The Champion Center — a now-closed rehabilitation facility that had been operated by Lompoc Valley Medical Center — lost $10 million in the two and a half years it was open, yet hospital leaders still have not explained to constituents how they plan to repay bond money or how the repayments could affect services offered by the hospital, according to a Santa Barbara County civil grand jury report.
The grand jury's nine-page report, released Monday, outlines several problems that the grand jury discovered from the center’s planning stages through its ultimate closure in July 2017. These included a failure to engage in appropriate market research prior to opening, and a lack of comprehensive risk assessment to examine what could go wrong.
The three recommendations from the grand jury were for the hospital’s board of directors to explain to voters exactly how and why the Champion Center failed, how the hospital plans to repay mortgage bonds related to the center, and how those repayments could affect current services at LVMC.
“The (grand jury) found it disturbing that the Lompoc Valley Medical District leadership interviewed who were involved with the startup process stated that no mistakes were made and they had no need to explain the failure of the Champion Center to its voters,” read a portion of the grand jury report.
The LVMC board of directors has 90 days to formally respond to the grand jury’s findings, but hospital CEO Jim Raggio did not need that long to hit back against the claims.
On Tuesday, LVMC’s top executive said the hospital disputed all of the conclusions reached by the grand jury.
“The recently released grand jury report regarding the closure of the Champion Center, which is owned and operated by Lompoc Valley Medical Center, contained a number of inaccurate statements,” Raggio said. “LVMC disagrees with all of the grand jury’s conclusions. Furthermore, LVMC is perplexed that the grand jury was unaware the three recommendations it made were all completed by LVMC between June 23 and Aug. 1, 2017, a full three months prior to the start of the grand jury investigation.”
Looking back
The grand jury report delves into the background of the Champion Center, which was located in the 300 block of South C Street in a building that had previously housed the old Lompoc Hospital from 1956 through 2010.
In 2009, after no buyers stepped up to purchase the old hospital building, hospital leaders began exploring the idea of converting the building into a rehab facility, according to the report. Those talks began after leaders met with the owner of Addiction Medicine Services, which was operating as a three-step rehab program — combining detox, rehabilitation, and outpatient counseling — connected to a hospital in Hemet.
The Lompoc facility was ultimately named the Champion Center because one of its primary goals was to serve clients from military and/or first-responder backgrounds who were suffering from substance abuse issues linked to post-traumatic stress disorder.
A consultant was hired by LVMC in 2009, after getting board approval, to evaluate the Addiction Medicine Services' program in Hemet and its potential replication in Lompoc, according to the report. That evaluation concluded that the same model could be used as a revenue-booster in Lompoc, but it also warned that the building’s nonconforming seismic condition had to be considered when deciding how to license a chemical detox program.
The Champion Center would have needed to meet seismic requirements to operate under LVMC’s general acute care license, but a freestanding chemical dependency recovery hospital would not have to meet such standards.
After deciding to go the recovery hospital route, LVMC leadership began the process of remodeling the old hospital, determining construction costs and exploring financing.
“According to senior (hospital) district staff, the district did not pursue a cost assessment of seismically upgrading the building,” according to the grand jury report.
LVMC was ultimately able to secure an $18.75 million revenue bond from Cal-Mortgage to cover construction costs, according to the report. The bond did not require voter approval because its repayment is due to come from hospital income and not from voters.
That bond money was issued in 2013 and the building was remodeled soon after. With Addiction Medicine Services leading the recovery program, the Champion Center held a ribbon-cutting in August 2014 and received its license as a freestanding chemical dependency recovery hospital the following month. The first clients entered the program in November 2014.
Road to failure
The grand jury reported that it found no evidence that anyone involved with the Champion Center ever reviewed any other facility besides the one in Hemet.
“The jury also found no evidence that a comprehensive risk assessment was conducted or contracted by the (hospital) district to examine the market for a (freestanding chemical dependency recovery hospital) in Lompoc or the potential risks of pursuing such a project before the decision was made to proceed,” the report noted.
LVMC contracted a separate consulting firm in August 2010 to produce a financial feasibility study, as required by Cal-Mortgage. That study, completed in November 2012, led LVMC to the $18 million construction estimate, which would be financed with the combination of tax-exempt bonds insured through Cal-Mortgage and with hospital reserves.
Raggio said last year that a lot of the expectations for the center were based on that feasibility study.
The grand jury report noted that all of the judgments regarding the potential performance of the Champion Center were problematically based on input from officials with Addiction Medicine Services and LVMC, the two stakeholders in the project.
“(Hospital) district officials confirmed to the jury that no other independent risk assessments were conducted either before or after the district decided to pursue the project,” the report read.
Insurance issues
The grand jury report states that the Champion Center was refused a license from the Centers for Medicare & Medicaid Services in July 2016 because of LVMC’s decision to not seismically retrofit the building.
Further, when the first patients arrived in November 2014, neither Medicare nor other insurance contracts were in place.
It was projected by LVMC officials that it would take about six months to obtain insurance coverage plans, but the grand jury report notes that “the time lost was much greater than expected.”
“Between March 2015 and December 2016, the center worked through many delays securing insurance contracts,” the report states. “For example, the first insurance contract was signed in June 2015, but the center was not loaded onto its system until eight months later. Other insurers had a three-month waiting period before coverage could become effective, in addition to another six-month delay to load the center into their systems.”
By operating the Champion Center for more than 16 months without a full complement of insurance payers, LVMC created continued operational losses, according to the grand jury.
By 2016, according to the grand jury, the Champion Center had an average of 20 to 25 patients at all times, amounting to an occupancy rate of about 40 percent.
“Tricare, a government insurance program for military families, did not become available until September 2016,” the report states. “Medi-Cal did not become available until 2017, just as the (hospital) district closed the center.”
Money woes?
As agreed upon by both Raggio and the grand jury, LVMC was never able to meet its occupancy targets for the Champion Center.
The losses, according to the grand jury, amounted to about $300,000 per month, or about $10 million total over two and a half years.
Staffing, the grand jury reported, was the biggest expense. The center needed specialized counselors and a physician medical director with specialized training in addiction medicine. Ultimately, there were five such medical directors in the center’s less than three years of existence.
“Although the forecast was for a first year loss of $1,900,000 and a second year of $411,000, the actual operating loss for the first fiscal year (2014-15) was $2,400,000 and $3,900,000 each for the second and the third fiscal years,” the grand jury report noted. “In the end, the (hospital) district had invested roughly $21 million ($18.75 million bond and $2 million cash reserves) in the facility, and incurred an additional $10 million in operating losses.”
Raggio said Tuesday that not only is LVMC not in financial turmoil but that it "is in the best financial position in its history.”
Cal Mortgage, which insures the revenue bonds, requires LVMC to maintain minimum financial indicators, according to LVMC. Two of those indicators are Debt Service Coverage Ratio and Days Cash on Hand.
The minimum requirement to be compliant with the bond covenants, according to LVMC, are to maintain a Debt Service Coverage Ratio of no less than 1.25 and to keep Days Cash on Hand from dropping below 30 days.
“As of April 2018, LVMC’s (Debt Service Coverage Ratio) is 7.4, which means the hospital district can cover all of its debt 7.4 times,” hospital spokeswoman Nora Wallace said Tuesday. “LVMC’s Days Cash on Hand as of June 19, 2018, is 121 days. Both indicators far exceed (requirements).”
The debt services on the bonds will cost a little more than $1 million per year through 2042.
End of the line
While acknowledging that the decision to close the Champion Center was inevitable, the grand jury took issue with the way the closure was announced to the public.
“The proposal to close the (Champion) Center was a quiet one,” the grand jury report stated. “No public announcements to explain the closure were ever made and the closure only appeared on the (hospital) district’s agenda of a specially called meeting, which was posted as required.
“The board members and senior district staff who were interviewed did not explain their actions to the public,” it continued. “All senior staff and board members interviewed ... stated that no mistakes were made in the development or operation of the center.”
Wallace, the LVMC spokeswoman, disputed that by pointing to press releases that were sent out to local media after the board decided to close the center.
“No grand jury representative asked CEO Jim Raggio for any communication made to the community about the Champion Center closure,” she said. “Had he been asked, Mr. Raggio would have provided the information."
The Champion Center has sat vacant since its closure in July 2017, except for a small portion used for laundry services. LVMC, according to the grand jury, has offered the building for sale at an appraised value lower than the remaining bond debt and has also considered leasing the building.
“It is uncertain how the center will be used or generate income,” the report states.
Still, the grand jury noted that LVMC leaders “told the jury that they are confident that (LVMC) can repay the remainder of the loan even as it (is) struggling with diminishing reimbursements.”
Going forward
Among the contributing factors listed by the grand jury for the Champion Center’s ultimate failure were:
- The reliance on only one chemical dependency recovery hospital to validate hospital leaders’ decision to proceed;
- The failure to engage in appropriate market research to determine the potential number of patients;
- The lack of a comprehensive risk assessment to examine what could go wrong, instead relying on a feasibility study that based financial projections on the same sole chemical dependency recovery hospital; and
- The decision not to retrofit seismically, which caused delays for licensing and insurance coverage.
The grand jury’s three recommendations going forward were for the LVMC board to report to its constituents how it plans to repay the revenue bonds; explain how those repayments will affect existing operations; and provide a “clear and detailed explanation” of the failure of the Champion Center.
Wallace noted that the board will comply with the grand jury’s requirement for a response within 90 days.
Raggio announced in January that he plans to retire effective June 30, though he could stay on longer if the board cannot find his replacement before then.
The next regular meeting of the LVMC board of directors is scheduled for 4:30 p.m. Thursday, June 28, in the boardroom at the hospital, 1515 E. Ocean Ave.
June 19. 2018
Lompoc Record
By Willis Jacobson
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