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January 10, 1996

Via Facsimile and Mail

Crownie Billili, Muriel Knudsen, and
Members of the League of Women Voters
Los Altos-Mountain View area

Dear Ms. Billik and Knudsen and Members of the League of Women Voters:

Thank you for your letter of January 3rd expressing concern about recent events affecting El Camino Hospital, including the suit recently initiated by the El Camino Hospital District Board against Camino Healthcare, and requesting that representatives of the El Camino Hospital District Board participate in a town hall meeting in early February.

At the outset, as described below, I must emphasize that the District Board had no choice but to act as it did in filing suit. When it acted, the Board did so with the confidence that the future of El Camino Hospital and its ability to meet the needs of the community over the long term would be enhanced by that action. Subsequent events, particularly the disclosure to us in December of Camino Healthcare's audited financial statements for the fiscal year ending June, 1995, which show enormous operating losses averaging approximately $350,000 per week, have given us even more confidence in the wisdom of our decisions.

Unfortunately, as a result of the circulation of inaccurate or incomplete information about the reasons underlying the District Board's actions and the nature of the current dispute, it has been difficult for the public to gain an accurate understanding of the matter. Thus, we welcome the opportunity to respond to your letter and we strongly support a community meeting hosted by the League of Women Voters. To that end, we would be happy to answer any questions that might help you in developing discussion topics for that meeting.

I believe it would be helpful first to describe the events leading to the District Board's filing suit, following which I will address some of the specific concerns raised in your letter.

The District Attorney's Letter

As you may recall, on June 28, 1995, Mr. William Larsen of the Santa Clara District Attorney's office wrote a letter (a copy of which is attached for your convenience) to Mr. Paul Lion, the District's general counsel, regarding reported conflict of interest violations that may have occurred in the negotiations of the 1992 contracts transferring approximately $250 million of the District's assets to Camino Healthcare. In his letter, Mr. Larsen examined relevant conflict of interest statutes and cases. He concluded that he could not, based on the information available to him at the time, initiate any criminal charges arising out of the potential conflicts of interest involved in the making of the 1992 El Camino Hospital asset transfer contracts because of the very high burden of proof -- i.e., beyond a reasonable doubt -- applicable to criminal cases. He pointed out, however, that one of the District's alternatives was ''to hire counsel to pursue a civil action based upon a violation of � 1090." In his "Summary and Conclusions," Mr. Larsen stated: "It appears at this time that the [District] board has the power, via a civil action pursuant to Government Code section � 1092...to protect the interests of the public and avoid any contract that the board determines was entered into in violation of � 1090. Furthermore, the district is not saddled with the greater burden of proof attendant to a criminal prosecution under � 1090."

The District's Formal Investigation

Faced with these serious allegations of conflict, Mr. Larsen's letter, as well as the public's demands that action be taken, the District Board by a unanimous vote approved the retention of special legal counsel to investigate formally the allegations of conflicts of interest and thereafter the District retained the San Francisco law firm of Steefel, Levitt & Weiss, and one of its senior partners, Stephen S. Mayne, to investigate the 1992 transactions for possible conflict of interest violations. As part of its investigation, special counsel completed a comprehensive review of the events leading up to the District's October 31, 1992 vote to reorganize and the execution of the 1992 asset transfer agreements on December 17, 1992, thoroughly analyzed the 1992 contracts, interviewed numerous people presently or formally associated with the District and Camino Healthcare, and reviewed literally thousands of pages of documents. At the conclusion of the investigation, special counsel provided a written report of its findings to the District Board.

On the basis of the special counsel's report, the District Board came to three conclusions: (1) there was in fact a violation of Government Code � 1090; (2) the 1992 contracts were void under Government Code � 1092; and (3) the 1992 contracts grossly failed to protect the District's rights. For example, if Camino Healthcare were to breach the contracts, the District would be liable for all of Camino Healthcare's debt, yet would not receive back the cash (approximately 5100 million) it had originally transferred to Camino Healthcare in January, 1993. I note that Camino Healthcare published a news release on December 22, 1995 in which it suggests that all of Camino Healthcare's assets, including its cash, would come back to the District. While I cannot speculate as to the reasons why they would misstate the facts, simply stated, that assertion is not true. The 1992 transfer agreements in fact provide that upon termination of the ground lease the District is allowed to purchase its buildings and personal-property assets back and must assume Camino Healthcare's debts. The documents do not provide for return of the cash.

The District's Decision To File Suit

Following receipt of the special counsel's report to the District Board, the District Board either had to approve formally and re-execute the deficient contracts (and thereby rectify their "void" status), or seek a judicial determination that the contracts were void. The District Board obviously could not affirm contracts that failed so fundamentally to protect the District's rights. Thus, a suit to declare the contracts void was the District Board's only real choice.

Accordingly, on October 30, 1995, the District Board filed suit. Legal action was taken out of an absolute necessity to protect the public's interest in El Camino Hospital by removing the cloud of legal uncertainty as to the validity of the 1992 contracts. It was not the District Board's purpose in initiating legal action to regain control of the hospital. The idea of an integrated delivery system was not perceived as the problem; rather, the problem was that the District's interests in the execution of that idea were not adequately protected, as evidenced by the grossly deficient transfer documents.

The District's Attempts At Cooperation And Discussion

At the time we filed suit, we made a conscious decision to withhold service of the summons and complaint in order to give Camino Healthcare an opportunity to retain counsel and to familiarize itself with the issues in the hope that, by doing so, we would maximize the opportunity for a constructive dialogue with Camino Healthcare on the matters implicated by our suit. Unfortunately, Camino Healthcare did not retain its litigation counsel, Keker & Van Nest, to represent it until late November and we did not have our first meeting with Camino Healthcare representatives until December 14, 1995. This delay did not help matters. Although we have fully cooperated with Camino Healthcare's litigation counsel by bringing them up-to-speed on the issues raised by the case, as discussed below, Camino Healthcare has not been so cooperative.

In order for the District to engage in a meaningful discussion of the matters implicated by the suit, it was imperative that the District be provided certain essential information. By letter dated November 6, 1995, special counsel asked Camino Healthcare to provide the District Board the certain basic information and documents essential to the District Board's ability to evaluate Camino Healthcare's operations and obligations, and to determine the District's best course of action. Despite Camino Healthcare's assurances to the public of cooperation and desire to discuss a resolution of the matter, its actions did not match its words. To date, the District has not received from Camino Healthcare any of the requested documents. In short, the District has been stonewalled.

Camino Healthcare's noncooperation and reticence to provide the District Board with the documents is not new. The District has repeatedly requested from Camino Healthcare, and has been consistently refused, copies of certain bond documents (under which the District may be liable). Furthermore, under paragraph 5.5 of the 1992 Ground Lease, Camino Healthcare is required to provide the District every six months with reports on its operations and compliance with the 1992 Ground Lease. The District has never been provided with such reports. In July 1995, the District Board appointed an Audit Committee to review independently the financial status, operational status, and quality of care that the District was entitled to under the reports. Camino Healthcare resolutely refused to allow access to any of its finances or other documents that would assist the Audit Committee in pursuing its objectives .

Camino Healthcare's Report of Substantial Losses in 1995

A few days prior to the December 14th meeting, Camino Healthcare finally released to the District Board its audited financial statements for the fiscal year ending in June, 1995 -- documents the District Board is legally entitled to under 1992 contracts. Significantly, the auditors opinion letter is dated August 25, 1995. Thus, it appears that Camino Healthcare's audited financial statements were provided to the District nearly four months after Camino Healthcare received them from their auditor. Camino Healthcare offered no explanation for this inexcusable delay.

One possible explanation for the delay may be the alarming financial performance the financial statements report. For example, the 1995 audited financial statements reveal that Camino Healthcare increased its expenses in fiscal year 1995 by almost $37 million (23%), and lost nearly $18 million in operations during the fiscal year ending June, 1995. In contrast, Camino Healthcare reported an operating profit of nearly $11 million for the prior fiscal year, ending June 1994. Thus, only in December, four months after the fact had been confirmed by the auditors, did Camino Healthcare disclose to the District an approximate $29 million negative change of position in its operating income (loss) from 1994 to 1995.

It appears that a substantial element of this loss may be attributed to the merger and operational agreements between Camino Healthcare and Camino Medical Group (an entity formed by the merger of Sunnyvale Medical Clinic and Shoreline Medical Group) in September, 1994 as part of Camino Healthcare's plan to form an integrated delivery system (IDS). Camino Healthcare's acquisition of Camino Medical Group is subject to Internal Revenue Service approval which has not yet been given, with the result that the IDS has not yet been completely formed. Until such approval is obtained, Camino Medical Group's operational costs are covered by Camino Healthcare in exchange for a management fee.

These losses are of great concern to the District Board, as well as those whose principal concern is the well-being of the El Camino Hospital and the community it serves. Moreover, these losses have occurred at the same time Camino Healthcare made staff reductions and other cutbacks that many believe have degraded the quality of care provided at El Camino Hospital. As a publicly-elected official responsible for protecting the taxpayers' interest in El Camino Hospital, I view the $18 million loss (approximately $350,000 per week) in the operation of a public asset with grave concern, and I believe that the District Board will conclude that the resumption of operational control over the hospital is essential to its continued viability and return to preeminence.

Because of the enormous losses and other events, the District Board again requested that it be provided with the requested documents that may illuminate the causes of its financial crisis, but was again rebuked by Camino Healthcare. Accordingly, on December 20th, the District Board was left with no alternative but to serve officially the lawsuit it filed on October 30, 1995 in order to begin the formal discovery process and obtain the necessary documents. And, on January 9, 1996, the District served its First Request for Production of Documents, demanding those documents it has been refused for over two months.

Other Issues Raised In Your Letter

Turning now to the matters raised in your letter, you express fear that El Camino Hospital will be made vulnerable to take-over by a for-profit organization, as is happening with Good Samaritan Hospital in San Jose. As you know, Good Samaritan was suffering substantial operating losses, which made it an ideal candidate for take-over. By its actions, the District Board is acting to prevent such an outcome.

Your letter also states that the District Board has not presented any plan for the future administration of El Camino Hospital. In response to that concern, I must once again stress that we are not in a position to formulate a specific plan without the basic information we have requested repeatedly, and have not received, from Camino Healthcare.

We have, however, taken a significant step in the direction of restoring El Camino Hospital to a profitable operation that provides quality healthcare to its community. In anticipation that the District will soon be in possession of El Camino Hospital, either through negotiation or through litigation, we have appointed Richard Warren -- a healthcare veteran with 25 years of successful experience as the chief executive of Washington Hospital in Fremont -- as the interim Chief Executive Officer of the El Camino Hospital District. In that capacity, Mr. Warren will bring his invaluable experience and expertise in district hospital management to bear upon El Camino's health care management issues and will prepare to resume management responsibility in the event that hospital operations are returned to the District control.

As evidence of Mr. Warren's capabilities -- and contrary to the dire predictions in 1992 that district hospitals could not survive in the changing healthcare world -- I have attached the 1994-1995 financial report from the Washington Hospital Healthcare System, a district owned and operated, not-for-profit healthcare system which reported a net profit of more than $15 million for the fiscal year ending in 1995. We look at this as the model to follow in reorganizing El Camino Hospital, and are extremely fortunate to have Mr. Warren as our new chief executive

In a statement presented to the District Board in a special meeting held on January 3rd, Mr. Warren outlined some of the major issues he will address in his position as interim C. E. O.

They include:

1. Preparation of an objective evaluation of the present Integrated Delivery System organization to determine if it is still in the best interest of the District to continue with the current arrangement.

2. Development of an information plan to explain to all of the District's publics -- including physicians, employees, volunteers, patients, and community residents -- the necessity of this undertaking.

In regards to the latter, I have forwarded a copy of your letter to Mr. Warren so that he can include the League of Women Voters in his public information plan. If you are aware of any other "publics" who would be interested in receiving information about District Board activities, please contact me and I will personally see to it that they are added to our distribution list

Present Discussions

In your letter you urge a solution to the dispute by negotiation, noting that Camino Healthcare's Board of Directors have admitted errors and are amenable to change it must be recognized, however, that the enormous operating losses sustained by Camino Healthcare cast grave doubt on its ability to operate El Camino Hospital successfully in the future. As I stated earlier, we have attempted to discuss these issues with Camino Healthcare, but have not had the basic information we need to make those discussions meaningful. Although we are continuing to attend meetings with Camino Healthcare officials, please understand that we view this as an emergency situation and must act as promptly as possible in the public interest .

Further, in the final analysis, I believe the community's best interest will be served by the return of operational control over El Camino Hospital to the District We hope that Camino Healthcare will conclude that it is in the best interest of the community to cooperate by agreeing to such a transfer

On behalf of the El Camino Hospital District Board, I thank you for your interest in this matter Again, we look forward to participating in a public forum as you have suggested, and welcome your comments and questions on this issue

Sincerely,

Paul Hoar, M.D.
Chairman of the Board
EI Camino Hospital District

cc Douglas Usher and Members of the Camino Healthcare Board
Susan Mirch-Kretclmlann, Chair, LWV Sunnyvale-Cupertino Area
Members of the El Camino Hospital District Board
Richard Yarren, Interim C E O, El Camino Hospital District
Stephen S Mayne, Esq.
Paul L Lion, Esq.

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