CPMC's new numbers threaten St. Luke's and the mayor's deal

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Is CPMC really committed to operating a rebuilt St. Luke's for at least 20 years?

Can San Franciscans trust California Pacific Medical Center (CPMC) not to shutter St. Luke's Hospital once the company gets what it wants from the city? And has the Mayor's Office, in its desire to please the business community and building trades, accepted and promoted a bad deal that doesn't adequately protect the city's interests?

Those are some of the questions that arose Monday during a hearing on CPMC's $2.5 billion, multi-hospital development proposal before the Board of Supervisors Land Use Committee when officials from the Mayor's Office revealed that the development agreement they negotiated with CPMC might not be good enough to keep St. Luke's open.

As we've reported, CPMC (a subsidiary of Sutter Health, a not-for-profit corporation that nonetheless has a well-earned reputation for profiteering and other bad corporate behavior) is seeking to build a 550-bed regional luxury hospital atop Cathedral Hill. In exchange, the development deal requires CPMC to rebuild St. Luke's, a seismically unsafe hospital in the Mission District that is relied on by many low-income San Franciscans (as well as the city, which would otherwise have to shoulder more of that burden at General Hospital).

After years of stalled negotiations between CPMC and two consecutive mayors, Mayor Ed Lee announced a deal in March that would have CPMC build a smaller version of St. Luke's (with just 80 beds) and agree to keep it open for at least 20 years as long as CPMC's operating margins didn't dip below 1 percent in two consecutive years.

Activists had criticized the deal as too small, too short, and without enough guarantees, but Mayor's Office officials have consistently said they were confident it was enough to keep St. Luke's from being shuttered. But now, based on new revenue projections offered by CPMC, even those officials have lost confidence in the deal and say it needs to be renegotiated.

“These new 2012 projections, while still showing CPMC will not breach the 1 percent margin, do not offer the same comfort level we previously had,” Ken Rich of the Mayor's Office of Economic and Workforce Development told the committee.

The news hit like a bombshell, shaking the confidence of even supervisors who strongly supported the deal, such as Sup. Scott Wiener, who called it a “surprising, critical piece of information” and said, “It's very, very important that this issue is quickly resolved.”

For supervisors who were already skeptical of the deal and CPMC – such as Sup. David Campos, whose District 9 includes St. Luke's – it was further evidence that this was a bad deal that needed more work before being brought to the board. The Planning Commission has already approved the project and the full board was scheduled to consider it in just a few weeks.

“What does that say about the way the negotiation was done?” Campos told us. “How half-baked can something be? What have we done to verify the numbers that CPMC gave us? And what does this say about CPMC?...If the numbers on St. Luke's aren't accurate, how can we trust the rest of what they're telling us?”

Yet during the hearing, when Campos tried to get reassurances from CPMC officials and requested that the board be allowed to review the company's financial records, he was rebuffed and belittled by CPMC attorney Pam Duffy – who later tersely apologized for her comments after Committee Chair Eric Mar criticized them as “insulting to the board.”

Campos had questioned Rich about why the city was relying on CPMC rather than independently assessing the numbers. “Maybe if you had done an audit, you wouldn't be in this position of being surprised by the numbers that were given to you,” Campos told Rich.

But Rich said “projections are guesses, we can't ever guarantee that they are right,” noting that CPMC had revised its revenue estimates downward for the years after St. Luke's would open (when it would be absorbing the high costs of construction), making its profit margin slimmer. “CPMC took a more conservative approach to forecasting the rate of increase in hospital charges as well as patient volumes in light of the greater uncertainty in health care finance,” Rich said.

So Campos asked whether the supervisors could review CPMC's data. Rich, who has reviewed it, replied, “The conditions under which we were shown CPMC's projections is that those are confidential.”

Campos noted that it is the board's job to review and approval this deal to determine whether it's in the city's best interests, which shouldn't simply involve trusting CPMC. “Why should the executive branch of the government see those numbers but not the legislative branch?” he asked.
“It's really not our call,” said Rich, noting that he had no objections to the request.

But when Campos asked CPMC's Duffy, she offered a legalistic refusal, and when Campos tried to explain his reasoning, she said, “I heard your speech a moment ago” and added, “this isn't really a game of gotcha.”

When Campos said the board was simply exercising its due diligence over an important project. she said “nothing unusual or untoward has occurred here, and the suggestion that might be the case, I think it unfair.”

But Campos wasn't alone in wanting more reassurance from CPMC, who supervisors, labor leaders, and community activists have criticized for its secrecy and bad faith negotiating tactics with both the city and its employee unions.

“This announcement is shocking, on a number of levels,” Board President David Chiu said at the hearing, noting that he had met with CPMC officials just days earlier and they hadn't mentioned the new developments, instead assuring him that their operating margins were high and the deal protected St. Luke's. “It's not a great way to build the trust we'll need to move this forward.”

Rich said he had learned of the new numbers 12 days earlier, drawing a rebuke from Campos and others who said the supervisors should have been notified earlier. But Rich said that he was hoping that the problem would be solved through negotiations with CPMC before the hearing, but that talks over the issue have so far been fruitless.

“We would have vastly preferred to have an agreement in hand,” Rich told the committee, reassuring the supervisors that the Mayor's Office will not support the project until the St. Luke's issue is resolved to its satisfaction.

But Sup. Malia Cohen criticized CPMC as an untrustworthy negotiating partner. “CPMC has an interesting corporate culture,” she said, noting that the company has repeatedly misled supervisors and community leaders, accusing it of being “disingenuous in its negotiations.”

Chiu emphasized that this is a make-or-break issue: “This is an escape clause that could allow St. Luke's – and what St. Luke's means to the city – to not be operational. So this is an incredibly important question.”

Campos said this latest episode only added to his suspicion that CPMC will play games with its finances to shutter St. Luke's – whose construction must be completed before CPMC can build Cathedral Hill Hospital – once it gets the lucrative regional medical center that it really wants.

“How do we know they aren't transferring money out of CPMC into Sutter in order to shut down St. Luke's?” Campos said, adding that he wants to see a clear guarantee that St. Luke's will remain open as a full-service hospital. “This deal, as far as I'm concerned, is not ready for prime time.”

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