civus
Minutes

Committee Hearing, February 12, 2004

Philadelphia City Council Committee HearingsFeb 12, 2004

People mentioned

Names our system found in this transcript. Automatically extracted, so it can include anyone named in the record, not only officials or parties.

Organizations mentioned

Councilman Nutter

How long were you in that capacity?

Dr. Klasko

Since July of 2000.

Councilman Nutter

Where were you before that?

Dr. Klasko

I was the Chair of OB/GYN and the President of Lehigh Valley Physician Group at Lehigh Valley Hospital.

Councilman Nutter

How long were you there?

Dr. Klasko

I had been there since about 1982. I was a private OB/GYN physician originally and then I went into academic medicine, spent some time at Penn State. And then I came back to be Chair of OB/GYN and then went back to Wharton and then became President of a physician group.

Councilman Nutter

President of?

Dr. Klasko

Lehigh Valley Physician Group.

Councilman Nutter

So your time at MCP is from January '02 forward? 127 2/12/04 - COMMERCE - RES. 040046 At MCP, my office existed at MCP from January '02 to about July of 2003.

Councilman Nutter

And based on that time, your perspective is even prior to or during Allegheny that virtually no one could operate MCP in a superior fashion?

Dr. Klasko

From what I know about that hospital --

Councilman Nutter

Is there something wrong with the hospital?

Dr. Klasko

No. The hospital needs a whole lot of capital, even more than it has. It needs a significant amount of infrastructure. It's needed that for a while. And at least to this point, there hasn't been a period of time, other than that small period of time where there were financial reasons, mostly around the outliers, that it's been profitable. From what I understood, it was not a very viable entity even during the Allegheny times. That might not be true, but that's what I've heard.

Councilman Nutter

Mr. Chairman, that's all my questions, I think, at the moment -- I'm 128 2/12/04 - COMMERCE - RES. 040046 sorry. I do have one last one. So when you were informed on December 17, 2003, by Mr. Schaengold that Tenet proposed to close the hospital, did you agree with that decision?

Dr. Klasko

I didn't have --

Mr. Archibald

We weren't asked to agree or disagree with that.

Councilman Nutter

Hold on, Mr. Archibald. I asked Dr. Klasko.

Dr. Klasko

The reality is that the way the decision was presented to us is that someone external to Mr. Schaengold made a decision that the hospital was going to close. It was not a discussion. I did not have any basis to know whether or not that was a good decision or a bad decision. I knew it was a devastating decision for my faculty, my staff and the university. But I had no way of knowing if the business plan that was presented to restore MCP was a viable one or not. I was a proponent of that business plan.

Councilman Nutter

So do you support or oppose the proposed closure of MCP? 129 2/12/04 - COMMERCE - RES. 040046

Dr. Klasko

I support having a viable campus at MCP that can be run by someone who can run a hospital and run it well, and we would be happy to be a part of that. It's one of our clinical campuses.

Councilman Nutter

So now you're saying you do believe that someone could run that particular hospital, you just don't think that the people who are running it now can run the hospital?

Dr. Klasko

No. I don't know if somebody can make money running that hospital. I don't know if there's money from the State or the City that can make that happen. I don't know any of that. Assuming that the hospital can be run and capital is put into that hospital to make it into a good university hospital campus, that would be a great, great thing.

Councilman Nutter

Mr. Archibald, did you want to add to that?

Mr. Archibald

No. 24

Councilman Goode

The Chair recognizes Councilman Rizzo. 130 2/12/04 - COMMERCE - RES. 040046

Councilman Rizzo

That last exchange just peaked my curiosity. Could you explain the management level there? Who's who here? Are you his boss or is he your boss? Tell me how this works.

Mr. Archibald

The Dean reports to me.

Councilman Rizzo

I could tell when you told him not to talk. That's why I asked that question. So you're the Chief Executive.

Mr. Archibald

No. Constantine Popadoukas (ph) is the CEO of our corporation here at the College of Medicine. He is also the CEO of Drexel University.

Councilman Rizzo

And then you are?

Mr. Archibald

I report to him.

Councilman Rizzo

And the Dean reports to you?

Mr. Archibald

He does.

Councilman Goode

Councilman Rizzo, we assume Mr. Archibald was talking because he was not sworn in two weeks ago, and Dean Klasko was. Before we end with this panel, with 131 2/12/04 - COMMERCE - RES. 040046 respect to the notification given to you by Tenet, the closing of MCP and your relationship with Tenet with regard to the other five hospitals that it intends to continue to operate, I'm assuming you have made direct inquiries as to the financial health of those individual hospitals and those hospitals collectively?

Mr. Archibald

No, we have not made financial inquiries about those hospitals. When Tenet put out its release of the hospitals that they were retaining, they specifically mentioned in that release that they were going to retain the five remaining Philadelphia hospitals.

Councilman Goode

So you're assuming that the other five hospitals that they intend to operate, because they were not on the list, are in financially good condition?

Mr. Archibald

Once again, they specifically mentioned the Philadelphia region hospitals in their announcement of the hospitals that they were retaining and the reason that they were retaining them, because 132 2/12/04 - COMMERCE - RES. 040046 they believe all those hospitals were financially viable.

Councilman Goode

I understand that. You didn't answer my question. I'll ask it in a different way. You're not relying upon, after having only hours notice from Tenet about 9 the close of MCP, surely you're not telling us 10 that you're relying upon their press release 11 regarding the other hospitals nationwide that 12 will close and those within Philadelphia that will continue to operate? You're not relying upon that in terms of decisions that you make about your own livelihood, are you?

Mr. Archibald

I have an 18-year affiliation with respect to my livelihood, and it's attached to Tenet's --

Councilman Goode

Let me ask you a more direct question since you want to play around. Are you having any financial problems at all with your relationship with Tenet, outside of MCP?

Mr. Archibald

No. 133 2/12/04 - COMMERCE - RES. 040046

Councilman Goode

You have no 3 problems whatsoever?

Mr. Archibald

Nothing different with respect to Tenet has occurred with the other five hospitals.

Councilman Goode

No problems at Hahnemann?

Mr. Archibald

We provide services --

Councilman Goode

Like for instance, with your radiology services?

Mr. Archibald

We provide services inside the hospital. To the extent that we are not adequately reimbursed, we annually look at what our reimbursements are. We make a determination whether or not we're going to continue those services. Radiation right now is one of those services inside the hospital that we're not adequately reimbursed.

Councilman Goode

Since these hearings two weeks ago, you have in fact notified Tenet that you cannot adequately provide radiology services at Hahnemann because they're not fulfilling a financial 134 2/12/04 - COMMERCE - RES. 040046 obligation?

Dr. Klasko

No, that's not correct. What we have asked them to do, and we are working on a plan as we speak to effect this, is to take over the operations of this hospital-based service, which is, frankly, very common in many hospitals. In the hospital system I came from, we would routinely have discussions like this between the physicians and the hospital. The only thing that makes it news and requires paper is because we're two separate corporations. But the reality is what we're doing with radiology is asking them to take over the operational control, because right now we run a physician group, and they run the hospital. And you've heard enough testimony about how the communication between those two can be difficult. And in a hospital-based service, that is magnified.

Councilman Goode

Thank you, Dr. Klasko. Mr. Archibald, are you familiar with the statement, "DUCOM cannot continue to incur the 135 2/12/04 - COMMERCE - RES. 040046 financial losses associated with the radiology services it provides to HUH accordingly unless we are able to reach an agreement by which Tenet provides compensation that will at a minimum fully cover DUCOM's cost of providing services. DUCOM will, unfortunately, be unable to provide those services beyond 60 days from the date of this letter." In other words, April 4th 2004.

Councilman Goode

Can you explain that statement?

Mr. Archibald

It means that we're hoping in the next 60 days to work out a financial arrangement with Tenet with respect to these services. If we're not, on the 61st day we are expecting Tenet to be financially responsible for that department.

Councilman Goode

So there's no 21 potential shut down of service?

Mr. Archibald

Oh, no. Absolutely not.

Councilman Goode

So this statement is meant to convey what, in terms of your 136 2/12/04 - COMMERCE - RES. 040046 financial relationship with Tenet? They must take over?

Mr. Archibald

There are a number of things Tenet can do. They can take over the entire staff or they can pay us to continue to operate it. One of those two things have to happen. Or the third one is, they decide that they're going to not take over the staff and outsource the whole service.

Councilman Goode

Okay. Thank you. Councilman Nutter, you can call your next panel.

Councilman Nutter

Well, Councilman Goode, a question just as a follow-up. What caused this?

Mr. Archibald

We can no longer continue to operate hospital-based services where the cost of our service exceeds our reimbursements. That's what caused it.

Councilman Nutter

Did this just happen?

Mr. Archibald

No. We provide a lot of hospital-based services for Tenet, and 137 2/12/04 - COMMERCE - RES. 040046 they pay us for that. They don't pay us enough. There comes a point as an organization you have to stop doing it. In this particular area, we have to stop doing it or they have to change the way they're paying us.

Councilman Nutter

So if Tenet decides not to pay you, and in line with Councilman Goode's question, if they just decide not to pay anybody, would you not have radiology services at the hospital? You both immediately responded that, well, of course, there will be the service.

Dr. Klasko

Because there will.

Councilman Nutter

Why.

Dr. Klasko

Because this is literally just a recognition that the radiology service will be better run with having a single entity taking both the financial and operational risk. It's a more efficient way of handling it. Right now they have an administrator; We have an administrator. In most hospitals, again, because they're the same corporation, there is that financial and operational mesh. We're two separate 138 2/12/04 - COMMERCE - RES. 040046 corporations, so everything we do becomes sort of a deal that requires a piece of paper to occur. This is not unusual.

Councilman Nutter

How long have you been providing these services at Hahnemann?

Mr. Archibald

Probably since '98 when they came out of bankruptcy.

Councilman Nutter

And you've always had the dual administrator and all the other --

Mr. Archibald

In many hospital-based services.

Councilman Nutter

So for five years you've been running it this way, and now all of a sudden you've reached the tipping point and you say, "Well, we can't do it this way anymore"?

Dr. Klasko

No. It's not exactly like that. There are other services where we've changed the way that we've -- who employs the doctor and who takes the financial and operational risk. At any given time we're looking at how best to deploy our resources for our three missions. 139 2/12/04 - COMMERCE - RES. 040046

Councilman Nutter

Let me ask this question. I'll go back to an earlier example. You talked about the OB/GYN from South Philadelphia. Now, when that idea was put forward and it was accepted, and then apparently it basically didn't work out the way you thought it would, who has the financial responsibility for the decision that was made, the decision that did not work out. I'm assuming the doctor probably had a contract with you or Tenet. Now the patients aren't being referred. Is the doctor still there? Even if the doctor does not continue to perform, somebody's got to fulfill the obligations of the contract, right?

Dr. Klasko

The doctor is still there. In that particular doctor's case, he had been a private physician. He came on pretty much very similar to still being a private physician. The patients that I said, about 40 percent of his patients, believe it or not, actually did come up to MCP, and the other 60 percent decided that they wanted to go to Graduate. So he did some of his cases at 140 2/12/04 - COMMERCE - RES. 040046 Graduate. He did some of his cases at MCP.

Councilman Nutter

If those 60 percent don't come, there's in essence a loss of revenue that you anticipated when the decision was made to bring that doctor on.

Dr. Klasko

There's a loss in hospital revenue.

Councilman Nutter

Hospital revenue. Who eats the cost?

Councilman Nutter

But you made the decision?

Dr. Klasko

No. Tenet and we made the decision.

Councilman Nutter

So you both make a decision, but if it doesn't work out, it's on Tenet?

Dr. Klasko

I think it depends on your definition of not working out. We had no 21 gynecology. We brought in a great gynecologist, who, from the point of view of bringing those South Philadelphia patients, entrepreneurially didn't work. But, you know what, he was seeing patients in the Center for 141 2/12/04 - COMMERCE - RES. 040046 Women's Health. He was seeing patients in Andorra. He was seeing patients in the clinic. So while financially it didn't work out, for that period of time that he was there, we actually had really excellent gynecology covered. So I would argue that from everything you're asking about, which is how do we take care of that community, it was a success, and both Tenet and Drexel subsidized that success.

Councilman Nutter

Okay. Let's go back to the statement that the Chair read into the record. What happens in the radiology situation on day 61 if you don't have an agreement, move the piece of paper on this particular issue?

Dr. Klasko

If we don't have an agreement, we will continue to provide radiology services. All these faculty are under our employ.

Councilman Nutter

Dr. Klasko, wait a minute. You wouldn't go to the extent of notifying the staff of this decision, and other people wouldn't put statements in 142 2/12/04 - COMMERCE - RES. 040046 writing, that if we don't have -- "DUCOM will, unfortunately, be unable to provide those services beyond 60 days from the date of this letter," i.e., April 4th, 2004.

Dr. Klasko

The information you haven't gotten --

Councilman Nutter

I can only read English. So what it says is, if we don't have something by day 60, we have nothing on day 61. You're saying, life will go on?

Dr. Klasko

We met with the staff today, both the CEO of the hospital and I, and we basically set out a plan whereby we would be able to transfer that operational risk, and we made it very clear if that doesn't happen immediately, that we will continue the current arrangement. What you've got a copy of is literally basically a statement that we want to transfer the financial and operational risks to Tenet in 60 days.

Councilman Nutter

You're trying to get their attention?

Dr. Klasko

It's something that 143 2/12/04 - COMMERCE - RES. 040046 would happen literally on a monthly basis if we were the same corporation. That requires a letter like this because we're different corporations. In my old job, I would have said to the CEO of the hospital, "You know, we really need more money for radiology because malpractice is up." And he would have said, "All right. Well, I'm not sure I want to do that." I would have said, "No, I'm really serious. We really need it." And we would have that discussion. With our relationship with Tenet, anything that initiates that discussion --

Councilman Nutter

And the affiliation agreement requires you to send nasty letters to your partner to get them to do something? Is that the operation?

Dr. Klasko

It requires us to make clear what we would like to have happen and what our intentions would be.

Councilman Nutter

Okay. Must be a lot of fun down there, boy. 144 2/12/04 - COMMERCE - RES. 040046 Mr. Chairman, thank you very much.

Councilman Goode

Thank you, Councilman. Gentlemen, will you please remain here? We're going to ask the Tenet panel to please approach the witness table again. Could we actually ask Mr. Thomas Morgan to approach the witness table, as well? For the record, let me note that we've been joined by Councilwoman Jannie Blackwell. Mr. Morgan, please state your name for the record and proceed with your testimony.

Mr. Morgan

My name is Thomas Morgan. I represent my community as a Committee Person of the 12th Ward, 11th Division. Also, I am a dialysis patient at MCP. DCI is the unit in the back of the hospital that houses the dialysis patients. Now, DCI has built the building -- I'm not sure how this breaks down -- has built the building on land that's owned by Tenet. The patients in the hospital, in dialysis, we're 145 2/12/04 - COMMERCE - RES. 040046 concerned because we're one of the units in the City whereas if something happens to you in dialysis, you have the doctors, radiology, surgeons, everybody right there to help you to live. If you go to another unit that does not have these services, or the hospital where a doctor comes in once a month, once a week, a nurse comes in once a week, and there's only technicians there, your chances of survival if there's a problem are quite less. Right now I believe in my unit, if something happens in my unit today or tomorrow, they have to call 911 and take us somewhere else. You know, I don't know if any of these people that run this understand any of this. I don't mean to break up.

Councilman Nutter

It's okay. It's all right.

Mr. Morgan

It seems like you're playing with my life. Drexel, Tenet, it seems like you're playing with our lives. I got a family just like you. I own a home. I live right. For me to come in here and seem like we're playing romper room, you know, questions 146 2/12/04 - COMMERCE - RES. 040046 and answers and you don't answer nothing. I'm trying to live, man. I represent 130 people, maybe 40 in this dialysis unit. Just like I'm sitting next to you now, somebody is sitting right next to me could pass away tomorrow that I have known for some time. I've been doing this thing now for four years. I work every day just like you. You understand? And I go to my dialysis treatment three times a week, four and a half hours. Get up and go back to work. And to hear this -- and I'm a taxpayer. You wouldn't want to see me in a dark alley. You understand? You would not want to see me in a dark alley. We've got some good doctors down there. Many of them have been represented here. Many of them have testified here, many of the nurses, maintenance, everybody. It's all one big family. You need to stop and think about some of the things you're doing before you just shut down a hospital. You're killing a community. I don't know if it matters, but that's all I have to say, sir. 147 2/12/04 - COMMERCE - RES. 040046 (Applause.)

Councilman Nutter

Thank you very much, Mr. Morgan. I really appreciate you coming in and sharing your story. Thank you. Mr. Schaengold, Mr. Leonard. From the previous panel, we've now become aware of a document generally referred to as an affiliation agreement between Tenet and Drexel Medical School. Tell us about this agreement. What does it cover? And then I may have some additional questions.

Mr. Schaengold

The agreement contains a confidentiality clause that would prevent me to discuss it in detail, other than to say it governs the partnership between Tenet and Drexel.

Councilman Nutter

Based on the previous questioning of Dr. Klasko and Mr. Archibald, and in direct response from a question from the Chair, the issue was raised as to the waiving of that portion of the agreement, which would allow for transmittal of the agreement, as you've transmitted other information that had confidential components 148 2/12/04 - COMMERCE - RES. 040046 to it. I'm now making the request, can we have the agreement, and as a regular request that we've made for other items of information in the context of these hearings?

Mr. Schaengold

I will relay that request to my company. I don't have the authority to waive that confidentiality, but I will forward your request.

Councilman Nutter

And I appreciate that. Let me ask this question. Is the confidential nature of the agreement related to financial data or the terms and conditions of payment for various services back and forth, or are there other operational components that also are covered by this confidentiality agreement.

Mr. Schaengold

All of those items are in that affiliation agreement.

Councilman Nutter

Well, I have made the request with the Chair's approval. When would you know what the answer would be, which is basically a yes or no question? When 149 2/12/04 - COMMERCE - RES. 040046 would you know whether or not you can share the affiliation agreement?

Mr. Schaengold

I think within the next to 72 hours, having a weekend 6 intervening. But by Monday we certainly would 7 be able to provide you with a response. 8

Councilman Nutter

I appreciate 9 that. 10 Explain to the Committee as the 11 party that decided to propose the closure of 12 the hospital, recognizing that there are 13 medical school students and others who derive 14 benefit as a part of their educational program, 15 what are the costs of, I guess, giving such 16 short notice? Is there a two-year notice 17 requirement with regard to closure of a 18 hospital? 19

Mr. Schaengold

Yes. And in lieu 20 of that two years, then we have to reimburse 21 for costs incurred. 22

Councilman Nutter

And when the 23 decision was made to close the hospital -- and 24 I'm sure the individuals who are involved in that discussion or even yourself being aware 150 2/12/04 - COMMERCE - RES. 040046 of the affiliation agreement and the direct and immediate impact, not only on MCP, but on Drexel Medical School, and recognizing that clearly you are going to violate at least a provision with regard to the two-year notice which then would obligate you to make certain additional expenditures, what was the value that was placed on the amount of money that Tenet would have to expend for having violated the two-year notice agreement?

Mr. Schaengold

We did not violate the two-year notice agreement. In lieu of two-years' notice, we are responsible for costs incurred.

Councilman Nutter

Well, with every respect, I would have actually anticipated that type of answer actually from your counsel. You have a two-year notice obligation, correct, under the agreement?

Mr. Schaengold

Correct.

Councilman Nutter

Did you provide two years' notice?

Mr. Schaengold

No. 25

Councilman Nutter

Therefore, 151 2/12/04 - COMMERCE - RES. 040046 you're in violation of that. And I am sure in another part of the agreement, the cure for violating that is that you cover all costs, correct? You only put a provision in that says you're required to give two-years' notice because someone actually was serious that they wanted two years' notice, correct?

Mr. Schaengold

I'm really not comfortable discussing the contents of the agreement until I have received approval to waive confidentiality.

Councilman Nutter

I understand that. I'm not trying to talk about the entire agreement. There's testimony on an open record that you have a two-year notice requirement. I asked you was there a two-year notice requirement; you said yes. So I'm confining myself to that area. But I can't allow a situation where you say, "We didn't violate the two-year notice agreement because we've agreed to pay X-amount of dollars." That's just an incorrect statement.

Mr. Schaengold

Well, it's not a 152 2/12/04 - COMMERCE - RES. 040046 violation. The agreement gives us the options of a two-year notice. Or if we don't provide a two-year notice, we have to then cover the costs incurred. It's not a violation of. It is options of.

Councilman Goode

So you intend to pay $50 million?

Mr. Schaengold

We don't know what the total costs will be.

Councilman Goode

Do you intend to pay whatever the costs may be?

Mr. Schaengold

We intend to pay the costs that are incurred by Drexel as a result of the closure of MCP.

Councilman Goode

At what point do you plan on discussing with Drexel what those costs might be? In other words, do you accept the statement that those costs might be $20 million by June 30th of this year and $50 million going into next year?

Mr. Schaengold

I accept that those are potential costs that we may have to incur in the event that they are unable to find 153 2/12/04 - COMMERCE - RES. 040046 employment and relocate their physicians and staff.

Councilman Goode

I'll ask the question again. At what point will you have a conversation with Drexel about the reality of what those costs are at first leading up until June 30th of this year?

Mr. Schaengold

We have had those conversations. They have shown me an estimate of what they believe their salaries and expenditures will be for the remainder of their academic year.

Councilman Goode

Up until June 30, 2004?

Mr. Schaengold

Correct.

Councilman Goode

You have agreed to pay those costs?

Mr. Schaengold

We have agreed to cover the costs that they incur as a result of our decision to close MCP.

Councilman Goode

But they showed you a list of potential costs up until June 30, 2004?

Mr. Schaengold

Correct. 154 2/12/04 - COMMERCE - RES. 040046

Councilman Goode

Do those costs seem unreasonable.

Mr. Schaengold

The cost represents the current salaries that they're paying their staff.

Councilman Goode

During this academic year. I got that, Mr. Schaengold.

Mr. Schaengold

I assume they are accurate.

Councilman Goode

So what was your communication with Drexel with regard to that list?

Mr. Schaengold

I have made it clear to the leadership of Drexel that we will honor our commitments under the affiliation agreement.

Councilman Goode

With no direct response to the list that was given you?

Mr. Schaengold

No. The list just represented all the physicians and staff that they currently employ and their salaries and benefits associated with those individuals.

Councilman Goode

And there was a dollar amount? 155 2/12/04 - COMMERCE - RES. 040046

Mr. Schaengold

Yes. And we don't know how many will be here throughout the next several months. But we have an inventory of their staff.

Councilman Goode

I will defer to Councilman Nutter to continue his questioning. Somewhere between your statement and Dr. Klasko's statement, someone is not telling the full truth about whether there's an agreement to pay wind-down costs and whether there is a specific agreement to pay wind-down costs at least until June 30, 2004. The Chair recognizes Councilman Rizzo first.

Councilman Rizzo

Thank you. In reference to the affiliation agreement, your decision to close the facility, the hospital, was made premature of the two years. If you would keep the institution open on what you know today for two years, you would not be in violation; is that right?

Mr. Schaengold

We're not in violation now. There are two alternatives. I can give you two years' notice and I don't 156 2/12/04 - COMMERCE - RES. 040046 incur any costs, or I can close it right now and I incur the costs that they will experience as a result of that decision.

Councilman Rizzo

I don't know where I learned the word "violation," but I'll take it out of my vocabulary. But I think I learned it from that desk where you are sitting. If you actually notified and took advantage of the full two years, what do you think your losses would be? You're talking the potential of $50 million. If you kept it running for two years and did not trigger what you just described, what do you anticipate your losses would be.

Mr. Schaengold

If you look at the losses at MCP for fiscal year '03 and the information that we've presented and I've stated before, we've incurred losses of over $30 million at MCP. And based on information available to me, we could very well be incurring the same amount every year going forward, excluding any investment in capital. As you may recall from my previous 157 2/12/04 - COMMERCE - RES. 040046 testimony, the decision to close MCP was based on the fact that we could not sustain those kind of losses without jeopardizing the well-being of the five remaining hospitals.

Councilman Rizzo

Very good. Thank you. Thank you, Mr. Chairman.

Councilman Nutter

Mr. Schaengold, let's talk about that. First of all, I would think that you would have had to factor in to either your business plan -- or it must have come up in the course of discussions between December 10th and December 12th, 2003, someone must have analyzed what you anticipate your exposure to be on wind-down costs related to the option to not provide two years' notice and to cure it by paying costs incurred during the wind down; is that correct?

Mr. Schaengold

Correct.

Councilman Nutter

What was the estimate that the company had at the time that was used as a part of the closure decision of anticipated exposure to close the hospital without the two years' notice? 158 2/12/04 - COMMERCE - RES. 040046

Mr. Schaengold

Approximately $50 million.

Councilman Nutter

Had you had a conversation with the Drexel medical people to determine that?

Mr. Schaengold

No. That was based on our estimate of the number of physicians working at MCP and what we projected to be a reasonable wind-down period.

Councilman Nutter

So without a discussion with the Drexel medical school people, and having left them at some point in time along the way believing that more investment was going to be made in the hospital and possibly increased services, you estimated on your own, two separate entities, a $50 million wind-down cost, which is exactly the same as what Drexel came up with on their own, and there was no conversation or sharing of information for the arrival at those figures?

Mr. Schaengold

That is correct. I mean, this is a fairly straightforward analysis of taking a look at the cost of salaries and 159 2/12/04 - COMMERCE - RES. 040046 benefits and malpractice and making an assumption that over a two-year period, about 50 percent of attrition will occur and approximately $50 million in costs will have to be covered as a result of this attrition. There was no discussion or collusion or conspiracy with Drexel in regards to this. This is a business decision that was made.

Councilman Goode

Mr. Schaengold, that makes complete sense to me, that if the actual cost is $50 million over two years, the cost is $50 million over two years. And if the cost up until June 30, 2004 is $20 million, then the cost is $20 million. Why then does Drexel have to submit to you a list of their costs?

Mr. Schaengold

We are obligated to reimburse them for their costs that they incur as a result of our decision. When they incur that cost, they will submit that and then we pay that.

Councilman Goode

I think you testified that they have already submitted a list of those costs for the remainder of this academic 160 2/12/04 - COMMERCE - RES. 040046 year.

Mr. Schaengold

No. They have submitted a list of employees that they currently have that are employed providing service at MCP, and it will be those individuals that are tracked over a two-year period to determine what actual costs are incurred.

Councilman Goode

But up until June 30th of this year, Drexel has submitted to you a list of potentially affected people and the cost associated with them; is that correct?

Mr. Leonard

Mr. Chairman, we're not to June of this year. They've given us projections. They haven't incurred the costs yet. We're in February of this year.

Councilman Goode

Well, I completely agree with you. I'm asking why did they submit their list in terms of projections? I'm trying to figure out more specifically, has there been a discussion about what the wind-down costs are, and is there actually an informal agreement between Drexel and Tenet.

Mr. Schaengold

Let me make it 161 2/12/04 - COMMERCE - RES. 040046 absolutely clear. We have committed to the leadership of Drexel that we will honor our commitments under the affiliation agreement.

Councilman Goode

With no specific costs associated?

Mr. Schaengold

Correct. I asked Drexel to give me a list of physicians and staff currently employed at MCP, and that will be the base of the individuals that we track now for a period of two years so that we can both know what expenses are being incurred. And we are obligated to cover those. I requested that list of them and they provided it this past week. It's a list of their employees.

Councilman Goode

And you believe that list is accurate.

Mr. Schaengold

Absolutely.

Councilman Goode

Okay. Thank you. Councilman Nutter.

Councilman Nutter

Thank you, Mr. Chairman. At the first hearing there was a fair amount of discussion -- maybe we didn't 162 2/12/04 - COMMERCE - RES. 040046 have the report yet. Maybe it was the second hearing. It was estimated by your consultant that with a certain amount of investment and a whole host of other steps and actions to be taken, that the hospital could either potentially or in fact reach a break-even point in about two years. A decision was made, though, at the December time period, a day or so after receiving that report, that in the company's opinion that was not doable and the decision was made. You said also during that time you recognized that there could be as much as a $50 million exposure for wind-down costs. Was it this past fiscal year there was a $30 million loss or is it the current fiscal year?

Mr. Schaengold

FY '03.

Councilman Nutter

FY '03, which ended when for you?

Mr. Schaengold

December 31.

Councilman Nutter

December 31st you had a $30 million loss? 163 2/12/04 - COMMERCE - RES. 040046

Mr. Schaengold

Over $30 million.

Councilman Nutter

What was the projection for FY '04? You're on the calendar year?

Mr. Schaengold

Correct.

Councilman Nutter

Projection for FY '04 was?

Mr. Schaengold

Our budget for MCP that we submitted, or at least we were prepared to submit, was a loss of $27 million.

Councilman Nutter

$27 million. So over the two years it's a $57 million loss? Over the two years, a $57 million loss?

Mr. Schaengold

'03 and '04.

Councilman Nutter

And so then you have to factor in your anticipated wind-down costs of at least $50 million. Now, suppose Drexel submits during that time more than $50 million in costs under the affiliation agreement. What happens?

Mr. Schaengold

We have committed to honor the terms of the affiliation agreement, and we will reimburse them for costs that they incur as a result of this decision. 164 2/12/04 - COMMERCE - RES. 040046

Councilman Nutter

So if it were $60 million, you'd pay it?

Mr. Schaengold

Yes.

Councilman Nutter

If it were $70 million, you would pay it?

Mr. Schaengold

Yes.

Councilman Nutter

If it were $80 million, you would pay it?

Mr. Schaengold

Yes.

Councilman Nutter

So in the calculation to determine whether to close the hospital or not, you decided that somehow it was cheaper, more cost efficient to close the hospital and then set off a chain of events that could in fact result in more money being spent in wind-down than it would actually cost to keep the hospital operating; is that correct? (Applause.)

Mr. Schaengold

We made a decision based on the information available to us that MCP was no longer a viable acute care facility and that we should close it as soon as possible because the losses were not 165 2/12/04 - COMMERCE - RES. 040046 sustainable. If we were to save the remaining five hospitals in Philadelphia, we could not afford to continue operating a facility that over the past five years has lost the cumulative amount of $70 million and received $44 million in capital for a negative cash outflow of over $113 million. We could not sustain that kind of an operation. And we made a decision based on the available information to close this facility. This hospital was on the verge of bankruptcy before it was acquired by Allegheny, during Allegheny, and it has been in a negative position for the past five years. We simply could not turn it around and we made a decision to close it at this time.

Councilman Nutter

While simultaneously making capital investment and, at least according to the Drexel testimony, increasing a variety of services or taking steps to increase and improve services at the same time either yourself or someone else -- and you weren't here for most of that time, I recognize that -- that the company was under 166 2/12/04 - COMMERCE - RES. 040046 the belief that the hospital would not survive?

Mr. Schaengold

We tried for five years to turn around a facility that all health care consultants in this community suggested and warned us that it was not viable. We tried for five years to make it a go, and we made a business decision that we could no longer sustain --

Councilman Nutter

Mr. Schaengold, I hate to interrupt you. But the most recent consultant that you hired gave you a report on December 9th that laid out in a two-inch thick, three-ring binder the history and a variety of steps that could be taken or should be taken to turn the hospital around. Within 72 hours of receipt of that report, a decision was made to close the hospital. How is it possible? How can you sit at that table and tell me that you took any of those recommendations seriously, since there was never any time to try to implement them?

Mr. Schaengold

It was in my judgment and in the judgment of others that the probability of successful implementation of 167 2/12/04 - COMMERCE - RES. 040046 those suggestions would still not stem the losses generated by MCP and it was not a viable facility.

Councilman Nutter

Well, that may very well be true, but you are leaving out the part about it was about mid-December. Your fiscal year ends on December 31, 2003, and the financial people had also made a decision that if something was going to happen it needed to happen in 2003 and not in 2004. Wasn't that as much a factor in the decision as anything else?

Mr. Schaengold

That involves the timing. This does not involve the decision whether MCP is a viable hospital. You are intimating by your question --

Councilman Nutter

Mr. Schaengold, timing, as they say, is everything.

Mr. Schaengold

May I finish? You are intimating by your questions that we have made a terrible, bad business decision and that in fact because of our incompetence --

Councilman Nutter

No. You've made 168 2/12/04 - COMMERCE - RES. 040046 a terrible, bad healthcare decision. (Applause.)

Mr. Schaengold

If that is correct, sir, if that truly is correct, then I go back to my previous offers to this Committee that Tenet is prepared to do two things: Turn over the hospital so that the City can operate it and lease the facility, or acquire the facility from us for a minimal amount of money and operate it as a City hospital. This is the largest City in the country that does not have a general hospital. If we are so incompetent in how we operated this hospital and that you believe that the consultant report, in fact, can make this hospital be viable, then I am offering this to the City formally today. Two alternatives: Lease it from us or acquire it from us and operate as an acute care facility.