about $1.3 million and by issuing interest-bearing notes payable to the prior owners for $2 million. We were advised by a representative of the hospital”s accounting firm that, at the time Memorial Foundation acquired the assets of Memorial Hospital, Inc., the Foundation owned 85 percent of the stock of Memorial Hospital, Inc. SSA records show that the Medicare fiscal intermediary has not made any cost settlements with Memorial Hospital. Therefore we were not able to determine the extent that the Medicare program costs will be affected by the additional depreciation and interest expense resulting from the change in ownership of the hospital. 8
Information Pertaining to Changes in Ownership of Certain Hospitals in California From Proprietary to Nonprofit Institutions
Published by the Government Accountability Office on 1971-05-27.
Below is a raw (and likely hideous) rendition of the original report. (PDF)