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January 26, 1996

Crownie Bilik, Muriel Knudsen and
Members of the League of Women Voters
Los Alto-Mountain View Area

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

We, the community directors of Camino Healthcare, have received the January 10, 1996 letter written by Dr. Paul Hoar (Chairman of the Board of El Camino Hospital District) in which serious allegations are made against Camino Healthcare. Although eloquently drafted, Dr. Hoar's letter contains inaccuracies that require correction. To do so, we must first establish the context of the District's decision to sue Camino Healthcare

Background

In l996, after years of studying market conditions and community need, the District decided to develop an alliance between El Camino Hospital and the community's largest physician group (currently named the "Camino Medical Group"). To develop this Hospital-physician alliance (often called an "IDS"), the District took several steps.

First, the District developed an Asset Transfer agreement, Ground Lease Agreement and other documents (the "1992 agreements") by which it transferred El Camino Hospital and other District assets to Camino Healthcare. We, the Board of Camino Healthcare, never negotiated or influenced the 1992 agreements‹those agreements were unilaterally imposed on Camino Healthcare by the District. In fact, Camino Healthcare and its Board did not even exist at the time the agreements were developed by the District. Second, the District created a private nonprofit corporation (currently named "Camino Healthcare") dedicated to serving the community. Third, the District approved the appointment of five community volunteers and three physician volunteers to the Board of Camino Healthcare, and instructed us to develop an alliance with physicians.

Based on the District's l992 agreements, this Board immediately accepted responsibility for developing a Hospital-physician alliance, and set out to accomplish that goal. After lengthy negotiations (with medical groups that had other options available to them), Camino Healthcare succeeded in creating an alliance with Camino Medical Group. It was our expectation that this Hospital-physician alliance would, over time, improve the health and well-being of our community.

Sometime after the Hospital-physician alliance began, certain members of the District's Board began public attacks on both the Hospital-physician alliance and this Board's decisions regarding hospital operations. Although those public attacks increased over time (for example, see the text of a speech by District director Mark O'Connor to the California Legislature, and our response), this Board declined to become embroiled in public disputes. Instead, we focused our attention on improving Camino Healthcare's operations. In particular, we addressed the complex issues arising from the merger of a hospital and physician practices.

Last year, the District decided to try to void the 1992 agreements, and take back the Hospital, by asserting that there was a technical conflict of interest in the 1992 transfer. The District hired legal counsel, conducted its own investigation, and on October 30, 1995 sued Camino Healthcare to void the 1992 agreements and take back El Camino Hospital. Although the facts on which the District now alleges a conflict of interest were public knowledge in 1992, the District decided to wait until now to use those facts to unwind the 1992 transfer. In the meantime, both Camino Healthcare and the Camino Medical Group have entered into agreements, and co-mingled assets and operations, in reliance on the District's l992 agreements.

Our Concerns

Dr. Hoar's letter suggests Camino Healthcare's Board is incompetent and that the District Board is better able to govern the Hospital. It would be more accurate, however, for Dr. Hoar to state that the District Board and the Camino Healthcare Board have very different philosophies regarding the health care system.

One fundamental problem plaguing our community's health care system is that two separate boards of directors each with its own separate beliefs regarding health care‹are attempting to govern El Camino Hospital. We do not feel that Camino Healthcare or its community are best served by this situation.

Despite its statements to the contrary, the District gave itself significant powers over Camino Healthcare when it unilaterally created Camino Healthcare in 1992. In addition, by keeping $3 million per year of tax revenues (this money does not go to Camino Healthcare), the District has the resources to impede our decisions and activities. For example, the District's lawsuit has effectively precluded us from hiring a new CEO, has caused our early repayment of $30 million of debt, and has disrupted the implementation of our business plan. In our opinion, the current dual governance structure between the District and Camino Healthcare does not allow this Board to properly operate Camino Healthcare, El Camino Hospital, the Hospital-physician alliance and/or the community's health care delivery system. For this reason, we have instructed our legal counsel to investigate all possible resolutions of the current lawsuit, including the possible return of the Hospital to the District on terms that are acceptable to the District, Camino Medical Group and ourselves.

One additional problem is that our health care system is facing enormous new pressures. Reimbursement rates (the amount received by hospitals and physicians for providing health care services) are decreasing, and significant new competitors (such as Columbia/HCA) are moving into the South Bay market. In addition to these external forces, we are faced with internal problems such as how to treat all physicians in our community in a fair and suitable manner. There are no easy solutions to these complex problems.

With this background, we address the allegations in Dr. Hoar's letter.

The District's Intent in Filing Suit

Dr. Hoar's letter claims that the District did not initiate its lawsuit for the purpose of regaining control of the Hospital, and that the District had no choice but to file the lawsuit against Camino Healthcare because the 1992 agreements "grossly failed to protect the District's rights." First of all, we do not understand how the District could possibly: (1) file a lawsuit which, if successful, almost certainly gives back the Hospital to the District, and (2) at the same time claim that the District did not intend to regain control of the Hospital.

In addition, the District did have a choice. The District claims it had to file the lawsuit because certain terms in the 1992 agreements are unfair to the District. But the District had alternatives to filing this costly lawsuit. It could have approached us and revised those terms. The District has never asked us to revise the 1992 agreements! This Board always has been, and still is, willing to revise the 1992 agreements to address any valid concerns of the District even though the 1992 agreements were unilaterally developed by the District.

The lawsuit clearly indicates the District's intent to take back the Hospital. The current District Board has continually criticized our decisions regarding the Hospital-physician alliance and the Hospital's operations. The District apparently believes that it has found a way to legally challenge us and take back the Hospital, based on an allegation that the District's own officers might have had a technical conflict of interest in 1992. Based on this, the District chose to sue Camino Healthcare to take back the Hospital instead of asking Camino Healthcare to revise documents that the District considers unfair.

Losses

Camino Healthcare's losses for last year approximate those stated in Dr. Hoar's letter. However, the letter's incomplete presentation of the facts is misleading.

Dr. Hoar's arguments appear strong because he consistently fails to mention critical facts. The letter does not mention that there is a significant difference between operating a hospital and operating a much more complicated organization that merges the dissimilar operations of a hospital and physician practice. The letter also fails to mention that Camino Healthcare's alliance with Camino Medical Group presents significantly greater organizational complexity and financial stress than the operation of a governmental hospital which is subsidized by tax dollars. The Hospital's alliance with Camino Medical Group is effectively a start-up business, not just a continuation of hospital operations. Most start-up companies in America (including almost all Hospital-physician alliances throughout the country) incur operational losses in their first few years, and Camino Healthcare is no different.

In fact, the operational losses in Camino Healthcare were anticipated for the first few years of the Hospital-physician alliance. There are several known reasons for these losses. For example, Camino Healthcare has embarked on the expensive task of upgrading its systems and integrating physician practices, while competing in an increasingly competitive market that pays less while demanding more from Camino Healthcare. Camino Healthcare has also funded the expansion of physician services to the community (such as the West Valley Medical Clinic and the other clinic sites).

We should also note that Camino's losses are decreasing. Operating losses for 1995 approximated $18 million; Camino Healthcare's budgeted operating losses for fiscal year l996 are $11.4 million. After seven months of operations this fiscal year, however, Camino Healthcare has reduced those budgeted losses by approximately $4 million. Thus, not only are losses budgeted to decrease each year, but we are reducing those losses quicker than expected. We should also note that operating losses are offset by our investment income (thus, net losses for fiscal year 1996 are budgeted at $2.5 million‹almost $9 million loss than the $11.4 million operating losses).

Finally, we note that the District is quick to attack us for our operating losses, but is likewise quick to attack us when we implement actions necessary to reduce those losses. This highlights the problem of having two boards (each with a different vision) that govern the activities of Camino Healthcare.

Dr. Hoar's letter states that the District transferred approximately $100 million in cash to Camino Healthcare in 1992. This is misleading. Although $100 million was transferred to Camino Healthcare from the District, Camino Healthcare had borrowed $32 million from a bank, and transferred that money to the District (at the same time it received the $100 million from the District) so the District could pay off its tax-exempt bonds. Thus, the net cash transfer from the District to Camino Healthcare was $68 million.

At the same time, Camino Healthcare also assumed approximately $50 million of the District's liabilities applicable to the facilities. In addition, Camino Healthcare agreed to indemnify the District for all of the District's known and unknown liabilities.

Return of Cash

Dr. Hoar's letter states that, upon termination of the Ground Lease, the District will not receive Camino Healthcare's cash. The documents (created by the District) do not address this issue because there was uncertainty in 1992 as to how much cash should be appropriately returned to the District if the Ground Lease terminated upon expiration of the lease's term. If the "unfair terms of the Ground Lease" are truly the reason for the lawsuit (as the District claims), Camino Healthcare is willing to modify the 1992 agreements and return the cash attributable to the Hospital as part of an overall settlement of this dispute.

Liability for Debt

Dr. Hoar's letter claims that the District must assume Camino Healthcare's debt upon termination of the Ground Lease. This statement is often made by District directors as a primary example of how the 1992 agreements are unfair (and why the District had no choice but to sue Camino Healthcare). Unfortunately, this assertion is inaccurate and misleading.

If Camino Healthcare defaults on the Ground Lease, the District has several alternative remedies available to it. The 1992 agreements specifically give the District the option of terminating the lease or retaining the services of a management company to operate the Hospital until the breach has been cured (Camino Healthcare must pay the costs of the management company). If the District chooses to retain a management company, the District is not required to assume Camino Healthcare's debt. If the District chooses to terminate the Ground Lease, however, it is then required to assume the debt. We are informed this provision was necessary for Camino Healthcare to obtain certain financing.

If the Ground Lease terminates for any reason other than Camino Healthcare's default (for example upon expiration of the lease), the District is not obligated to assume Camino Healthcare's debt.

Although we feel that the District has misrepresented the contents of the 1992 agreements in an attempt to justify its lawsuit, Camino Healthcare is willing to discuss and, if appropriate, revise the 1992 agreements to address the District's concerns as part of an overall settlement to this dispute.

Confidential Information

The District created Camino Healthcare in a manner that would maintain the confidentiality of Camino Healthcare's arrangements with physicians. There were several good reasons for this decision. First, certain information must remain confidential so that our competitors (who do not release their confidential information to the public) do not gain an unfair advantage over us Second, the District was informed in 1992 that, as a practical matter, physicians (who operate private practices) would not be willing to create an alliance with the Hospital unless the physicians' financial arrangements could be kept confidential. Thus, the District established Camino Healthcare, in part, to help keep arrangements with physicians confidential. The 1992 agreements balanced this need for confidentiality against the public's interest in information by creating Camino Healthcare as a private nonprofit corporation (so that private financial information would remain confidential) that releases its audited financial information each year (so that the District and public could have broad oversight over Camino Healthcare's activities).

For these reasons, nothing in the l992 documents require Camino Healthcare to disclose any private financial information to the District. Now, the District is attempting to undo its original decision and obtain confidential information after Camino Medical Group and other physicians relied on the District's implicit promise of confidentiality. Ironically, the District is attacking Camino Healthcare and this Board for doing what the District created us to do.

The District's Cooperative Attitude

Dr. Hoar's letter states that the District has asked Camino Healthcare for "certain essential information" necessary for the District to "engage in a meaningful discussion of the matters implicated by the suit." Generally, Dr. Hoar's letter portrays the District as reasonable and cooperative.

It is informative to review the list of documents requested by the District, and ask oneself whether the list is reasonable or even related to the lawsuit. The District's written demand for documents includes: all documents, letters, words, pictures, memoranda, reports, exhibits, drawings and telephone message slips that "reflect, refer or relate to any agreements of any kind whatsoever" by and between Camino Healthcare and Camino Medical Group and/or Camino Medical Group's predecessor physician organizations. This same incredibly broad language is used to ask for seemingly every document in Camino Healthcare's possession, including most federal and state tax documents, all bond and loan documents, communications with underwriters, all bookkeeping and financial records, corporate and business records, insurance records, employment records, information systems documents and pension plan information. In addition, the District's document request requires Camino Healthcare to submit all bills, invoices, canceled checks, correspondence, memoranda and notes pertaining to a host of various arrangements with Camino Medical Group and/or its predecessor organizations.

None of the District's document requests are relevant to the District's allegation of a conflict of interest. The District's lawsuit pertains to an alleged conflict of interest by District officers in 1992. A review of the District's document request reveals the District's desire to review the 1994 Camino Medical Group transaction and hospital operations. These items are not related to the "matter implicated by the suit" (as Dr. Hoar's letter claims).

Camino Healthcare's Audited Financials

Dr. Hoar's letter complains that Camino Healthcare did not provide its most recent audited financiaIs to the District for nearly four months after Camino HeaIthcare received it from the auditors. The letter speculates "one explanation for the delay is the alarming financial performance [of Camino Healthcare]..." This statement implies dishonesty by the Camino Healthcare Board.

We assume that Dr. Hoar and his attorneys were simply unaware of the standard approval procedures for public release of an audit. These standard procedures are followed by both Camino Healthcare and the District itself.

The procedures require auditors to chose a "cut-off date" for their report and use that date (in this case, August 25) as the signature date of their report. Auditors present an unsigned draft audit to management for review and comment. After this, a copy is presented to the finance committee at its next scheduled meeting (Camino Healthcare received its copy in the latter part of September). The report is then submitted to other committees for review and revision, as appropriate (this occurred during the month of October). The report is then sent to the corporation's Board of Directors for approval before it is publicly released. In the present case, the report was sent to this Board toward the end of October. Unfortunately, we did not hold our November meeting. Consequently, we did not approve the audited financials until our December 14 meeting, we then delivered the report to the District. Board approval of an audit is standard procedure before its public release.

Attorney General's Letter

Dr. Hoar's letter suggests that Mr. Larsen, the Assistant Attorney, supports or encouraged the District's lawsuit against Camino Healthcare. Unfortunately, Mr. Larsen was quoted out of context. Fortunately, Dr. Hoar attached a copy of Mr. Larsen's letter.

Mr. Larsen's letter clearly limited itself to explaining the District's options to the District. In fact, the letter states: "the purpose of this letter is to summarize the law and remedies available to the El Camino Hospital District Board, individual tax payers, and the district attorney, if such violations occurred." His letter in no way can be taken as expressing a conclusion, or even a belief, that there was a violation of the conflict of interest laws in 1992. Nor does the letter endorse the present lawsuit.

Washington District Hospital

For every apparent success in today's health care environment, (such as the Washington District Hospital situation cited by the District), there is a failure (such as the Sequoia District Hospital reported in the attached newsclipping). The issue is not what works or doesn't work in other communities. The issue is what works in our community. The truth is that the dramatic changes occurring in the health care industry (including in our community) make it impossible to state that there is one certain answer for El Camino Hospital. The District Board has its beliefs (i.e., return to the governmental model that worked well in the past) and we have our beliefs (i.e., the Hospital should seek a comprehensive health care delivery system if it is to succeed in the future).

Next Steps

Preliminary, we note that many good people have been caught in this unfortunate situation. We feel that Dr. Hoar and Dr. Curatola were both unfortunate to have joined the District Board just as the 1992 agreements were entered into. To be fair, it is unlikely that either of them had the necessary time to fully comprehend those documents. Likewise, other Board members such as Dianna Adair and Dale Brown (Brown resigned rather than participate in the District's decision to sue Camino Healthcare) have selflessly contributed to their community in support of Camino Healthcare (and in opposition to the decisions of the other District directors). In addition, the physicians of Camino Medical Group, who created an alliance with Camino Healthcare assuming that the 1992 agreements constituted a commitment by the District, now find themselves caught in the uncertainty of the present lawsuit. Most important, the community is left with a health care system stagnating in dispute.

We seek to resolve this dispute as quickly and responsibly as possible. You should know that we are currently taking the following steps:

1. Pursue Negotiations. We are pursuing negotiations with the District and Camino Medical Group to resolve this dispute. We are doing this for several reasons. First, we believe the current relationship between Camino Healthcare and the District is dysfunctional. The 1992 agreement, created by the District, give the District too much power over how Camino Healthcare is operated. Those agreements permit the distracting attacks that have characterized the District's actions against Camino Healthcare. This makes it impossible for us to make the difficult decisions that are necessary for Camino Healthcare to be successful. Second, the District Board has over $9 million of tax revenues to attack our every decision (for example, the District is currently using some of that money to bring the current lawsuit).

We would prefer to enter negotiations with the District in which the 1992 agreements are revised (to address the District's concerns and the dual-governance problems mentioned in this letter), but the District has indicated it will not pursue these discussions with us. Thus, we have no choice but to explore negotiations with the District for the return of the Hospital. If we can reach an agreement that serves the community and Camino Healthcare's best interests, we will adopt that solution (even if it includes returning the Hospital to the District). For these reasons, we have authorized our legal counsel to explore all available options to resolve the current dispute with Camino Medical Group and the District. We are also willing to participate in the mediation advocated by the Hospital's medical staff.

Examine the District's Conflict of Interest. As we proceed to resolve this dispute, it is important that the resolution be legal. I here have been allegations made within the community that the District's vote to sue Camino Healthcare is void because certain District directors had a financial conflict of interest in their vote to bring the lawsuit. We do not know if this is time, but we do not want anyone to bring yet another legal action against Camino Healthcare because we settled a lawsuit which was not proper]y brought by the District. Therefore, before we finalize any decision, we have instructed our attorneys to ask the court whether any of the following interests are a legal conflict of interest that invalidates the District's decision to sue Camino Healthcare or settle the suit:

a. Allegedly, two of the physician directors on the District's Board have practices that are dependent economically on the Hospital. We have been informed that these physicians might benefit more from a District hospital than from the Camino Healthcare-Camino Medical Group alliance model.

b. One of the District directors is a physician assistant who owns a health care business that may compete with Camino Healthcare's occupational health business.

One newly appointed director is the husband of a physician who was a shareholder of Camino Healthcare Medical Group's predecessor (i.e., Sunnyvale Medical Clinic), and has been a vocal critic of Sunnyvale since her departure. She has also been a vocal critic of the Camino Healthcare-Camino Medical Group alliance since its inception. It is not clear whether the wife of this Director is financially affected by the Camino Healthcare-Camino Medical Group alliance. Although this director did not vote on the current lawsuit, he may be precluded from voting on accepting any negotiated resolution.

Again, we do not know whether the vote of these directors (in the past or in the future) to sue Camino Healthcare, to break up the Hospital-physician alliance, to return the Hospital to a District model, and/or to accept a negotiated settlement constitutes a conflict of interest in violation of California law. However, we are certain that the District will want to join us in definitively determining whether the District's current action (i.e., bringing the lawsuit against Camino Healthcare) is a violation of California's conflict of interest laws before we finalize any settlement. We must also determine which District directors may lawfully negotiate a settlement.

3. Inform the Public. From the beginning, we have felt caught between our legal duty to keep information confidential (both for competitive and contractual reasons) and a desire to keep the public informed regarding our activities. Although we have held numerous meetings between ourselves and the public or community physicians, we often wanted to do more. The major changes that are now being contemplated for the community's health care system require that the public be informed before we take action. To this end, we would like to applaud the League of Women Voters for keeping the public informed of the activities of Camino Healthcare. In addition, it is our commitment to release to the public a comprehensive explanation of our perspective of Camino Healthcare and its activities since inception.

Conclusion

We thank you for allowing us this response, and hope that you have had an opportunity to review the letter written by Mr. Billy B. Russell. El Camino Hospital District Director Emeritus, 1956 1992 (a copy is attached). It is our goal to act as expeditiously and responsibly as possible to end the current lawsuit against Camino Healthcare. If you have any additional questions, please feel free to contact Chairperson Lynn Briody.

Very truly yours,

The Volunteer Community Members of the Camino Healthcare Board of Directors

Vernon Anderson, co-founder of Silicon Graphics
Lynn Briody, former Mayor of Sunnyvale
Norma Melchor, R.N., past President of El Camino Hospital District Board
Carol Proffitt, member of the El Camino Hospital Foundation Board
Doug Usher, President of Idevco, former President of the El Camino Hospital Foundation Board
Jim Wilson, former President and Chief Operating Officer of Syntex Corporation

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