Quick Take
Watsonville Community Hospital reflects the growing fragility of Santa Cruz County’s health care system, strained by rising costs, workforce shortages and declining reimbursements. Despite real progress since becoming community-owned in 2022, Stephen Gray, the hospital’s CEO, writes that new federal Medicaid cuts are projected to cost the hospital up to $10 million annually, threatening local access to care. Measure N has funded critical facility upgrades, he writes, but state law prevents those dollars from covering staffing or service losses caused by federal cuts. To protect and expand health care services, the Pajaro Valley Health Care District is now actively seeking a strategic operating partner to ensure long-term stability. He insists the hospital will work to preserve local oversight.
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Santa Cruz County’s health care system is fragile. We know this.
Watsonville Community Hospital, where I serve as CEO, has well-documented financial struggles going back decades and culminating with a 2021 bankruptcy and a new health care district that took over the hospital with nearly no cash reserves.
This month, hospital leadership has had productive, collaborative discussions with our nursing staff and union representatives about the services we provide and seek to continue. We are grateful for this partnership and the shared commitment to patient care. Our focus remains on recruiting and retaining high-quality medical providers, encouraging community members to seek care locally, and keeping services available and providing excellent care for patients in every way we can.
We are not alone in our struggles to provide health care to our community, which includes an increasingly aging and health care-dependent population.
The two major integrated health systems – Dignity/CommonSpirit and Sutter Health – have both publicly acknowledged that they lose money in Santa Cruz County, when accounting for their full range of services provided here.
Kaiser Permanente grew quickly upon arriving in 2016 but had to scale back growth plans due to the nature of our market. Independent providers continue to struggle with ever-rising regulatory and administrative burdens and decreasing reimbursement rates.
WATSONVILLE COMMUNITY HOSPITAL: Read Lookout’s news and Community Voices coverage here
Our community’s federally qualified health centers – the final safety net for primary care – face those same rising costs and reduced funding. They also potentially – in another macabre twist to the health care story – need to defend themselves at the ballot box later this year.
Should any of those health provider pieces falter, the house of health care cards could tumble, meaning worse access to providers, longer wait times in emergency rooms and urgent care clinics, and more driving over Highway 17 or to Monterey County for essential care.
And now all providers will be significantly impacted by new federal legislation that guarantees the road ahead will be even more challenging. Like many community hospitals across the country, we are facing significant challenges related to federal funding impacts, which are projected to worsen this year due to the federal H.R. 1 bill that was signed into law by President Donald Trump. The bill, passed in July 2025, includes $1 trillion in cuts to the Medicaid reimbursements that hospitals rely on. Watsonville Community Hospital expects to lose between $4.5 and $10 million per year over the next three years as a direct result of those federal cuts.
These pressures are compounded by the fact that the hospital inherited limited financial reserves when it began operations as a community-owned entity three years ago. Despite these obstacles, the Pajaro Valley Health Care District has made meaningful progress since taking over in 2022, including improved quality and safety ratings, improved patient experience ratings, new equipment investments, and a successful bond measure initiative.
Measure N remains a financial bright spot, passed by local voters in 2024. The measure represents an important investment by the community in the future of the hospital. Measure N is a bond measure that provides funding exclusively for essential facility upgrades, equipment modernization and the purchase of the hospital property. State law prevents the hospital from utilizing bond funds to support personnel- and service-related costs. In other words, the bond funds cannot save us from the federal cuts.
Ensuring the hospital’s long-term financial stability will require ever-increasing, collective efforts. In the current federal environment, the health care district cannot afford to maintain and grow a hospital on its own. To this end, we are working hard to identify an operating partner for the hospital. The health care landscape is no longer one that lends itself to stand-alone, independent hospitals and health districts. Across California, more and more hospitals and health districts are choosing to partner with larger organizations to maintain and strengthen services, recruit physicians, and find long-term financial sustainability.
I recently spoke with the leader of a health care district in another part of the country. Their story is very similar to ours: a stand-alone hospital that was struggling financially with extremely low cash and having serious conversations about the services they could continue to afford, to the point where they were forced to close their labor and delivery services. They have since found a strategic partner in a large regional nonprofit health system that will step in to oversee the operations and financial management of the hospital under a lease arrangement. This will allow their health district to pivot to new, innovative health and wellness activities for their community, while no longer having to worry about the finances of their hospital, which will now have more physicians and services — including the return of labor and delivery — pouring into their town.
Like that health district, bringing in a partner to support our hospital’s operations could not only stabilize our current financial situation and expand services, but provide the health care district with space to realize its own potential. Our district board has history in this community and experience with past partnerships with non-local, for-profit entities, which should give us confidence that the district will enter into any partnership agreement with eyes wide open about any concerns related to loss of local oversight. Across California, health care districts have the capacity to do much more with their resources, including health-related services such as skilled nursing, clinics, ambulance services and community health partnerships.
In a time when health care options are being threatened at the federal level, we actually have the opportunity to grow services in our community.
We remain optimistic and committed to working together — with our staff, current partners, future partners and the broader community — to strengthen Watsonville Community Hospital for the future. We will maintain our commitment to strength, transparency and community in the face of all the challenges before us.
Stephen Gray is CEO of Watsonville Community Hospital.