As Salinas Valley Memorial Healthcare System’s board of directors looks for a financial partner to pull it out of a bind that threatens future service in the community, a state politician is taking aim at one of the policies that put the Salinas hospital in a precarious state.

Assemblyman Luis Alejo, who represents District 28, authored a bill that received unanimous support from the Assembly and is now being heard on the state Senate floor. Assembly Bill 2115, dubbed the “Hospital Accountability Bill,” requires that local health care districts enter into a written contract with their hospital administrators.

The bill was spurred when Salinas Valley Memorial Healthcare System (SVMH), a public hospital in Monterey County, underwent a state audit that found the chief executive officer of the healthcare system had worked without a written contract for 26 years.

Former CEO Sam Downing, who retired in 2011, received more than $4.9 million in supplemental pension and severance benefits, according to Alejo’s office. Most of the money was paid to him before he retired. During the period that he was receiving his expanded compensation, he announced in 2010 that the hospital’s staff would be reduced by 5 to 6 percent.

“They should have a contract and this would prevent any lack of transparency,” said Marva Diaz, a legislative aide in Alejo’s office. It is still unclear if any other health care districts employ CEOs without written contracts, she added.

The bill is supported by the California Nurses Association and the Association of California Healthcare Districts.

“This bill creates a uniform approach, which fosters good governance for all healthcare districts and the communities they serve,” said Amber Wiley, a senior legislative advocate for the Association of California Healthcare Districts.

If approved, AB 2115 will require a written employment agreement if a local healthcare district employs or contracts with a hospital administrator or CEO.

The audit report also found that the CEO had entered into contracts with businesses with which the members of the hospital’s board of directors stood to earn financial gains.

Jim Gattis, the board president, focused on the quality of healthcare in a response to the audit.

“It is important to note that the BSA (Bureau of State Audit) did not express any concern with the quality of our patient care at Salinas Valley Memorial,” Gattis wrote in a rebuttal to the audit in March. “In fact, the auditors noted that the quality of the patient experience did not appear to suffer as a result of our recent initiatives to reduce costs in order to remain financially viable.”

SVMH has had increasing fiscal problems since 2008, just as Downing started to receive his increased compensation.

“He worked for them for more than 25 years,” Diaz said. “The board members changed and there was a lack of oversight.”

Another surprise in the audit was the board’s approval of multiple retirement contracts, Diaz added.

The public hospital serves an average of 125 patients a day in a city of about 150,000 residents.

At the end of the 2010-11 fiscal year, the hospital had lost nearly $7.5 million on operating expenses. Paired with some mandated capital projects such as a seismic retrofitting and a switch to electronic record keeping, the hospital went from having $112 million cash on hand in 2008 to just $32 million last year.

“The primary reason we are doing this trumps everything,” said Gattis, on why the hospital started the search for an affiliation. “The primary overriding reason is our commitment to making sure this hospital is here for generations to come. We take very serious long-range strategic planning that is the most important thing we do as a board.”

The hospital board hired Cain Brothers & Company to facilitate the process of seeking an affiliation partner, a process that started early this year. Jim Moloney has been the primary contact at board meetings, public forums and for healthcare systems who are interested in pursuing an affiliation.

Though the auditor’s report questioned the transparency of the board in past meetings, the board members have been focused on gathering public input during the affiliation process. The group held multiple public workshops where they explained the decision-making process. They allowed members of the public to ask questions about their concerns as well.

Public input is important, because as a public hospital district, any potential affiliation will need to be approved by a public vote. The board members said if they decide to move forward with a vote it will be in November.

In April, the board elected to move onto phase two of the process with two potential partners.

One potential partner, HCA Healthcare, a national chain that manages around 160 hospitals in 20 states and in England, did not submit a letter of intent at the end of phase two. The nearest HCA-owned hospitals include Good Samaritan Hospital and Regional Medical Center, both in San Jose, about an hour north of Salinas.

The other, Natividad Medical Center, which runs a county hospital in south Salinas, proposed the creation of a new hospital district that would manage both facilities. Natividad is a “safety-net” hospital that provides services to patients that are uninsured or underinsured. The medical center submitted a letter of intent on July 2. The Board of Directors was expected to vote as early as July 26 on whether to pursue the affiliation with Natividad or remain as a stand-alone organization.

Harry Weis, the CEO of Natividad Medical Center, talked about a proposal for a merger of sorts at a June town hall meeting.

Weis’ presentation discussed many of the ways healthcare is changing in the region and how the partnership would allow both agencies to thrive.

He said the number of patients in hospitals statewide has declined by 200,000 per day since 2007. County-run hospitals, such as Natividad, have seen a drop of an average of 250 patients per day.

In Salinas, the number of patients seeking in-patient services has dropped an average of 50-60 patients per day.

“The model of health care we have had in the past has to be totally changed,” he said, noting a need for an increased focus on outpatient services, bundle payment option for patients and preventative care.

He said the two hospitals would be overseen through the creation of public authority that would have a board that is appointed by elected officials, such as county supervisors.

Others were concerned that Natividad Medical Center may try to become the primary hospital, using SVMH as an “overflow” hospital.

Weis suggested that would not happen.

“The way we would set to work with your team is there is a lot of untapped opportunity,” he said. “Patients go out of the area. With the right healthcare delivery system, we can grow.”