chiu as well. they're not making any opening remarks. >> thank you for having this back again. he will be mostly seeing staff from the department of public health here today. if i could have the power point. just to remind everyone of our hearing schedule, we are here today in the second hearing focusing on health care. on the ninth of july, we propose to come back into with the remaining items in the agreement. expecting to be at the full board for the eir appeal and first reading on july 17 and the second reading on july 24.

in the spirit of housekeeping, i wanted to alert you. these are being passed out to you today. some technical items we have been cleaning up in the development agreement. these are listed on the screen in front of you. there are technical cleanups, nothing substantive. in exhibits f, what has been added are a statement that the program goals of the innovation fund can be modified with the approval of the cpmc. an attachment was added, which is the proposed grant agreement between the foundation which will hold the money from the innovation fund. i just wanted to alert you to what you are getting now. under housing, you will be hearing about this next week. we have added the manual for the

down payment assistance loan fund, which is pretty much the same as the existing loan fund. in exhibit k, you'll hear about that next week. that is all i have for you. i would like to call barbara garcia to start us off on our public health presentation. supervisor mar: thank you. >> thank you. good afternoon. i am here with our deputy director under financial officer. thank you for the opportunity to discuss with the health related provisions of the cpmc development agreement. we are here to provide you with a more in-depth review and to discuss more background and content. the hospital project and the

development agreement provisions we are discussing is an important project that will help meet the health care needs of san francisco. insuring access to care for the most vulnerable among us, are low income, and uninsured, and publicly on shirt -- in short residents. -- insured residents. expand access to these services. it ensures that these services are available in seismically safe facilities. this is of critical importance. i thought it was important to build upon a significant work already done over the past five years by our health commission and the blue ribbon panel on st. luke's.

the blue ribbon panel on the future of st. luke's was established in march of 2008 to create a viable plan for the acute care hospital and outpatient services. their work resulted in the blue ribbon panel report on the future of st. luke's hospital and include 11 recommendations, including a new acute care hospitals should be rebuilt on the st. luke's campus, the size of the hospital should be appropriate, and it should include service -- centers of excellence. on october 7, 2008, the commission passed a resolution endorsing the panel's recommendation. in each of the following two years, the commission passed an additional resolution that identified ways for cpmc to improve care to the vulnerable population and recorded specific targets for improvement in areas -- the commission has been monitoring the progress and cpmc

has continued to meet the agreed upon goals. the three resolutions passed by the commission and the work of the blue-ribbon panel provided the framework for the following health care priorities of this project. the recommendations on these bodies highlighted three key priorities. insuring a secure future for st. luke's. st. luke's is a valuable community assets with a long history in san francisco. san francisco in the mission rely heavily on st. luke's for hospital and outpatient care. in addition, the emergency room at cemex hospital helps to meet the emergency medical needs of patients in the city's southeast neighborhood. integrated into the cpmc system, it looks to be part of a larger community of a continuum of care that will enable cemex patients to access primary care, hospital services, specialty services,

skilled nursing services, and more. integrating st. luke's into the broader cpmc system shifts the question away from whether cpmc is financially viable on a sound and relies on the financial position of the entire cpmc system. the second priority was insuring access to cpmc, specifically the cpmc of new cathedral hill campus. cathedral hill does not except -- accept medical patient unless they come through the emergency room. with the passage of federal health care reform, it is important that we plan for the future in the context of this changing environment.

the desire to focus on cpmc's community benefits on san francisco's most vulnerable population. nonprofit hospitals -- this has long been mandated by the state law. it is not a federal law. these discussions we went to ensure that cpmc committee benefits are focused on san francisco's most disadvantaged with limited resources and have difficulty getting to health care services they need. the strike -- i will pass it over to my deputy, who will go for the details of the development agreement. thank you. supervisor mar: thank you. >> good afternoon, supervisors. it is good to be here before you to talk in more detail about the

health provisions of the cpmc development agreement. each of the elements of the development agreement was developed to address one of the three priorities that director garcia identified. we thought it would be helpful to organize this presentation around these priorities. the first priority for these discussions was insuring a secure future for st. luke's. the next several slides provide information about the specific provisions designed to do just this. the development agreement requires that cpmc construct a new hospital on the st. louis campus and operated for 20 years. construction of st. luke's would be simultaneous with the construction of the new cathedral hill and cpmc would be required to open st. luke's prior to opening cathedral hill. the development agreement includes several provisions to ensure the programming at st. luke's meets the needs of the surrounding communities. for the duration of the 20-year operating commitment, st. vix

will provide specific services on site -- st. luke's will provide specific services on the campus. it would require that st. luke's be operated as a full-service general acute-care hospital with an emergency room. st. louis will have a number of inpatients and outpatients specialty services and emergency room, which will be 50% bigger than the existing emergency room. they shall house two centers of excellence. it will serve approximately 800 patients each year focusing on preventing of outpatient care to a properly managed, diseases, such as diabetes, prevent unnecessary hospitalization. the senior of -- to increase or maintain their function, and maximize the independence at discharge, assist the transition from hospital to home, and

reduce unnecessary readmission. you can see on this slide that liquidated damages are noted for each of the centers of excellence. it represents the agreed upon compensation to the city in the event of a breach of this contract. i will note the liquidated damages for each of the provisions. at the end, i will summarize each of the liquidated damages in one slide. in the event of a breach, cpmc will pay $2 million for any year that it does not operate a center of excellence and $750,000 in any year that it does not operate a center of excellence in senior help. i will turn the presentation over to our chief financial officer to talk about the additional provisions. supervisor mar: thank you. >> good afternoon. greg wagner.

just a couple of notes on the operating commitments and then we will come back to this in a little bit more detail. i will be quick. the development agreement requires that cpmc operate st. luke's hospital for 20 years, and there is another provision in the development agreement that allows them to discontinue operations of the hospital under the condition that they meet what we call the operating margin test. the operating margin is pretty standard financial magic which is the percentage by which -- metric by which exceeds expenditures. unless the operating margin falls below 1% for two years in a row. it is a system wide metric for

all operations in san francisco. just to talk about what happens, what the process around that, we try to design the agreement said that it is a process there are some deliberations built into that process. in st. luke's is closed early, and they do not meet the operating margin past, they would be in breach of the agreement and liquidated damages would apply. if cpmc falls below the 1% operating margin threshold, for that single year, they're obligated to notify the city and began a process with the city about what actions can be taken to correct the course we are on an remedy the situation.

after that process, if cpmc falls below that 1% operating margin threshold, and no solutions have been identified, they would have the ability to close the hospital under the terms of the development agreement. if that happens and the city disputes the reasons for the closure of the hospital or disputes the conditions in the agreement, the city can initiate arbitration. if the city wins in arbitration, liquefied damages would apply. $30 million suggested by medical inflation per year for each of the 20 years that the hospital does not remain open. i will leave it at that and we will be coming back to talk a little bit more about this provision later in the presentation. thank you very much. supervisor mar: i wanted to

thank my colleagues for withholding their questions until after the presentations are done. >> thank you. one of the issues that has been raised has to do with the sizing of st. luke's hospital. across the country, large hospital systems are moving to a model of care were committed hospitals are linked to a central specialty hospital. specialty care for st. luke's patients will be available throughout the cpmc system. the camden group to provide data analysis found that some of the residencts would be likely to achieve better health out, if they were cared for at one of the other local cpmc facilities were clinicians who specialize

in those services and have a high degree of experience practice. this project balance is too important stakes. maintaining st. luke's as a community hospital and resources and insuring that same six patients have access to high-quality specialty care a few miles away -- and that st. luke's patients have access to high-quality specialty care a few miles away. they felt that the right bed size needed to be based on demand spurred by making st. luke's and into all parts of cpmc, we do not have to worry about being financially viable its own. the final provision related to st. luke's that i would like to highlight relates to the new medical office building project requires cpmc to entitle a new office building as part of the process. it would require that the process of the new medical office building began within

four years of opening the new st. luke's hospital. it sets forth preconditions that requires cpmc to submit a medical office building to the board of directors within 90 days of meeting these conditions. the current medical office building be at 90% occupancy for one year. the leasing commitments are at 75% of the new capacity. the operating rooms at st. luke's are utilized at 80% for one year. if these conditions are not matched or if cpmc does not move forward with a new medical office building, the city will have the right to lease the property for a nominal amount of work with the developer to build an office building. the next series of slides addresses the second priority of these negotiations, increasing access for charity care patients.

health reform represents a major shift in the future of health care in the united states. it was enacted in march of 2010 and takes the multi prompt approach to increasing the number of people who have access to medical insurance. the individual mandate requires all u.s. citizens and legal residents to have health insurance. health reform helps individuals comply with this mandate in several ways. for the lowest income individuals, it increases eligibility for medicaid. for those with slightly higher incomes, but still considered low income, it provides subsidies. it creates help insurance exchanges, which are online marketplace is what we did that allow people to purchase health insurance directly. it implements insurance reforms that help people obtain and retain insurance regardless of

pre-existing conditions. some of the insurance reforms -- most of the provisions become effective in january of 2014. 92% of residents will be ensured by 2016. i am sure the supervisors are aware that this case on the constitutionality is currently pending before the u.s. supreme court. i will address that a little bit later. what does it mean for san francisco? according to the most recent available data, 117,000 were uninsured for all their part of 2009. of those, approximately two- thirds will be eligible for health insurance as a result of reform.

health reform will reduce by 67% the number of uninsured san franciscans for lying on charity care services. the 30,000 will enroll in medical. it enables many of our slowest income individuals to meet the individual mandate -- many of our lowest income individuals to meet the individual mandate requirement. to be eligible in this age category, individuals must also have children, the disabled, or have extraordinary health care costs. beginning in 2014, all low income adult citizens with incomes below 133% of the federal poverty level, $14,500, will be eligible for medical regardless of family or help status. san francisco's human services agency anticipates that san

francisco will enroll 30,000 new individuals beginning january 1, 2014. this represents a 23% increase. i would like to cover one last piece of background information. we thought it would be helpful to provide a brief managed care 101. it has historically operated two types of delivery systems. under the fee for service system, providers pay for each service they provide. it provides patients with the freedom to choose a participating provider, this system creates on in --

unintended incentives. health reform is really moving health care to managed-care model. beneficiaries would enroll in a plan and see providers within a designated network. patients must limit their care to providers within the network, the plan and providers manage the patients care to provide better health outcomes. the state is moving away from -- moving towards managed medical. the 30,000 uninsured that will be eligible in 2014 will be required to enroll in managed care. in san francisco, there are two health plans participating. the san francisco health plan and the anthem blue cross. once a beneficiary of uses of

plants, they then she is a provider network. each provider network is composed of a primary care provider. a network of specialty physicians, a dermatologist, and an affiliated hospital partner. one primary care provider, one specialty care network, one hospital. this team of providers assumes an ongoing responsibility to provide all of the health care services on member needs in exchange for one flat fee per month regardless of how frequently or infrequently the patient uses those services. with the exception of emergencies, patients must receive their care from providers within their network. to meet the health care needs of the 30,000, san francisco will need a sufficient supply of providers who are willing and able to participate in managed

care. help performer will do is the number of uninsured who rely on charity care services, it will not eliminate it. the need for charity care and remain, which is why it is necessary to maintain cpmc's current baseline level of care and build on top of that to meet the demands of the changing environment. the proposed development agreement provides for the continuation of the baseline level of care for the most vulnerable population for the next 10 years. under this provision, cpmc will continue to spend at least $86 million each year on care for vulnerable populations. this provision was devised to ensure that cpmc continues to provide the same level of care and services that it has been providing all performing all the obligations in the development agreement.

it ensures that care to vulnerable increases by ensuring that prior levels of service are maintained and requiring new investments in this population. every other provision that will be discussed today is over and above this continuing commitment and cannot be counted as part of the 86 million. there are three elements to caring for the vulnerable population. the first is a charity care, the provision of care and services without the expectation of reimbursement. this includes hospitals participation in healthy san francisco this is the difference between the cost of providing care to a patient and the reimbursement that provides. the third category are other service to -- other services to the poor and underserved. grants and sponsorships and

other activities. i would return the presentation to greg. >> thank you. i will provide a little bit of context on the numbers behind this agreement. on the slide in front of you, the $86 million threshold was calculated based on taking the average of these expenditures over the last three years. bad as we arrived at the '86. under the development agreement, -- that is how we arrived at the '86. it will be increased each year at the rate of medical inflation. that has been about 3.5% a year. the most recent was about 3%. if you take that $86 million and assume 3% inflation over the next 10 years, that is $112

million by the end of the term. that amount will vary depend on the actual rate of inflation over the terms of the agreement. there is a provision in the agreement that cpmc will be required to meet this commitment, but not to spend more than 40% on this provision. earnings before interest taxes depreciation. the purpose is to essentially a factor out the capital cost of the new facility. it is a good measure of the basic operating performance financially of the organization. since we know there will be costs associated with the hospital's, we do not want that to interfere with the calculation of the baseline, the commitment value.

if cpmc fails to meet this provision, it will be subject tt to liquidate the damages. the value of that is 150% of the value of the commitment that they failed to meet. one other provision in the development agreement. there was the backstop commitment. as a backstop, if one of two things happens. it can be a backstop. it is kept out by 40% of a beat- up -- of about -- ebitda. that is there as an additional

pool of 40% of the ebitda cap, if it interferes. and just to give you a sense of what these numbers look like, i have got two grass in the presentation that shares two different presentations. what these are are the bars at the bottom. this will be in the development agreement. this is 40% of the cpmc ebitda. the first line that is in black of this is what happens if the cpmc ebitda goes with inflation. essentially keeping pace, the

base line commitment. this is if it stays flat entirely the money being required out of the backstop commitment. this would be a pretty pessimistic scenario.