May 27, 2024

An anonymous complaint to the California Fair Political Practices Commission seeks to invalidate a recently approved management agreement between Palomar Health and a private not-for-profit corporation, alleging conflicts of interest and violations of the state public meetings law.

The complaint accuses Diane Hansen, Palomar’s chief executive officer, and two contract lawyers of having an inappropriate financial interest in a deal with Mesa Rock Health Care Services, and also alleges that recent board meetings regarding the company were not properly presented on the agendas of public meetings.

“The FPPC should declare the Board approval of the Mesa Rock Management Agreement void … and of no force and effect,” the anonymous complaint dated March 26 states.

On Feb. 29, a majority of Palomar’s elected governing board approved a 15-year management services agreement with Mesa Rock, a newly formed not-for-profit company that will directly employ Palomar’s top executives. Directors of the North County public health care district, with campuses in Escondido and Poway, said they believe that having top management working for a private organization, one that is not subject to public reporting, will create the needed flexibility to turn Palomar’s troubled finances around, allowing deals with private organizations.

Palomar Health provided a short rebuttal Wednesday, calling the complaint frivolous, misleading, inflammatory and groundless.

“The facts are that Palomar, after numerous public meetings and months of diligence and deliberation, decided by majority vote of its publicly elected board to undertake perfectly lawful actions,” the statement said.

Palomar continues to feel a significant financial pinch, especially from the bond-rating companies that advise investors on an organization’s financial strength. In Palomar’s case, investors want to make sure that it can repay an estimated $712 million in bonds sold against future revenue.

Last week, Standard and Poors dropped Palomar’s credit rating a half notch, from BBB to BB+, saying the change “reflects our view of Palomar’s already vulnerable financial profile further depressed by a trend of deteriorating operating performance, a substantial and rapid decline in reserves and days cash on hand, and an extremely high debt burden and leverage.”

Moody’s Ratings announced a similar downgrade, citing “a material and unexpected decline in unrestricted cash reserves through Dec. 31, 2023.”

As it fights to regain its financial footing, Palomar now must respond to an FPPC complaint that revolves around two words: financial and interest.

The anonymous complainant cites California Government Code 1090, which “prohibits an officer, employee, or agency from participating in making government contracts in which the official or employee within the agency has a financial interest.”

Given that those named in the complaint own neither Palomar Health nor Mesa Rock, some might wonder how such an interest could occur.

On its website, the commission, in a “Quick Guide to Section 1090” posted on its website, says that financial interest does not have to be about ownership percentages. Financial interest, the FPPC’s document states, “may be indirect as well as direct, and may involve financial losses, or the possibility of losses, as well as the prospect of pecuniary gain.”

Here, Palomar insists that its contract with Mesa Rock does not convey any such benefits. The management leaves Palomar’s elected board holding the purse strings.

“Neither Palomar’s CEO, Ms. (Diane) Hansen, nor its outside legal counsel, had any financial interest, let alone a disqualifying conflict of interest, in Palomar’s Management Services Agreement with Mesa Rock,” Palomar’s statement says. “Palomar Health’s publicly elected Board of Directors has always set — and will continue to set — Ms. Hansen’s compensation as CEO.

“Moreover, Palomar’s publicly elected Board of Directors at all times will control the budget for Mesa Rock. This is an express requirement of Palomar’s contract with Mesa Rock.”

But the FPPC, in its 1090 guide, makes it clear that a financial interest can exist even if a contract does not change compensation directly.

“Employees generally have a financial interest in a contract that involves their employer, even where the contract would not result in a change in income or directly involve the employee, because an employee has an overall interest in the financial success of the firm and continued employment,” the FPPC guide states.

The anonymous complaint seems to follow this line of reasoning, making the case that Hansen’s contract with Mesa Rock meets the standard of financial interest because it is a relationship “which she initiated, negotiated, and participated in the making and the influencing of the Board to approve.”

Attorneys David Holtzman and John Kern, who advised Palomar on creation of the Mesa Rock management services agreement, are also named in the complaint, which alleges inappropriate financial interest because the newly formed nonprofit has the ability to hire outside legal counsel and could send work their way in the future.

But in its statement, Palomar states that it believes legal precedent is on its side, citing Eden Township Healthcare District v. Sutter Health. In this 2011 California appellate decision, justices found no financial interest for executives involved in a complicated hospital purchase deal because there was no proof that they benefited.

Reviewing the contracting situation, the court found that “if the contract itself offers no benefit to the official, either directly or indirectly, then the official is not financially interested.”

“The California Court of Appeal in Eden Township vs. Sutter Health addressed almost identical facts and definitively ruled there was no conflict of interest under Government Code 1090,” Palomar’s statement said.

The complaint also accuses Palomar of violating the Brown Act, the state open meetings law, stating that committee meetings leading up to approval of the Mesa Rock deal in open session on Feb. 29 did not let the public know what business came before their elected officials. A closed session meeting on March 11 which listed “trade secrets” on its agenda is also called out, with the complaint alleging that the Palomar board approved a $25 million loan from SharpHealthcare connected to an “exclusivity agreement” with Mesa Rock.

Sharp had no comment on that statement, and Palomar rejected the public meetings claim.

“Public health care districts like Palomar are specifically empowered to protect their trade secrets in closed sessions pursuant to both the Health and Safety Code and the Brown Act,” Palomar said. “In any event, the FPPC has no jurisdiction or authority over the Brown Act allegations improperly made in the anonymous complaint.”

State law does require public boards meeting in closed session to report out votes taken behind closed doors, though that reporting can be delayed in cases where doing so could affect ongoing business or legal matters.

Palomar did not respond to a request, made Monday, that asked whether the board reported taking any actions during its March 11 closed session.

In a letter to Palomar dated April 5, the FPPC states that it has made no “determination about the allegations made in the complaint,” and asked for a response within 14 days, which Palomar said it will meet.

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