Watsonville Community Hospital sale to fledgling health district approved

Update: The Pajaro Valley Healthcare District Project celebrated on Wednesday after a bankruptcy court judge approved its bid to purchase Watsonville Community Hospital.

The hospital will stay open and medical services will continue uninterrupted, but the group still has hurdles to overcome.

It has to:

• Raise $20 million by Aug. 31 to finalize the purchase.
• Raise an additional $29 million to operate the hospital through the end of the year.
• Set up a board of directors by March 22. Applications are due by March 4.
• Come up with a long-term plan to turn around the failing hospital, which has had 20 administrators in the past 21 years.

The district is optimistic about its chances of success and, with the help of State Sen. John Laird and Assemblymember Robert Rivas, whose district includes the Pajaro and Salinas valleys, “anticipates” receiving close to $20 million from the state by the end of June, said Santa Cruz County spokesperson Jason Hoppin in a news release.

Longtime Santa Cruz health administrator Mimi Hall, who is the CEO of the district, said she feels “amazing” about the approval, and that despite the challenges ahead, the hospital — the only one in Santa Cruz County other than Dominican in Live Oak — is worth saving.

“To me, this has always been about equity,” she said, adding this effort will help change the future of health care for South County residents. “There’s still so much to do, but today, I’m looking back and soaking in what we’ve accomplished so far.”

The district formed in just a single month in January, thanks in large part to the legislative clout of Laird, who spearheaded a bill creating the district and then pushed it through both houses. The district still needs a board of directors and the Santa Cruz Board of Supervisors is currently accepting applications for the district’s board through March 4, for March 22 appointments.

The hospital management team will stay in place until Aug. 31.

“The court approved the sale today, but we do not expect the sale to close and the project to take a direct managerial role until they complete the transaction,” Watsonville Community Hospital CEO Steven Salyer said in an email to Lookout.

Hall said the district has been working with the hospital team to make sure the transition is smooth.

“Management and operations decisions will be up to the newly formed district board, likely with recommendations from the project’s project manager, who will stay on initially to serve the new district board for continuity,” she said.

Note: Lookout’s Tuesday story, below, laid out the many issues in the dramatic change in Watsonville Community Hospital ownership. Click here for an application to join the newly formed district’s board of directors.

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Previous story: Watsonville Community Hospital needs saving.

That’s the consensus of a group of government and local health care leaders who in the past month have created a healthcare district and raised an astonishing $20-plus million to acquire the long-struggling hospital, which declared bankruptcy in December. But the new group, called Pajaro Valley Healthcare District Project (PVHDP), is still seeking about $20 million – $15 million of which it hopes to get from the state — so it can purchase the hospital.

On Wednesday, a judge will decide if the group has secured enough funding to close the deal by Aug. 31.

Even with the immediate shortage, those closest to the sale are optimistic it will go through.

At the hearing, PVHDP doesn’t need to have all the funds ready, says Mimi Hall, a veteran Santa Cruz health care administrator, who now heads the group. With the $20 million — assembled through commitments from Santa Cruz and Monterey counties, the Community Health Trust of Pajaro Valley and the city of Watsonville — and a commitment to complete the fundraising by Aug. 31, she believes the court will award the hospital to her group. Likely making matters simpler: there are no other apparent bidders.

Since the hospital declared Chapter 11 bankruptcy in December, only the still-forming new district has stepped forward to shoulder the responsibilities of ownership and management.

The hospital serves a high number of underinsured patients, and that has exacerbated its financial woes. Close to half its patients — 49.5% — received some kind of Medi-Cal support in 2019, state records show. Comparatively, a total of 25.1% of Dominican Hospital patients received some kind of MediCal support. Statewide, the total is 31.2%.

The hospital, a long-troubled enterprise, has had 20 administrators in the past 21 years and, as of August 2021, had an annual loss of $17 million, court documents show.

Nurses at Watsonville Community Hospital demonstrate outside the hospital, Wednesday, Jan. 27, 2021.

(Patrick Riley/Lookout Santa Cruz)

“We know that it’s not sustainable the way it is,” Hall says, “and you cannot turn it around in one day or one month, or even one year. But we’ve done a ton of work and business modeling that shows us by the end of 2023, with some of the changes and the improvements that we’ll be making, that will get to break even.”

Hall declined to share the business plan with Lookout until the sale is finalized.

Hall is a 20-year veteran health administrator who received national accolades for her early, decisive action, leading COVID-19 precautions for Santa Cruz County. She acknowledges the warp-speed creation of the healthcare district and its funding model is complicated to understand and seems overwhelming. However, both she and State Sen. John Laird — who used his considerable legislative clout to create the healthcare district around the hospital in less than a month — believe they will bridge the financial and logistical hurdles and find a way to turn the hospital around.

If the group is not successful, the hospital — the only hospital in Santa Cruz County other than North County-based Dominican — will most likely close. Health planners say that that would leave an area of about 140,000 people, centered around south Santa Cruz County as well as parts of Monterey and San Benito counties, without a 24-hour emergency room within a 30-minute drive.

Further, Watsonville Hospital currently employs 654 people and contracts with an additional 70 physicians, whose own job futures would be thrown into change.

That, says Hall, is unthinkable.

“When I look at the huge, negative critical impact, the closure of Watsonville Community Hospital could have on our community, especially those who really, really don’t have a voice of their own, and won’t have good options for health care, it’s just not something that I could let fly by,” says Hall, who retired from her position as director of the Santa Cruz Public Health Services Agency in November 2021.

But even if the group raises enough money to acquire the hospital, it will still need more money to operate.

Hall estimates it will cost $39-$40 million to acquire the hospital. Then, the group will need another $29 million — $18 million for operations and $11 million for employee liabilities — just to make the hospital functional through the end of 2022.

By the end of 2026, she says, the group hopes the hospital will be credit-worthy.

The numbers concern some with experience in health planning, even as they acknowledge the devastating effect the closure would have on the mostly low-income workers the hospital serves.

Dr. Wells Shoemaker, who has 20 years experience as a medical director, including eight years as medical director of the California Association of Physician Groups, says he admires what Hall and Laird are doing, but fears long-term sustainability is impossible. He is one of the few public voices so far to express doubts about the viability of the plan.

“How much money will it take? But more importantly, how can you make sure that there’s enough money flowing in to sustain it,” he says. “If you can’t sustain it, I think it’s unethical to even start because you’re just going to waste time and money and then somebody else is going to have to do it all over again.”

He says Watsonville has been losing physicians and nurses for years to other hospitals. Shoemaker has watched more than a dozen hospital administrators try to make the hospital work and worries PVHDP doesn’t have an administration capable of running a healthcare district.

For the most part, those leading the effort agree that it’s far from an ideal transition, but they believe in the cause and they are taking it step by step, with commitment, rather than funding certainty, driving them forward.

The Money

Hall estimates that the total amount needed to purchase and run the hospital for a year is between $60 and $70 million — as Lookout previously reported, based on documents filed with the legislature. The estimates came from the coalition.

Hall broke down the funds PVHDP already has for Lookout.

Hall hopes the largest amount — $15 million — will come from the state budget. She, Laird and Assemblymember Robert Rivas, whose 30th district encompasses Pajaro and Salinas valleys, are providing a letter for the bankruptcy court sale hearing that says they’re seeking the $15 million from the state. The funds would require legislative approval, with the overall state budget supposed to be approved by June 15.

Laird, who serves on 10 Senate committees, including three budget committees, one of which he is chair, insists that focusing on an exact dollar amount for the sale is too difficult right now.

“The amount of the bid and what is needed is a moving target,” he says “.…There’s a big question about what gets lumped into the cost for that. And that’s what everybody’s working on. So I think… there is not a common number that has been said. Just moving. And so the thing about it is everyone should relax, and just know that everybody’s working on that.”

Given that terrain that he describes, Laird doesn’t want to “speculate” on where the money would come from to cover the capital needed to run the hospital.

“It’s just too early to get to that conversation, even though everybody’s thinking about it,” he said. “And everybody has their idea about how that need will be met.”

In addition, Laird said that neither he nor Hall have a particular model of another healthcare district from which they are working. Laird says he has spoken with hospital district administrators over the years, and believes their experience can be applied.

Laird, long-time Santa Cruz government leader and three-term state assemblyman, who directed the California Natural Resources Agency for eight years under Gov. Jerry Brown, sums up his “optimism” that the plan can work, citing the need.

“It would just be a tragedy if this hospital were to go under,” he says. “People would just not have basic hospital services near them.”

To help defray costs of the hospital, he says the district “could levy a new tax,” but that “would definitely need to go before the public for vote.”

Taxes fund California’s 77 healthcare districts — 54 of which are in rural areas — operate.

Laird got it through both houses of the state legislature and signed by Gov. Gavin Newsom in less than a month, and that speed and buy-in provides him confidence about ultimate success.

“I’m feeling optimistic about it all,” he says. “But it is just one foot in front of the other.”

Shoemaker says it’s practically impossible for hospitals without a lot of privately insured patients to make money.

But Hall has a ready counter. She thinks the Affordable Care Act will allow more people to get insurance and that the hospital will increasingly have fewer uninsured patients. She also believes her group can attract specialized medical professionals to the hospital and make it more profitable.

Shoemaker thinks that’s unlikely, given the competition with Dominican Hospital and Sutter Health. He doesn’t see how the group — despite its optimism and good intentions — can solve such entrenched problems quickly.

Hall insists they are working on creative solutions.

Setting up the healthcare district

Laird’s bill created the district, but formed too quickly for the public to elect a board of directors. The district consists essentially of the Pajaro Valley School District minus Aptos.

“So we agreed to have the [County] Board of Supervisors make the initial appointments, and then over time, have it go to election,” Laird says.

The Board of Supervisors will appoint directors on March 22 and they will have their first meeting March 24, according to a release from the county earlier this month. A planning meeting will then be held March 26.

Hall said two of the members would be up for election within two years and then in another two years, the other three members would be up for election.

Sums up Laird, “ I think the key thing that has happened in this process is that every time there’s a successful move toward it, or let’s say every time there’s an affirmative move toward it, like the fast creation of the district, like the contributions of millions and millions of dollars, it sends a signal to everyone that this is an effort that stands a good chance of success, that they need to participate in this well.”