all parties would be transparent and allow as much dialogue to move forward with a common solution. i wanted to say from the letter that we received today from dr. browner, i still have concerns that this transparency is going to move it forward. i know a number of colleagues have raised issues from the last hearing that we had until now, questions of whether we can move forward without that sharing the financial information. i note that we will hear a lot about that at this meeting. i am hopeful that we will have more information from all stakeholders said that we can move this forward. with that, i will ask if my colleagues have in the opening comments to make before we go to the speakers. supervisor kim: thank you. i want to speak briefly because i was not here for the previous land use committee meeting when we learned about the new

production numbers. it actually put cpmc dangerously close to the trigger point that we had been discussing previously as something that was very hypothetical and almost impossible for this entity to reach. i wanted to say a couple of things since i did miss that announcement. i do want to appreciate the mayor's office for all of your work on this development deal. i really do appreciate your best intentions on this project. i further appreciate that the mayor's office is taking such a strong position on the continued opening of st. luke's. it is an incredibly important hospital in san francisco. i do not think any of us can discount how important the future and stability of that hospital is. everyone on the board of supervisors agrees and shares this as a priority. i just want to thank you for alerting us and continuing to work on ensuring that if we move

forward, the stability of st. luke's and the future of st. luke's is insured and that development agreement. i just wanted to say that i was very appreciative of our committee members on that day for standing up strongly and loudly on behalf of our community, particularly our most vulnerable communities. in terms of wanting to ensure that it is available and we do get to see any projection numbers that there is no way we can make a decision on this deal without having the full sets of data and information available. i was out of town when there was a whistle-blower clique of what could be those numbers. -- leak of what could be those numbers. i was very disappointed to see some of that come out. as we move forward, there is

going to need -- there will be a lot of questions that need to be answered. the last thing i will say, over the last couple of weeks, we think a very deeply about this very complicated and controversial development agreement that is coming before the board. i am happy to sit today for the shf presentation. there are some different pieces to this, whether it is affordable housing, charity care, work force. what has continued to emerge to me as the larger and even more important issue is this issue of the future of health care. cpmc's role as a very large entity in this industry in terms of how they will impact that. i look forward to this presentation, but i do think this is a key piece that i beekeeping a close eye on. thank you.

-- that i will be keeping a close eye on. thank you. supervisor cohen: there has been a lot of discussion and media attention in the last few weeks about the operating commitment to st. luke's and the provision that would allow cpmc to be relieved of its obligation to operate a hospital of its operating margin. as i articulated a few weeks ago, and given the unwillingness of cpmc to share any financial information to allow us to make informed decisions on this one issue, we need unlimited obligation from cpmc to operate st. louis for 20 years, not one that is dependent upon -- st. luke's for 20 years, not one that is dependent on financial assumptions that we are not able to review. i believe that all of us on the board and myself want this development agreement to ensure

not only that st. luke's is open and operating for 20 years, but that it is meeting the needs of the patients in the southeast portion of the city. while we have recently focused on the operating commitment, it is my goal today that we focus on some of the other aspects of st. luke's that i find concerning. there are two. the removal of the skilled nursing facility beds and the resources, staffing and focus of the centers of excellence. additionally, as i have previously mentioned, this project will significantly change the health care system and markets for years to come. i have heard very little around impact of that. i look forward to a robust discussion about pricing today. without further ado, mr. terra,

take it away. -- mr. chair, take it away. president chiu: i am not going to repeat the comments that were just made. we have learned a lot of information over the last two weeks that i think have been surprising to all of us. i associate myself with the comments of supervisor cohen around st. luke's. i want to think the mayor and his staff for understanding this with a comment he has made around that issue. that being said, i do hope that with this hearing, we can all take a step back and take a deep breath and understand that everybody wants to see the long- term health of the city be down the right way. not only do we want to get a few of dates on some of these issues, but we are about to

delve into another very important topic. how are city can get a handle on cost containment efforts while maintaining health care quality. this is a very important question that has not been covered before. i look forward to hearing the presentations because i do think we really have to wrap ourselves around these questions and resolve them in a way that is going to work for all parties in this discussion. i am still and will continue to be committed to working with all parties to see if we can get to a place that will work. supervisor mar: i just wanted to remind everyone, these items before us, we are not taking action on at the end of the meeting. we will likely continue this to monday, july 16. we have july 17 as the day to hear the appeal of the eir on the project. all of this is moving forward very quickly, but today we are focusing on health care.

let me introduce ken rich. >> good afternoon. if i could have the overhead, at the request of the committee, we are returning back to the subject of health care today. on your screen is a brief outline of what we propose to present. we will go back over the five key pieces of the presentation from last time. the st. luke's operating commitment, the baseline health care commitment, the beneficiaries, the skilled nursing facility bed commitment, and the health care innovation. they will hit those anymore summarized fashion for you. we will also do an update on the supreme court decision. we will do a full presentation on the health services system, which we did not hit last time. to remind you of the three priorities that our negotiations

were based on -- the first priority is st. luke's. as you remember, the operating commitment to construct a new hospital on the st. luke's campus and operated for 20 years, we want to reiterate the direction we have received directly from the mayor is that we now would like to see an operating commitment, which is stronger and more absolute than the one that we originally negotiated. we have communicated that to cpmc. we're continuing to talk to them. we hope that even though we have not gotten there yet, we're optimistic and convinced that over the next few weeks, we will get to a place where the mayor can be satisfied.

president chiu: i know what the last hearing, you stated that there would be ongoing conversations around the newer productions that have been proposed and new ideas that would go back and forth. if scientists and what you just said, it does not seem as if their art -- if i understood what you decide, it does not seem there is agreement. >> there is not agreement on this issue. i am here to make clear what the mayor has directed us to ask for. i am here to make clear that we are here to talk on here to find a way to get there. as of today, there is not an agreement. president chiu: we appreciate the mayor's perspective on this issue. >> thank you. one more thing on this, and this has not been so much in debate, but to finish the piece.

the development agreement requires the hospitals be constructed simultaneously. that is the new cathedral hospital and the st. luke's hospital. just to finish up on that. to continue going through our review -- >> good afternoon, supervisors. greg wagner, department of public health. i will review the contents of this portion of the development agreement. as you have heard, the development agreement provides for a baseline level of funding by cpmc on care for vulnerable populations. it is a 10-year time frame and the value of the commitment is

$86 million adjusted annually by the medical rate of inflation. the purpose of this provision is to establish consistent baseline above which the other elements of the development agreement for negotiated. care for vulnerable populations as defined in the agreement includes three things. charity care, it is the shortfall for treating medi-cal clients, and this other services to the poor and underserved. it was developed by taking the average of those actual expenditures over the last three years. you can see those numbers on a slide in front of you. the average is 86.

cpmc will be required to make at least that level of expenditure. the one provision that allows them not to spend at that level is if cpmc's earnings before taxes, interest, depreciation reaches a certain level and 40% of that value is less than the base line commitment, cpmc is no longer obligated to spend at the level that it otherwise would. a 40% of that value is a cap on the amount they are required to spend under the development agreement. however, there is an additional provision of $20 million, the backstop commitment, such that in any year the 40% comes into

effect, at cpmc has a $20 million cost of funds available. it is a one time pot of funds that would be applied to get them to their obligation. was that $20 million is exhausted, it is no longer available. -- once that $20 million is exhausted, it is no longer available. we have three charts. the orange bars are the base line commitment, negotiated in the development agreement assuming a 3% rate of inflation. that is the amount they would be required to spend on this base and commitment. over the 10 years of the agreement. the black line is the 40%.

and this assumes that it grows at the rate of inflation. the ebitda cap is growing. if it stays at exactly flat over the 10 years of the agreement. this would be a scenario where inflation is growing at a 3%. that would suggest a pretty substantial deterioration in the financial conditions since it is not keeping pace with inflation. if it stays flat, they would make it through the 10 years of

the development agreement and only be required to dip into the backstop for about $200,000 in the last year of the agreement. in that relatively pessimistic scenario, we would be fine on the cap. the last scenario is just to get a sense of what would happen if there was a significant decline in cpmc's ebitda. this depicts a 3% reduction in each year over the course of the development agreement. there is 3% medical inflation. there would be regular inflation happening in the world while cpmc is experiencing a consistent and dramatic decline in its ebitda. in that situation, the cap would come into a fact in europe -- come into effect in year six and the backstop commitment would be

exhausted. you would have a decline in the total available funds under the base line commitment, of course. there hundreds of potentials of scenarios that are in between or beyond any of these examples. it is just to give an illustration of what the conditions have to before this backstop -- or for the 40% ebitda to come into effect or not. >> this last charge is a new charge from your presentation from two weeks ago? this particular set of assumptions, my understanding is that 3% decline in ebitda, that is the assumption in the documents that were provided to the board of supervisors by the whistleblower, right? >> i do not think this particularly represents those assumptions. but then not a fact over 10

years is equivalent to the documents that the board received. on those documents, and i am not spend a whole lot of time looking at those documents, the ebitda number goes up and down over time. over that 10-year average, you would end up somewhere in the neighborhood. over the next -- >> over the next 10 years, if it decreases by 32%, i think that reflects what you're talking about. i think the reason this is important, i know that cpmc has been attempting to discredit the documents we have in front of us. the problem with that, they are the only financial documents the board of supervisors have at this time. when i look at what is going to happen to charity care over the next 10 years, i do not have any reason to believe the numbers will be much better than this

slide, slide 12, which is quite different from the previous two slides. i look forward to a conversation with cpmc. >> in response to that, i appreciate the comments on the financials that we have looked at. the analysis we have done on the historical numbers, at this scenario would look very pessimistic. in fact, the scenarios we have seen do not show the 40% of ebitda cap exhausting the commitment by the end of the year. depending on what assumptions you make and depending on what reality looks like, you could have different situations. president chiu: under this slide, it shows that by europe's six, which is 2018 -- it shows that by year six, which is 2018,

that happens to be the same year st. luke's could potentially close. the other thing i want to ask you, the projections you were shown, it is that more akin to slide number two? >> it is more akin to that. i cannot go into details on what the contents of those projections were. as i said, but they showed was that you could get to the end of the development agreement without having the baseline commitment capped by a combination of the 040% of ebitda and the backstop commitment. the level of comfort was not the same, byt the net effect is that

the baseline commitment would be mad. -- be met. we just looked at those financials visibly, we are trying to represent some scenarios without depicting what the projections were that cpmc shared with us. president chiu: if the financial projections are worse for the city, i think i would suggest that the 40% number and the timeframe ought to be looked at by staff as you reconsider how those projections impact this particular idea. >> thank you. >supervisor mar: i want to thank our director, barbara garcia, for being here as well. >> good afternoon, supervisors. another element of the development agreement is the 10,000 new beneficiaries

commitment. if i could have the overhead, please. under this commitment, cpmc would assume the hospital partner role in the managed-care model for 10,000 managed care beneficiaries. they would partner with at least two community based primary care providers. provide necessary hospital care to attend thousandmedi-cal beneficiaries. this is subject to a cap and on reimbursed cost each year. 9.5 million-dollar cap is adjusted for inflation. to the extent that the cost for caring for these 10,000 beneficiaries exceeds the 95 million adjusted for inflation, a backstop funds can also be used for that purpose. it is important to note that this provision is not reliant on cpmc's financial health, but an analysis that was done with

publicly available information independent of cpmc's financial status. this is a busy slide. you asked if the previous -- you had asked at the previous hearing for some additional information. this was an analysis that was conducted by the consultant. what this does is project be on reimbursed cost that cpmc will incur over the 10-year life over the commitment. there are three key component and i will go over them in detail. enrollment, how many people are going to be enrolled in managed care partnership. the costs for caring for those enrollees. the revenue that cpmc would receive for caring for those enrollees. i will start at the top. enrollment phases and over the 10-year life of this commitment. it phases inconsistent with

reform. as a first of to help reform, california has already enrolled in number of seniors and persons with disabilities into medi-cal managed care. the appellant agreement requires at least two partnerships -- the development agreement requires at least two partnerships. cpmc currently has a partnership with any medical services. we model using their information, assuming that we could stand upon their existing role would cpmc. under this partnership, they would take 1500 seniors and persons with disabilities and 7000 non-seniors and persons with disabilities. there utilization is different, their reimbursement is different because they use services at different rates.

in addition to the moment, there would be the tenderloin provider enrollment and that would be 1500 beneficiaries, 300 of those would be seniors and persons with disabilities. the fulton thousand enrollees would be in the cpmc system -- the full 10,000 enrollees would be in the c.p.i. system by 2016. the next category is cost. the number of times and enrollee is submitted to the hospital times the number of days times the cost per day. as i said, seniors and persons with disabilities utilize the hospital at different rates, as you can imagine. they have higher hospital utilization. an example is backed -- is that they have 36.5 admissions per

1000 enrollees for their senior and persons with disabilities population. that is largely because they do a really good job of managing care and getting folks the primary care and preventive care they need before hospitalization occurs. these projections are based on historic utilization. we have used conservative assumptions across the 10 ers. we have projected net change in utilization over the 10-year period of this agreement. this samoa's out pent-up demand. -- smooths out pent-up demand. at the end of the agreement, people will have had regular access to health care and that pent-up demand will go away and utilization will likely go down. keeping it flashed across the 10

years moves those two things out. the cost data was derived from publicly available data that is reported to the state office of health wide planning and development. we projected cpmc's cost to grow at 3.5%, which is faster down the rate of inflation. we are conservatively assuming that cpmc cost will increase faster than ablation -- inflation. the third category is revenue. we model does revenue using 2010 reimbursement rates. the per member per month rate at the hospital is paid regardless how frequently or infrequently the individual receives care. there are different rates for seniors and persons with disabilities. we used 2010 rates and we kept the rates flat for the full tenure so we do not

overestimated the revenue that cpmc would receive for caring for this population. no reimbursement increase is projected in this chart. to get to cpmc's net cost, it is cost-revenue. as you can see into starch, given the ramp up -- in this charge, given the ramp up, very little cost. it falls below the 9.5 million- dollar cap. by your 10, the cost is estimated at $9.2 million. the costs are generated for each year and not cumulative. the cap level of $9.5 million is projected to grow at inflation,

3% right now. this would leave about $3.2 million in flexibility to account for any extraordinary hospitalizations or catastrophic circumstances. we wanted to make sure that the allies could be covered under the cap, and we believe that is true. the 10,000 managed care lives was the number chosen because it represents a third of the projected new beneficiaries under health reform, which is approximately the proportion of cpmc's hospital discharges in san francisco. the next highlight was on the skilled nursing facility bad. cpmc would continue to provide and maintain 100 skilled nursing facility beds for a period of 10 years. there would be 38 beds at the davis campus