Watsonville Community Hospital under new management, but veil of secrecy surrounds who’s really in charge

Nearly a year-and-a-half ago, in October 2019, a new medical company named Halsen Healthcare finalized its purchase of Watsonville Community Hospital, vowing “to treat patients with excellence, dignity, and respect.”

Another company — an investment firm called Medical Properties Trust — also celebrated the transaction, which included Halsen selling the hospital building and its grounds to MPT in a so-called leaseback, thereby generating $55 million Halsen could use to provide quality care. The investment, MPT said in a Securities and Exchange Commission filing, would “help preserve a critical community asset.” MPT also said it expected Halsen to “grow its hospital portfolio over time, which may create additional investment opportunities for us.”

But now the partnership appears to be coming to an unceremonious and mysterious end.

Halsen no longer is running the hospital — a 106-bed facility with more than 200 physicians that serves a high proportion of uninsured patients and MediCal beneficiaries.

The company brought in last month to manage it on an interim basis, Prospect Medical Holdings, has come under fire nationally, accused of providing poor patient care and drawing the attention of Congress.

And the details of what led to Halsen’s ouster — and who exactly owns the hospital — remain open questions.

Neither representatives for Halsen, based in Los Angeles, nor MPT, based in Birmingham, Alabama, would comment for this story.

Charles Poole, a spokesman for Prospect, said only that “Watsonville Hospital has entered into a confidential management agreement with Prospect where Prospect is compensated for its services by Watsonville Hospital.”

Asked how long that arrangement might last or whether the hospital might again be put up for sale, Poole replied in an email, “No decisions have been made about next steps.”

Asked who owns Watsonville Community Hospital, he referred the question to MPT.

All this is of concern to Santa Cruz County health officials, who have seen the number of hospitals countywide decrease over time. Dominican Hospital in Santa Cruz and Watsonville Community are the two hospitals with emergency departments that remain.

While there has been no indication whatsoever that whoever might own the hospital has any plans to sell or close it, the lack of clarity about ownership is troubling.

“There used to be three hospitals in Santa Cruz County, and now we’re down to two. [If] we were to lose another, I think Dominican would be really hard-pressed to serve the entire county,” said Dr. David Ghilarducci, the county’s deputy health officer and director of emergency medical services.

A look back

The hospital, at 75 Nielson St. in Watsonville, has long been a community fixture. When its previous owner, Quorum Health, put it up for sale in the late 2010s, the not-for-profit Pajaro Valley Community Health Trust, whose mission is to address health care inequities in Santa Cruz County and beyond, contemplated buying it — but determined that renovation and operational costs would be too much to bear.

Enter Halsen and Medical Properties Trust.

Halsen bought the hospital from Quorum for about $39 million in summer 2019 and quickly sold the entire facility and site to MPT for $40 million. MPT agreed to lease the medical center back to Halsen for 15 years — and loan Halsen $15 million in a note that would “mature” on June 30, 2021.

In its SEC filing, MPT described Halsen as a “newly established operator with an experienced executive team comprised of former executives from Tenet Healthcare Corporation, Community Health Systems, Inc., and HCA Healthcare, Inc.”

But, about a month ago, staff at Watsonville Community Hospital received a surprise letter stating that Halsen “has been unable to meet its financial obligations to various stakeholders” and that hospital operations would be overseen on an interim basis by Prospect Medical Holdings of Los Angeles.

The document was signed by Jeremy Rosenthal and Frank Williams, who said in the letter that they had been appointed as new, independent directors of the hospital’s board. The role and affiliations of Williams and Rosenthal was not immediately apparent. Their names don’t appear on any state or federal hospital regulatory documents examined by Lookout, and attempts to reach them were unsuccessful.

Lookout has reached out to California state health officials to see if new documents have been filed and is awaiting a response.

New manager’s troubles

MPT and Prospect Medical have a long history of working together, as MPT bought all the real estate for Prospect hospitals in a $1.6 billion leaseback deal in 2019 — the same year MPT signed the deal with Halsen. But Watsonville Community Hospital is the only facility in which Prospect is managing an MPT hospital that Prospect doesn’t own.

Prospect Medical Holdings is a hospital chain which is majority-owned by Leonard Green, a private equity firm based in Los Angeles. Prospect hospitals mainly serve low-income patients and, according to a series from the investigative journalism not-for-profit ProPublica, all but one of the company’s hospitals rank “below average” in the federal government’s annual quality-of-care assessments.

ProPublica also found that Prospect has a history of closing hospitals the company had promised to preserve. Prospect insists it has done nothing wrong, telling Lookout “the publication’s conclusions regarding our company disregards significant evidence we provided.”

Most recently, Prospect has been facing scrutiny from the federal government because Leonard Green — the Los Angeles-based private equity firm that owns a majority stake in Prospect — is now attempting to sell that stake after having “drawn $658 million in fees and dividends from Prospect,” while many of Prospect’s “hospitals have suffered operating challenges and underfunded pensions,” according to a June 2020 letter from four federal lawmakers to Leonard Green.

“In using Prospect Medical to pay itself and its investors massive dividends, Leonard Green is putting some of our communities’ most vulnerable patients at risk and weakening public health protections,” the lawmakers also wrote.

Regulators in Rhode Island are now holding up that sale.

Six members of Congress wrote a letter to Leonard Green in July 2020, saying that “Leonard Green’s acquisition and expansion of Prospect appears to have been mostly aimed at creating a platform to raise debt so it could siphon off hundreds of millions of dollars in dividends and fees,” and asking the private equity firm to “return the fees and dividends the firm has collected from Prospect Medical,” instead of walking away.

What does this mean for Watsonville patients and the the community?

According to Eileen Applebaum, an economist who studies private equity firms and the co-director at the Center for Economic and Policy Research, “there doesn’t seem to be any evidence that patients are worse treated” at hospitals where private equity firms like Leonard Green are major investors in hospital companies, as is now the case in Watsonville.

”But what we do see is that [if the firm] thinks an operation is not paying its way, they will close it at that particular hospital,” she said, explaining that certain patient services might be reduced or shut down. “They will say: Well, there’s another hospital, it’s only another 50 miles [away]. [You] want to deliver your baby, go there.”

Watsonville Community Hospital already struggles with a low safety rating, and currently receives just two out of five stars on its quality evaluation from Medicare. The hospital serves 30% MediCal inpatients, and 40% of outpatients are on MediCal, as compared to Dominican, where both values are about 20%. Dominican also has 222 beds, more than twice Watsonville’s capacity.

Watsonville nurses, who have union representation through the California Nurses Association, have been publicly vocal about patient safety and working conditions on numerous occasions. To date, the nurses haven’t publicly raised any red flags about Prospect, which began managing the hospital on Jan. 18.

In an emailed statement to Lookout after this story went online, Quiché Rubalcava, an emergency department nurse and union representative at Watsonville Community Hospital, said that the “importance of keeping hospital services in our community has never been more apparent or urgent amid the deadly COVID-19 pandemic.”

The statement didn’t name Prospect, MPT or Halsen. But it called on whoever is in charge of the hospital to not scale back services.

“Nurses will do whatever it takes to inform our community, elected officials and city leaders to stand with us in protecting our patients and ensuring Watsonville Community Hospital continues to provide needed services,” Rubalcava said.

Dr. Ghilarducci of the county health department said that Watsonville Community Hospital worked hard to increase its capacity during COVID-19, but that doing so “really increased their costs” — and a temporary ban on elective surgeries because of the pandemic also reduced the hospital’s revenue.

Locally, the turnover and apparent financial distress that might have forced Halsen’s ouster are concerning because of the essential role Watsonville Community Hospital plays in the county, county health officials say. This is the third time the hospital has changed management in five years.