Santa Cruz County, health officials confident a district will save Watsonville Community Hospital

A coalition of local government agencies and health care groups aiming to purchase Watsonville Community Hospital got a crucial boost Friday from Gov. Gavin Newsom, but leaders acknowledge that steep challenges remain.

Newsom on Friday signed into law Senate Bill 418, legislation proposed by State Sen. John Laird that creates a health care district which, the nonprofit coalition says, will take over hospital operations and bring stability after years of financial woes.

The coalition, known as the Pajaro Valley Healthcare District Project, still needs to raise at least $64.4 million to acquire the hospital, which filed for Chapter 11 bankruptcy in December. It has brought in more than $12 million of that so far, including a $5 million grant from the County of Santa Cruz, and is hoping community partners will pledge more, but still hopes for a big contribution from the state budget so it can have a sale agreement by the end of March.

Not only does the nonprofit face challenges to acquire the hospital, but it also faces the long-term goal of creating a sustainable model to run the facility and continue providing care to Pajaro Valley residents. It’s something the leaders of the nonprofit — in which the county of Santa Cruz, the city of Watsonville, the Community Health Trust of the Pajaro Valley and Salud Para La Gente are partners — are ready to confront.

“This is a community of essential workers,” Salud Para La Gente CEO Dori Rose Inda said about the population served by the hospital. “Of people who are responsible for putting the healthy food on our tables every day, and it was so important for them to keep working during the pandemic because of their essential role and their essential work.”

Just under 53,000 people live in Watsonville, which along with the communities of Corralitos, Freedom, La Selva Beach, Pajaro, Royal Oaks and Pajaro Dunes make up the Pajaro Valley. About 8,500 people are employed by the agricultural sector and about 2,400 work in the tourism industry, according to estimates from county officials.

Rose Inda can’t accept, particularly after the impact of the COVID-19 pandemic on the region in the past two years, that the hospital could close and complicate access to medical services for these communities. The next-closest hospital, Dominican Hospital in Live Oak, is about a 15-minute drive without traffic from Watsonville Community Hospital. On bad traffic days, the drive can take 45 minutes or more.

She, like other project leaders, feels local ownership and accountability are what is needed to keep Watsonville Community Hospital open long-term. After researching solutions, they decided on the health care district model.

No formal opposition against the creation of the healthcare district was filed with the legislature, according to a State Senate floor analysis.

Where health care districts came from and how they work

Facing a shortage of hospital beds and lack of acute care at the end of World War II, the California legislature enacted the Local Hospital District Law in 1945.

“The intent was to give rural, low-income areas without ready access to hospital facilities a source of tax dollars that could be used to construct and operate community hospitals and health care institutions in medically underserved areas, to recruit physicians and support their practices,” according to a 2006 report for the California HealthCare Foundation.

It’s common for health care districts to receive a share of local property taxes, while some may charge for services or levy special parcel taxes, according to analyses of Senate Bill 418. They can also receive grants or generate revenue from property lease income.

In 1994, the legislature responded to changes to health care access and district demographics by changing the law so it became the Local Healthcare District Law instead of hospital districts. Currently, there are 77 health care districts in the state, and of those, 54 are in rural areas, according to the Association of California Healthcare Districts.

State law gives health care districts the authority to build and operate health care facilities, to lease or own property and to provide financial assistance to other entities providing health care services.

Health care districts, like other special districts such as a water district, are overseen by local agency formation commissions, or LAFCos. The commissions can conduct reviews or studies to determine how effective the districts are in providing services.

Each district is led by a five-member board of directors elected by district residents. The board members, who serve four-year terms, have to be registered voters within the district — something the district project leaders are hoping will be beneficial to the long-term success of the hospital. The Santa Cruz County Board of Supervisors will appoint the initial board members.

While not all health care districts run hospitals, two nearby hospitals — the Salinas Valley Memorial Healthcare System in Salinas and Hazel Hawkins Memorial Hospital in Hollister — are both operated by health care districts.

Sherrie Bakke, director of patient and community engagement and business development at Hazel Hawkins, said one of the major benefits of a health care district-run hospital is that the “governing board of the hospital is a reflection of the community we serve.”

She said this was a contrast to her previous job, where the hospital was run by a private, not-for-profit group.

“The board of directors did not reflect the community they serve, there were no term limits,” she said. “Nobody was allowed at their board meetings, nobody knew the decisions that they were making. Nobody knew what was happening with their hospital.”

Mimi Hall, who’s now CEO and president of the Pajaro Valley Healthcare District Project after four years as Santa Cruz County’s health services director, said while the PVHD will be unique, she hopes to learn from other districts like Salinas. She said the project plans to meet with the hospital’s executives.

Learning from other districts will be useful for Pajaro Valley Healthcare District Project leaders as they begin to develop the health care district.

“When we first decided to do a health care district, people said, ‘You’re crazy. Health care districts with hospitals are closing, they’re not starting,’” she recalled.

Based on figures from 2017, when there were 79 districts, a total of 38 owned and operated hospitals, 36 didn’t own or operate a hospital and five owned but didn’t operate a hospital, according to a study published in California Bankruptcy Journal in 2020. As stated in the analyses filed with SB 418, since the law change in 1994, “14 healthcare districts have filed for bankruptcy, and over one-third of the healthcare districts in California have either closed or sold their hospital.”

This doesn’t sway Hall.

“I do believe that we’re not going to be one of those stories of a hospital that fails because everyone has worked too hard,” she said.

Next steps for the health care district and the hospital’s acquisition

The district project has raised money and continues to work on additional funding sources, which Hall said are not finalized therefore she couldn’t provide more information on them, to purchase the hospital.

“We are buying a hospital before we have the dollars for it,” said Hall. “And that’s highly unusual.”

The project identified $45 million in acquisition costs, $18 million to operate the hospital for six months and $1.4 million to pay for administrative and consulting costs, all adding up to $64.4 million for its draft business plan, according to analyses filed with SB 418. That amount includes $25 million in debtor-in-possession financing provided by Medical Properties Trust, which currently owns the land the hospital sits on, in order to keep the hospital operating through the end of March.

Among some of the funding PVHDP has received so far is $5 million from the County of Santa Cruz and a $3 million grant from Central California Alliance for Health. In addition, it received $4.4 million from the Community Health Trust of the Pajaro Valley which will go toward a good-faith deposit, according to Hall. It has also made requests for funding from Kaiser Permanente, CommonSpirit and Sutter Health.

Hall said it will also be asking for assistance from the state budget.

“There’s no way that we can, with the timeline that we have of a sale agreement by March 31, and closing the sale by Aug. 31, I don’t think that there’s any way that we can raise the amount of money that we need without assistance from the state,” said Hall. “I don’t know of any other hospital acquisition that moved this fast from scratch.”

She said she hopes a significant portion of money will come from community partners and the rest from the state.

“My hope is that the state can see how everybody has come to the table locally and regionally,” she said. “And will feel like it’s worthwhile for them to make an investment in the acquisition, because there’s so much other local commitment behind it.”

The noticing agent for the bankruptcy case, known as Stretto, lists a bid deadline of Feb. 14 and a sale hearing on Feb. 23.

In the meantime, hundreds of Watsonville Community Hospital workers have been anxiously waiting for the project to move forward.

Roseann Farris, a registered nurse in the critical care department and the chief nurse representative of the California Nurses Association, said it’s been an emotional period.

“It could either go really well or really bad,” she said. “It’s definitely stressful waiting and hoping that the governor does the right thing and that the project gets the funding.”

The 270 nurses represented by the union have been thrilled to see the legislation progress, Farris said.

“This population that the hospital serves is in desperate need of having this safety-net hospital,” she said. “Without it, the health care of the whole community will go down.”