Sutter's Empire Strikes Back

Sutter Health has built its medical empire in many ways, but one of the more common involves the lease of hospitals from governmental entities known as public health districts. Such leases are often initially described in public service terms. The argument usually goes something like this: By leasing facilities to a nonprofit health care provider, a public health district can offer high-quality health care and save taxpayers money and gain protection from the vicious competition of the modern health care arena.

But two Northern California public health districts recently filed lawsuits to void leases with Sutter Health and regain control of formerly public hospitals. Allegations of conflict of interest are at the core of both suits. In each case, the government claims the terms of the lease favor Sutter, and harm taxpayers, to an inordinate degree.

The Marin Health Care District, which includes Marin General Hospital in Marin County, and the Peninsula Health Care District, which includes Mills-Peninsula Health Center and Mills-Peninsula Medical Center in San Mateo County, both filed legal complaints in 1997. The districts allege that the leases of their facilities to nonprofits were poisoned by conflicts of interest dating back to the mid-1980s.

The Marin and Mills-Peninsula cases reach back to their original leases in 1985, which were privatizations of the district hospitals. In both cases, the districts leased their hospitals to nonprofit health systems that later merged with Sutter Health. In both cases, key participants representing the public districts in the lease negotiations emerged, later, as employees for the new nonprofit entities created as a result of those deals.

Marin General Chief Executive Officer Henry Buhrmann and Charles Mason, former head of Mills-Peninsula, each led his respective hospital district into a privatization deal. Each subsequently became the top executive of the nonprofit that leased the formerly public hospital.

Quentin Cook -- an attorney formerly with the San Francisco law firm of Carr, McClellan, Ingersoll, Thompson & Horn -- represented the districts in both deals. Cook became the attorney for the nonprofit health care organizations created in those deals to lease the once-public hospitals.

In their lawsuits, the districts allege that Cook and the CEOs violated a conflict-of-interest law preventing government employees from participating in transactions in which they stand to gain from the outcome. Therefore, they argue that the 1985 hospital leases, which are still in place, are invalid.

Both districts allege that those leases heavily favor the nonprofits -- now part of Sutter -- leaving the public with little say in health care issues and virtually no income from the hospitals. "There's a mission that district hospitals have, and there's a mission that nonprofits have, and they are not the same," says Marin Health Care District Board Member Linda Remy. "District hospitals are the only form of organization for hospitals where the mission is to serve everyone in the community."

Mills-Peninsula and Sutter argue that there was no conflict of interest in the deals, that they were merely a way for the public hospitals to save money.

But the conflict allegations in the Peninsula suit do not deal solely with the original privatization. Some two years after it leased hospitals from the Peninsula Health Care District, the nonprofit Mills-Peninsula Health Services negotiated more favorable terms for its lease. Specifically, the nonprofit was allowed to receive credit against its $1.8 million in annual lease payments to the hospitals under lease for money spent on capital improvements and equipment.

When the new lease terms were negotiated, the president and treasurer of the nonprofit also were on the board of the public district. Essentially, they voted as members of a government body for better lease terms for their own private-sector employer.

Those votes became the subject of a 1995 investigation by the San Mateo District Attorney's Office. The matter was settled with an agreement: None of the nonprofit's employees could hold positions on the district's board; the DA's Office would not continue legal action against the nonprofit, or the two board members who had been under investigation.

Two years later, in June 1997, the Peninsula District filed a civil lawsuit to void the lease of its hospitals. Since then, things have gone from bizarre to downright comic.

During the course of the civil suit, it was discovered that Dr. Emmanuel Friedman, a member of the Peninsula Health Care District board of directors, is a founding shareholder in a physician's business that is financially dependent upon the nonprofit Mills-Peninsula Health Services, which is leasing the district's medical facilities. Legal filings show that Friedman was also on the finance committee of the nonprofit. Further, Friedman did not list his financial interest in the medical group on the financial disclosure form that all elected officials must file.

The Peninsula civil suit seems to get stranger with each filing of court papers. The nonprofit Mills-Peninsula now is arguing in court that its 1995 settlement with the District Attorney's Office prevents the hospital district from suing over the alleged conflict of interest. The District Attorney's Office, which is not a party to the civil suit to void the lease, maintains that the prior settlement applies only to criminal, and not to civil, actions.

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