Report 2011-113 Summary - March 2012
Salinas Valley Memorial Healthcare System:
Increased Transparency and Stronger Controls Are Necessary as It Focuses on Improving Its Financial Situation
Our audit of the fiscal management of the Salinas Valley Memorial Healthcare System (Health Care System) highlighted the following:
- The Health Care System does not have a formal policy for compensating its chief executive officer (CEO) and other executives.
- The board of directors (board) has made decisions regarding executive compensation in violation of the Ralph M. Brown Act, which requires conducting meetings in an open manner to keep the public informed of its actions.
- The Health Care System's executives were granted compensation at the upper level of industry practices.
- The former CEO, who retired in April 2011, received $4.9 million in retirement and severance benefits over four years.
- The salaries of the vice presidents employed as of August 2011 ranged from $272,000 to $341,000, and the former CEO's salary was $668,000 in 2011.
- We identified two instances in which conflict-of-interest laws may have been violated.
- About 25 percent of the Health Care System's employees and consultants that it identified as needing to file statements of economic interests for 2010 had not filed them as of September 2011—more than five months after the filing deadline.
- The Health Care System did not consistently document how it selected contractors in cases for which it was not required by law to use a competitive process.
- The Health Care System reported operating losses during fiscal years 2009-10 and 2010-11, sustaining an operating loss of $7.4 million in the latter fiscal year alone.
- By offering incentives to resign and imposing involuntary separations, the Health Care System reported reducing staffing by 341 positions from July 2010 through October 2011.
RESULTS IN BRIEF
The Salinas Valley Memorial Healthcare System (Health Care System) is an independent special health care district with an elected five-member board of directors (board) that governs its activities. At the core of the Health Care System is the Salinas Valley Memorial Hospital, which employed more than 1,700 employees as of June 30, 2011, and maintains 269 beds. Although as a public agency the Health Care System's decisions regarding compensation for its top executives should be transparent, this has not been the case for such board decisions. Even though compensation policies are very common in the health care industry and can support the transparency of an organization's compensation decisions, the Health Care System does not have a formal policy for compensating its chief executive officer (CEO) and other executives. When the board was making decisions regarding executive compensation, it also violated the Ralph M. Brown Act (Brown Act), which requires legislative bodies of local public agencies, such as boards, to conduct meetings in an open manner to keep the public informed of their actions. On several occasions since 2005, the board discussed proposed compensation for the Health Care System's executives in closed session, and neither the open- nor closed-session agendas listed executive compensation as a discussion topic, which the Brown Act prohibits, except in certain limited circumstances for closed-session discussions that do not apply here.
In an environment characterized by the lack of an executive compensation policy and limited transparency in executive compensation matters, the Health Care System's executives were granted compensation at the upper level of industry practices. The former CEO, who retired in April 2011, received $4.9 million in retirement and severance benefits between 2008 and 2011, most of which were paid to him before he retired. The majority of these benefits came from multiple retirement investment plans that the Health Care System provided him as part of his overall retirement benefits package. Examples of the level of compensation granted by the board include the salaries of the Health Care System's vice presidents employed as of August 2011, which ranged from $272,000 to $341,000, and the salary of the former CEO, which was $668,000 in 2011. The Health Care System also provides abundant health care benefits, including medical, dental, and vision coverage at no cost for all of its employees.
As a public entity, the Health Care System is required to have a conflict-of-interest code and should take steps to ensure that its employees are not involved in business relationships that could result in personal financial gain or the appearance of personal financial gain. However, we identified 11 instances between 2006 and 2010 in which Health Care System executives or board members had economic interests in entities with which the Health Care System had business relationships. In the two relationships we reviewed, the former CEO may have violated conflict-of-interest laws in one, and the board may have violated conflict-of-interest laws in the other. For example, the former CEO disclosed that he had an investment in 2008 with 1st Capital Bank, a business with which the Health Care System agreed to deposit up to $1 million in March 2008. We believe this action may have violated California's Political Reform Act, which states that no public officials at any level of state or local government shall make, participate in making, or in any way attempt to use their official positions to influence governmental decisions in which they have a financial interest. The Health Care System updated its conflict-of-interest policy in December 2011 to require that board members, medical staff, consultants, and employees disclose potential conflict-of-interest situations to their supervisors and the Health Care System's ethics and compliance officer, who is required to make a determination on the appropriate resolution.
The Health Care System also has not ensured that its employees and consultants file statements of economic interests (statements), as required. Our testing found that of the 99 individuals that it identified as needing to file statements for 2010, 25 had not filed them as of September 2011, more than five months after the filing deadline of April 1. We informed the Health Care System of our testing results, and according to the ethics and compliance officer, it subsequently obtained the statements from these individuals.
The Health Care System could also better oversee the support it provides to the local community, which it does in part by funding community events and programs. It does not have a policy and written procedures to demonstrate that its community funding furthers its public purposes, and it thereby risks questions about whether this funding violates the constitutional prohibition against public agencies making gifts of public funds. We reviewed 14 recipients of its community funding between 2008 and 2010 and found that in only three instances did it demonstrate that all of the disbursements related to these recipients furthered its public purposes. For example, it disbursed nearly $54,000 to the California Rodeo during 2009 for its 2009 and 2010 sponsorships of the event, but was unable to provide any evidence that it considered how this funding furthered its public purposes. According to the Health Care System's interim CEO, the California Rodeo provides an optimum means to market the Health Care System's services and positions it as the local expert in health care through sponsorship of the rodeo's first aid area. However, without a policy and procedures to ensure that the Health Care System's community funding furthers its public purposes, it risks making or appearing to make gifts of public funds.
Yet another area in which the Health Care System could provide better control is the awarding of certain contracts. Although it used a competitive process to award contracts when required for the contracts we tested, it did not consistently document how it selected contractors in cases for which it was not required by law to use a competitive process. Of the eight such cases that we reviewed, the Health Care System was able to demonstrate for only one contract that it went through some type of process to ensure that it received the best value from the contractor it selected. Although Health Care System officials were able to explain how they believed they received the best value from the selected contractor for four of the remaining seven contracts, they could not provide documentation of the process. Thus, the approach it used for awarding seven of the eight contracts we reviewed leaves the Health Care System at risk of not being able to demonstrate that it is obtaining the best value when procuring goods and services using public funds.
Stronger oversight and controls will be even more important as the Health Care System continues to focus on improving its financial situation. After a period of strong financial growth—its operating revenues increased by almost $79 million between fiscal years 2005-06 and 2008-09—the Health Care System reported operating losses during fiscal years 2009-10 and 2010-11, sustaining an operating loss of $7.4 million in fiscal year 2010-11 alone. Some of the reasons for its declining financial situation are, according to Health Care System management, high unemployment rates that resulted in fewer people seeking medical care, decreases in insurance reimbursements, and increases in the amount of income lost due to providing charity care.
The Health Care System hired a consultant in 2010 to review its operations and make recommendations for improvement. Subsequently, by offering incentives to resign and imposing involuntary separations, the Health Care System reported reducing staffing by 341 positions from July 2010 through October 2011. The Health Care System also reported estimated labor savings of nearly $44 million annually as of December 2011 and the implementation of 93 other cost-saving initiatives valued at $7.4 million as of September 2011, some of which are expected to be recurring. Our analysis of data for patient complaints and other measures of quality of care filed with either the Health Care System or the California Department of Public Health found no indication that the Health Care System's staffing reductions affected patient quality of care as reflected by such measures.
To provide members of the public with opportunities to meaningfully participate in board meetings regarding executive compensation matters, and to hold the board accountable for its decisions on these matters, the Health Care System should take the following actions:
- Develop a formal policy that establishes a process for determining executive compensation, including retirement benefits, that clearly documents all executive compensation decisions.
- Clearly indicate compensation matters on the agendas for its board meetings.
- Discuss executive compensation matters only in open sessions of board meetings, except in the limited circumstances that allow for discussion in closed sessions.
- To ensure that the Health Care System, its board members, medical staff, employees, and consultants are engaged only in appropriate business relationships with respect to their economic interests, the Health Care System should take the following steps:
- Engage an independent investigator to review the Health Care System's business relationships with entities that we identified as being among the economic interests of its board members and executives to determine whether any of the relationships violate applicable legal prohibitions and take appropriate corrective action if they do.
- Implement the requirement in the Health Care System's recently updated conflict-of-interest policy that board members, medical staff, employees, and consultants disclose potential conflict-of-interest situations to their supervisors and to the ethics and compliance officer.
To help ensure that individuals designated by the Health Care System as needing to file statements of economic interests do so, the Health Care System should amend its conflict-of-interest policy to specify the steps the filing officer should take to ensure that this requirement is met.
To ensure that it is not making gifts of public funds, the Health Care System should develop and implement a policy and written procedures to demonstrate how funds it provides to support entities and programs in the community further the Health Care System's public purposes.
To increase the transparency of its processes for awarding contracts that are not required by law to be selected using a competitive process, the Health Care System should require its employees to fully document the steps they take in selecting contractors and to describe how the selections result in the best value to the Health Care System.
The Health Care System disagreed with some of our conclusions but indicated it plans to implement all of our recommendations.