An AVA Special Investigation

Is Coast Hospital Honoring its Promises?

by Mark Scaramella

"There are various phases to this project, outpatient services building, materials handling building, connecting corridor and renovation to the central plant, which will be completed at different times. The main portion of the project involves the outpatient services and the materials handling buildings and should be completed by November of this year." —Bryan Ballard, CEO, Mendocino Coast District Hospital

Translation: We're running out of money so we'll be putting off the other stuff until we get more money, perhaps through another parcel tax. Hopefully, nobody will notice the missing central plant renovations and connecting corridor when we congratulate ourselves for completing the project on budget in spite of major cutbacks and over-runs.

* * *

The Mendocino Coast Hospital District Board hired its smooth-talking CEO in early 1999 at $120,000 a year plus a generous benefits package which included Ballard's moving expenses.

Bryan Ballard had almost 30 years of experience in hospital administration when he arrived in Fort Bragg as Coast Hospital's top guy. His recent berths included administrative posts at regional hospitals in Gilroy, in the South Bay, and Delano in the California Central Valley north of Bakersfield, all of them much larger medical centers than Fort Bragg's community owned hospital.

Ballard's record is not unblemished, however. In 1996, he paid a $5,000 fine imposed by the California Medical Board because he'd failed to report complaints about two anesthesiologists who his staff had complained about. (One, who nurses said "looked drugged," injected some anesthetic into a patient's bedding by mistake.) Fines of this relative severity are unusual for the Medical Board; the violations, it can be assumed, were egregious. Or the anesthesiologists Ballard seemed to have been protecting constituted an ongoing menace to patients.

Both of the hospitals where Ballard previously worked report major construction and service expansions during the approximate periods when Ballard was in charge.

So, like a charismatic preacher leading his new flock to build themselves a new church, by the end of 2000 Ballard had convinced the Coast Hospital Board of trustees and the extended rural community it serves to vote to raise their district fees (parcel tax) by 1.3% to pay off a $5.8 million long-term bond for the construction of an outpatient services building, a materials handling building and to pay for extensive remodeling of the aging and outmoded 35-year old publicly-owned hospital, the only publicly-owned hospital left in Mendocino County.

Although numerous problems were encountered in getting the construction going, the Hospital's ever-compliant board didn't blame Ballard, voting unanimously to give him a 15% pay increase in July, 2003, bringing his base pay to $138k annually (part of it in deferred compensation), plus the generous benefits he enjoyed in his original contract.

Then, just last month, the Hospital Board bumped Ballard's salary up again, this time by 5%, bringing it to $145,000 plus all those benefits. Hospital trustees said they would probably bump Ballard's salary up again in six months.

These people are deeply in love, but Coast Hospital is deeper and deeper in debt.

According to a recent Mendocino Beacon report, board member Don Tucker declared that he was "thankful" that Ballard has agreed to stay, and that Ballard's compensation is "at the very low end of the CEO scale." Tucker added that "despite these financially stressful times one of the biggest mistakes the board can make would be to underpay their CEO."

Board member Jim Hay replied, "Echoes. Especially true in these times," while board member Camille Ranker added, "I don't think I can top those statements."

"Echoes," indeed. Like the Mendocino County Supervisors and local school boards, the prevailing theory seems to be that the bigger your deficit, the more you pay your executives for getting you there. (Coast Hospital is currently running a $1.5 million deficit and the deficit is increasing while patients served remain roughly the same. Hospital finance has always been a question of service-to-patient load ratio. What can a small, rural public hospital serving a static population afford to offer? Why is Coast Hospital's Board planning to raise Ballard's pay even more when it struggles to pay its existing debt?)

At last month's meeting, according to the Beacon, "the board unanimously approved $15,000 for a feasibility study to be conducted following this upcoming November election for a parcel tax to be placed on the ballot."

But no specific explanation was provided for what the parcel tax — which must be earmarked for specific projects or purposes — would pay for.

Ballard angered hospital staffers early in his tenure when he took $200,000 out of the Hospital's tight budget and gave it to old friends from his previous hospital job site in the Central Valley. These $200,000 buddies — now calling themselves "consultants" — were soon striding officiously up and down Coast Hospital's austere corridors recommending "cost savings."

Ballard quickly adopted his pals' recommendations, slashing nursing positions and other vital hospital support staff while he reduced operating expenses to the bare minimum we see today. As his salary grew, and Hospital money flew south to Ballard's "consultants," Ballard blithely hired expensive specialists and sub-administrators, even though medical care reimbursements were, and still are, on the decline as patient-loads fall, more uninsured persons appear for care, and government and insurance payments are squeezed to all-time low reimbursement levels.

In 2002 the Hospital put the bond-funded construction project out to bid, but all the bids came back at more than $1 million more than the Hospital's budget had allowed for. In May of 2003, Ballard and his captive project oversight committee decided to drop the general contractor approach and switch the job to a controversial and risky "multi-prime" project, quietly hiring a couple of slick and expensive construction consultants — without any competing bids — named Brian Kent and Ed Migge who operate out of Lake Elsinore, south of Los Angeles in Riverside County. It would be Kent's and Migge's function to oversee a series of individual contracts for each of the various elements of the construction.

Outside the palsy walsy world of Coast Hospital administration, suspicions about rip-offs and pay-offs became widespread as the bond construction work began.

Ukiah-based General Contractor Peter Richardson filed a lawsuit to obtain a restraining order on the work, insisting that the Hospital hadn't properly put the Migge/Kent contract out to competitive bidding. After months of legal wrangling and thousands of pages of depositions, Ukiah Judge Cindee Mayfield declined to issue a restraining order, or even rule on the question, saying simply that Richardson's suit had been filed too late. Mayfield's ruling has been appealed, but most observers think that the question is moot now that construction has proceeded as far as it has. (Mayfield could have issued her transparent ducking maneuver early on, thus saving Coast taxpayers and Richardson a lot of money. But the Superior Court of Mendocino County has never been known for judicial courage. The case had been dumped on Mayfield when Judge Leonard LaCasse punted it to Mayfield while taking up weeks of time himself without a ruling.)

Richardson wasn't the only person unhappy about the Hospital administration's dangerous binging. The Hospital's medical staff was increasingly unhappy as their support staff was cut, line-worker pay squeezed, supply and equipment shortages developed, reimbursements declined, and the construction project was delayed as cost estimates increased.

The whole show was shaping up as one of those frequent Only In Mendocino County fiascos.

To address what had become a small avalanche of suspicions, we made a comprehensive Public Records Act information request of the Hospital District, to which Ballard and his staff have responded promptly and completely.

Using the detailed project information supplied by the Hospital, we reviewed the consultants' pay records, compared the Hospital's cost breakdown to that of the general contractors, and interviewed the project's principal architect and original cost estimator, Steve Gonsalves of the firm of Nicholas Melburg & Rosetto out of Chico.

Prior rumors that the hospital board had obtained special liability insurance policies for CEO Ballard and Hospital Board President Charlene McAllister in the wake of the construction problems could not be confirmed and were explicitly denied by Ballard.

The Hospital District, it is now clear, abandoned the usual one general contractor approach to the job when all three construction bids were more than $1.3 million over their $3.1 million original budget for that phase of the work. However, all three general contractor bids were within $55,000 (about 1%) of each other, out of an approximate $4.5 million bid, making all three appear quite credible. These three General Contractor bids were fully bonded, fixed price bids with the bidders assuming all the risk of cost overruns.

The District's original budget was based on the project cost estimate prepared by the Hospital's architect, Mr. Gonsalves. So the logical question became: Why was the architect's estimate of the job so much lower than the three general contractor bids?

"Our estimate was for a balanced standard commercial building," explained Gonsalves. "It is not cheaply constructed nor is it extravagant." Gonsalves agreed that the bids for the new outpatient building were significantly over his architect's estimate. "There's just not a lot of local contractor participation," said Gonsalves. "Many of the construction trade bidders were coming a significant distance. The electrical portion of the job was bid by Fort Bragg Electric and it corresponds with our estimate. But the mechanical portion, foundation, carpentry, roofing, etc. was significantly higher. We didn't correctly capture the remote, rural bidding climate when we did our estimates. It was more of an urban type of estimate. In addition, previous estimates we'd done for other Fort Bragg projects such as the Coast Clinic were not subject to the prevailing wage requirements that the outpatient center was, because in this case the funding source was public money. We came up with a reasonable estimate, but obviously we were incorrect."

"The construction market has been very busy lately," Gonsalves continued. "Companies are not as interested in bidding new jobs if they've got a backlog, especially at a distance. A lot of projects have been going over budget in recent years. The bidding climate is not as competitive, not as aggressive. In addition, it can be hard to find skilled people to do the specialty work. The Coast Hospital is not unique in going over the architect's bid. But I'm still disappointed and surprised by the differential."

After a brief review of the three well-over-budget bids, the Hospital Board and management decided to hire a project management firm made up of two people, both friends of Ballard's, Brian Kent and Ed Migge who, according to Project Oversight Committee records, had been recommended by the Hospital's then-project coordinator Rob Cohen as project management consultants. The Hospital District converted the job to a "multi-prime" contracting approach giving Kent and Migge a $745,000 contract, at least $300,000 more for project supervision and management than the three general contractors had bid for supervision and management. Kent and Migge convinced the hospital district that they could get the job done for much less than what the general contractors had bid — so much less that their fat fees would be paid for by the savings.

What is "multi-prime" contracting?

According to the national Contract Management Association (CMA):

"With multiple prime contracting, the Owner holds separate contracts with contractors of various disciplines, such as general construction, structural, mechanical, and electrical. In this system, the Owner, or its Construction Manager, manages the overall schedule and budget during the entire construction phase. This system ... gained favor in part as another method of 'fast-tracking' construction. Work in each construction discipline is bid separately, allowing the flexibility of awarding construction contracts on the first portions of the project as soon as the respective aspect of design is completed. This fast-track approach appears to be a highly desirable feature of this method of procurement in cases where time of performance is a critical element. Furthermore, the system allows the Owner to have more control over the project schedule, since the Owner sets the schedule for bidding individual portions of the work. For example, if an initial phase of construction (such as foundation construction) is delayed, the Owner may reduce liability for delays by postponing the bidding of follow-on work. Another advantage of this system is that the Owner can realize savings by directly procuring major material items, such as structural steel or major mechanical equipment, avoiding contractor mark-ups."

Notice that the CMA carefully uses the word "appears" when describing the "highly desirable" fast-tracking. Also, there's no indication that Kent/Migge or the Hospital district bought any raw materials or components directly from the source supplier.

CMA continues:

"However, the very nature of this system causes its primary disadvantages. First, the final cost of the project is not known until the final prime contract is procured. [My emphasis.] In addition, there have been numerous cases where this method did not work well due to the absence of overall authority and coordination once construction is underway. The problems primarily arise from lack of coordination and contractor delay issues. While the general construction prime contractor [Kent/Migge in Coast Hospital's case] is often given contractual responsibility to coordinate the work among trades, including schedule, this contractor lacks the contractual authority to dictate the schedule of another contractor. For example, during the construction of a university laboratory/classroom facility, delays arose due to coordination issues involving installation of laboratory equipment The general contractor sought damages from the Owner for delays by the mechanical contractor, while the mechanical contractor blamed the general contractor for its delays. This type of dispute is far from unique in this form of contracting, even in cases where the Owner has used an independent construction manager to coordinate schedule issues."

* * *

Although the new outpatient services building is a conventional commercial facility not requiring higher-cost hospital-style construction standards or special construction management, Kent and Migge were given a $745,000 consulting contract to manage the "multi-prime" contracts (for the many individual industrial trades) which were awarded to a series of subcontractors who contracted individually with the Hospital District.

In addition, billing and payment records for Kent and Migge show that they're getting a lot more than their base $745,000 because expenses were not included in their already very big payment — expenses that are always included in General Contractor bids as part of their overhead. In the Kent/Migge contract, travel and other expenses (e.g., blueprints) are paid separately. It's not clear what the additional expense total is or will be at this point, but it's well into the tens of thousands — so far. Most of the trips that have been reimbursed seem to be attempts to recruit more bidders in various parts of California, or to attend Hospital District board or project review meetings.

Besides putting a large administrative burden on the Hospital District for the many individual contracts, as noted by CMA, this approach has a number of risks.

"It's an unusual approach to hire a management outfit, but have the trades contract directly with the owner," agreed architect Gonsalves. "I've seen it in a few other projects, but it's not the typical way these projects are managed. You have to remember that the hospital decided to change gears in midstream. Rather than doing a new, lower-cost design and re-bidding the job, in an effort to try to speed up the process, they decided to begin construction while they were still working out contracts with the other trades/contracts for the balance of the work. That puts the hospital at risk, and they won't have a clear grasp of what the ultimate project will cost, nor of when it will be completed. I'm not sure if there's a definitive schedule in place, which means there's no incentive to meet them. There's no penalty clause in the consultants' contract and there's no way to hold individual trades to an overall schedule because they can always blame the hospital or the other trades for delays. I was told there are liquidated damages clauses in the contracts with the subcontractors. But that's a difficult thing to prove. It's a paper tiger anyway. You can try to pin almost any amount of damages on a subcontractor, but unless you can prove it you won't get it. You might get a partial settlement, but that would be after the work is over and the costs are incurred. The District has been relying on EJM/KKG's projections of the money that can be saved. I don't know about their budget. We're not in that loop. If the job was done conventionally by a general contractor, they'd have an on-site superintendent and project management and office support and overhead built into their bid. We generally estimate it as a percentage of construction, something like 7-8% for supervision, and another 7-8% for overhead and general conditions which includes such things as small tools, fencing, trailer, utilities, and some for insurance and bonding."

"The multi-prime approach is a new phenomenon," added Gonsalves. "It puts a lot more pressure on the ownership group, because they hold all the subcontracts and the risk. Any problems with missing scope [unanticipated work that must be done to keep the individual subcontracts on track] are not covered, so that becomes a problem for the hospital. With a conventional project, that would be the general contractor's responsibility. And you can experience daisy chain impacts where early mistakes can bump up the cost over the following contracts. There's just more risk involved in this kind of contracting than in going with the general contractor."

"Obviously the hospital thinks it can save money by eliminating the general contractor's profit margin. I assume that's their rationale," said Gonsalves. "I don't have enough history with similar contracts in the multi-prime arena, so I can't say if there's any real savings."

But if the general contractors bids were over-budget for the reasons stated by Gonsalves, how could Kent and Migge save the more than $1.5 million that would be required to make up the difference between the amount the general contractors had bid and the Hospital's original budgeted amount? It is now clear that much more than $1.5 million over the initial estimate plus their own additional add-ons for travel and related expenses that the two consultants' approach to the project will cost much more than any one of the three bids by the three snubbed contractors.

As they became aware that their management of the project was quickly driving overall costs up, Kent and Migge quickly began cost cutting by "value engineering" the job.

In theory, value engineering is finding cheaper ways to do the same thing, cutting only cosmetic elements of the design or finding bidders willing to do the work for less. But how realistic is it?

"Our design would have given the hospital a serviceable building," explained Gonsalves, "with reliable systems that would not need to be replaced or rebuilt before the bond period was up. We looked at both initial and life cycle costs. We told the Hospital District to consider deferring the materials handling building or other elements of the project to another day. Then use their available resources for the outpatient expansion and central plant as we designed it. But they're reluctant to do that. They feel they made a promise to the community."

"There's no question it's a big nut to make up," said Gonsalves. "Time will tell if it was prudent. All we're doing is trying to help them with various scenarios." (The architect is still reviewing design changes that are proposed by Kent/Migge or the Hospital.) "We'll stick with the owner and help them deliver the best possible project they can. We hope they don't get stuck with partial completion on all the contracts — that would be the worst scenario. I still think they could propose to delay parts of the project. But it's true that that doesn't honor the promises they made. Some of it is normal cost escalation."

"We don't use term 'value engineering'," added a skeptical Gonsalves. "They've proposed quite a few cosmetic changes, but they're minor cost reductions. The bigger cost savings are being generated by going to cheaper systems — air conditioning, for example. The existing hospital has a central plant with a boiler and chiller supplying chilled or hot water to a four-pipe system. It's economical and responsive. The water is circulated around the building, through radiators, and fans blow air over the pipes heating or cooling different parts of the building. The equipment in the central plant is near the end of its useful life. So we designed a similar central plant system for the outpatient building. You can do a much less expensive mechanical approach, using 'package units,' to reduce initial costs. But these individual units increase utility costs and will not be as responsive or as long-lived a system as a four-pipe system. The Hospital is trading off initial expense for higher life-cycle costs, higher utility costs and earlier replacement and increased maintenance. But it's the owner's choice. We gave them the pros and cons, and they picked the less expensive system. It's 100% code compliant, and not a design problem. I guess some people call that 'value engineering.'

"It's always possible to find areas to cut costs. We work with our clients to review cost savings methods to make sure there are no code compliance issues. We're still the designer of record.

"But the entire approach is a gamble the hospital has taken," said Gonsalves. "A few other people are doing it this way, but it's not common In general, it comes about when the owner is solicited by a construction management firm at some point during the project who convinces them that hiring the management firm will save them money. They think they have expertise in helping the owner do the bidding and saving some money. In fact, the Butte County College expansion used this method, but they did it from the outset and budgeted it that way. I have no personal experience with it and I've seen nothing showing that money was actually saved. It's a new method, so the few multi-prime projects are still under construction. I don't know how you'd say you saved money. It's all speculation. Who can say if the finished project is really comparable to the initial design? Even if you could compare the costs, you won't know for years. I hope they succeed with this and we will continue to work with them and do what we can to see that it works."

* * *

The project's latest expense report shows that as of August the District had paid for more than half of the outpatient services center work, work which Ballard now says will be "completed" in November. The materials handling building is now little more than a metal warehouse, for which Kent and Migge found a lower cost bidder in Southern California, thus saving more than $100,000.

Very little has been spent on the infrastructure remodel work so far and there doesn't seem to be any chance of that work being funded, much less completed, by November. The medical/surgical and obstetric services nurses' stations were also scheduled for remodel and upgrade early in the planning, but they've disappeared from the project schedule entirely.

The District hasn't made any official final cost or schedule projections, although their latest "budget element comparison" on whatever the project has been reduced to shows $714,000 in cost over-runs.

Will delaying much of the project be perceived by Fort Bragg and the rest of the District's sprawling northwest service area be seen as "not honoring the promises that were made"? So far, according to the District's Project Oversight Committee minutes, there's an almost complete absence of public participation in the project status meetings.

Then we hear the recent announcement that the District is going to pay $15,000 for a feasibility study to put another parcel tax on the ballot.

Nobody wants to see the crucial and widely supported hospital squeezed into catastrophic financial scenarios. Nobody wants to see the hospital sold to an HMO or other privately-owned hospital chain, a recurring fear that Ballard's contract and the casual fiscal practices of the Hospital Board have ignited.

Paying more, borrowing more, taxing more, scaling back, putting off, and giving work to your friends is the norm for public spending these days because it's easy to do when nobody's watching and nobody's asking hard questions. Hello? Board of directors? Anybody home?

Meanwhile, Ballard and his board are proceeding to plan even more hospital construction. In September of 2002 they approved another project to develop and construct a 12,000 square-foot Medical Office Building to be situated next door, west of the Neva Cannon Building. The project is not yet underway, but may use some of the same subcontractors as are at work on the outpatient services building, and quite possibly creating another unique set of problems when it gets underway.

The Medical Office Building is being developed by G.L. Bruno Associates, Inc., a commercial real estate development company based in Fresno, just up the road from Ballard's prior place of work in Delano. G.L. Bruno specializes in the development of medical office complexes in the Central Valley and other states. Their architects are unlikely to be confused with Michelangelo. The planned, single-story Medical Office Building will be a joint venture between the developer, Bruno, local investors, with the hospital providing the land as its share of the investment. Rumor has it that Ballard and his Chief Financial Officer, Jacob Lewis, are among the other "local investors" in the G.L. Bruno project; it will be situated on approximately .9 acres of Hospital land appraised at $114,000.

If history is any guide, the Hospital District's board will re-apply their edict: the farther into debt Ballard drives them, the greater will be his reward.

But the basic question, not raised by the public or the Hospital District's alleged trustees, remains: Can the sparsely populated, relatively low-income residents of the northwest corner of Mendocino County support all this expensive construction and expansion of services and facilities while government payments and insurance reimbursements are declining?

Are we that sick?