oversight

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)

                    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