Trouble in Paradise?

For more than a decade, San Diego Medical Services (SDMS) was lauded as an innovative public-private partnership that could serve as an example to other cities. Not only did the city of San Diego benefit financially through a profit-sharing arrangement with its private partner, Rural/Metro Corp., but the city was largely free from the turf wars between the fire department and private ambulance service that vex so many others.

“At a time when many American cities have been forced to cut services, and emergency medical services agencies nationwide struggled to provide high-quality prehospital emergency medical care under the constraints of declining reimbursement, San Diego’s EMS system stands out as one of the best in the nation …” reads an SDMS 10-year report issued in 2007. “SDMS does all of this without a City subsidy … . Furthermore, SDMS generates a profit that it shares with the City to enhance San Diego’s ability to provide the highest quality emergency services.”

All seemed to be going smoothly between the city of San Diego and Rural/Metro Corp., which had joined together to form the limited liability company named SDMS in 1997. The city and the private ambulance service were seen as so tight that no other company even bothered to go through the bidding process when the arrangement, per state requirements, came up for renegotiation in 2007, says Rick Keller, a partner with Fitch & Associates, an EMS consulting firm that the city contracted with in the mid-1990s to redesign the EMS system, a plan that gave rise to SDMS.

That was until this past April, when a former Rural/Metro executive accused the company of cheating the city out of its fair share of profits. In response to the accusations, the city auditor released a 60-page report that found millions in improper or unreasonable costs and fees charged by Rural/Metro to SDMS, as well as a lack of city oversight of Rural/Metro’s financial management.

Specifically, the audit found that Rural/Metro withdrew about $5.8 million in expense reimbursements it was not entitled to between 2006 and 2010; had not put about $4.2 million in revenues into the partnership’s account between 2002 and 2007; and may have inflated or duplicated some charges for expenses.

In addition, the auditor’s report called into question the characterization in the 10-year report that SDMS isn’t city-supported. Rural/Metro has charged both a billing fee of $23.50 per transport, as well as a 6.5 percent monthly “operating overhead” fee, costing SDMS about $8.3 million a year between 2006 and 2010, according to the audit. Yet “SDMS does not compensate the City for occupying City-owned facilities and utilizing other City assets, a practice that results in a continuing financial support to SDMS for which the City derives no direct benefit,” the report reads.

None of the findings went over well within city administration, which is facing a nearly $57 million budget deficit next year. “It’s not a reflection on the quality and level of service we’ve been receiving, but clearly at a corporate level there was misbehaving,” Jay Goldstone, the city’s chief operating officer, told the San Diego Union-Tribune.

Rural/Metro has denied any wrongdoing. “We stand firmly in our belief that all matters have been managed appropriately and professionally, all of the money is accounted for, and we have followed the SDMS operating agreement with the full cooperation of our partner, the City of San Diego,” Michael Simonsen, director of public affairs for Rural/Metro West Zone, said in a statement during a city audit committee meeting.

The audit has left the future of the once-celebrated public-private partnership in doubt and has raised questions about the extent to which it’s prudent for city governments to tie themselves so closely with private companies.

“There is no reason a private company and a government entity can’t work hand in hand, but there are certain premises that need to be followed, and that’s transparency and accountability,” Keller says. “If everybody knew what was in the agreements, and objective external people were holding people accountable, it would not have been an issue.”

And even though SDMS may end up serving as a cautionary tale, other experts say they hope the falling-out won’t put a chill on future attempts at new models for providing EMS. Regardless of the outcome of the dispute, between 2006 and 2010 alone, SDMS reimbursed the city $23 million—better than the city would have fared under a typical contract with a private provider, experts say. They add that in the face of an aging population and worsening budget constraints, the need for civic leaders and private providers that are willing to work together to come up with creative solutions is desperately needed.

“The city of San Diego was trying to be entrepreneurial, only they weren’t MBAs,” says Geoff Cady, a fire/EMS consultant and resource planning and deployment administrative officer for the San Jose Fire Department. “If you want municipalities to be innovative, you cannot kick people in the teeth when they make a mistake.”

What made SDMS different

Many cities, of course, enter into agreements with private ambulance companies to provide EMS. But experts say San Diego was the only one to form a separate legal entity that was run by both public and private employees, was overseen by a public-private board of directors and shared expenses and revenues.

SDMS, in fact, was created in the wake of a falling-out with the city’s former EMS contractor over questionable billing practices, a failure to meet response time standards and multiple lawsuits, according to SDMS’s 10-year-report.

Under SDMS, Rural/Metro ran the day-to-day operations, the finances and the billing. The partnership was governed by a five-member board composed of three representatives from the city, including the fire chief, and two from Rural/Metro. The mayor appointed the board chair and was responsible for city oversight of the contract.

Shortly after its formation, SDMS upgraded an outdated dispatch system and developed TAPCHART, among the first electronic systems for collecting patient information for use in research, quality improvement and billing used by an EMS system. “The city didn’t have the money for those kinds of improvements, but Rural/Metro had the financial depth and credit line to be able to make capital investments to ... result in greater coordination of fire and ambulance resources,” Cady says.

Medical oversight also was improved, according to the 10-year-report. Prior to SDMS, there was little medical oversight of the EMS contractor; today, that’s provided by James Dunford, M.D., an emergency physician at the University of California, San Diego, Medical Center, widely considered one of the nation’s top medical directors.

And operationally, the arrangement was nearly seamless. San Diego Fire-Rescue Department’s firefighter/paramedics and firefighter/EMTs provided first response, while Rural/Metro employees operating under the auspices of SDMS handled transports. Rural/Metro consistently met response times, Simonsen says.

“We use the same equipment. We fall under the same medical direction. The scene management is provided by the fire department. When a San Diego Medical Services ambulance pulls up, even though you have private provider personnel on the ambulance, when they are on scene they are under the command of the fire department,” Simonsen says. “Everything in this EMS system is done together and jointly between the partners, and thus the citizens are receiving the best service possible.”

One difference: Firefighters are city employees and receive public pensions. Rural/Metro’s paramedics are paid by the company, have a separate retirement package and are covered by their own collective bargaining unit, the National EMS Association.

Maurice Luque, spokesman for San Diego Fire-Rescue, reiterates that the questions have arisen over profit-sharing, not patient care. “Operationally, it provided what we felt was a top-level customer care approach to responding to medical emergencies,” he says.

Cady, who studied the San Diego model when the ambulance contract in his county was coming up to bid, was impressed with what he saw, particularly the cohesion among the public/private personnel, as well as San Diego Project HeartBeat, a public access defibrillation program. The program offers a turn-key solution for businesses looking to add AEDs that includes purchasing equipment and helping businesses meet state requirements for training employees, testing, maintenance and documentation, all of which protects them from liability. A government agency would have difficulty offering such a program on its own because of the “arduous procurement process” for equipment purchases and budget constraints, Cady says. But Rural/Metro was nimble enough to make it happen. Project HeartBeat is both self-sustaining financially and a public service.

“Businesses that were interested in having an AED program now had a way to set one up and feel comfortable that they had met all the state regulations,” Cady says. “It was great for the people of the community, and it was also great ‘PR’ for their organization. It showed a very progressive organization.”

The future of EMS in San Diego

While initially it looked as if litigation was looming, since the audit’s release, the city and Rural/Metro have “entered into an agreement that we would work together to resolve the issues that have been raised,” Simonsen says. But SDMS, as it was, is being disbanded.

Rural/Metro has agreed to hire a forensic auditor to look over the books and to have the process overseen by a retired judge whom both parties agree on. Rural/Metro will also put up a $7.5 million “surety” bond and will agree “to negotiate with the city in good faith on a new short-term service agreement with the city of San Diego to continue EMS services.”

The whistle-blower, Robert Heffner, was Rural/Metro’s former West Group president. According to news reports, city officials have said the San Diego contract will be put out to bid soon (see “Who Will Provide EMS in San Diego?” below).

Despite the findings, experts caution against jumping to conclusions. The agreement involved not just profit-sharing but expense-sharing as well. Rural/Metro was allowed to put its costs for capital investments and other services against profits, an accounting system that can be complex and involve things like depreciation, accrual, interest—and room for interpretation. “The challenge in any kind of accounting activity is to agree how you are going to account for the value of various things,” Cady says.

Public and private entities also operate under different rules and regulations, adding to the complexity of SDMS’s accounting. For example, private entities have depreciation schedules to lower their tax burden; public entities don’t get taxed, so they don’t have to do that accounting, Cady says.

“You’ve got the policy-makers saying public employees have got to be creative, light and agile on our feet, only they’re more educated on the issues of public policy and administration,” he says. “The folks evaluating the feasibility of the business model aren’t really trained in assessing that.”

One example: For years, Rural/Metro was charging a 12.5 percent “capital fee” for certain undepreciated capital assets, costing SDMS approximately $1.6 million between 2006 and 2010. According to the report, that rate was about twice the industry standard.
“Fundamentally, the system design and structure are sound,” Keller says. “It was in the implementation of the relationship between the city and Rural/Metro, and as the auditor’s report indicated, the evolution of it, without clear oversight that allowed it to stray from its initial fundamental structure.”