Watsonville Community Hospital suffered financial losses, ‘could have been in trouble’

Watsonville Community Hospital has been a money-losing venture “for the last couple of years” and “could have been in trouble,” but the hospital’s interim management company says it is steadying the ship at the No. 2 medical center in Santa Cruz County and is hinting at a more permanent role in the future.

Prospect Medical Holdings took over interim management of the hospital in January after Halsen Healthcare, a medical company that bought the hospital in 2019, was “unable to meet its financial obligations to various stakeholders,” according to a letter sent to hospital staff at the time.

During a meeting of Santa Cruz County’s Emergency Medical Care Commission this week, Kevin Spiegel, senior vice president for strategic planning and business development for Prospect in California, told commissioners that “the previous group managing Watsonville hospital defaulted on their payments to Medical Properties Trust” — an Alabama-based investment firm that owns the hospital building and the land on which it sits.

When Halsen bought the hospital for about $39 million from its previous owner, it sold the building and its grounds to MPT in a so-called leaseback, thereby generating $55 million Halsen could use for hospital operations long-term. A voicemail left with Dan Brothman, the CEO and founder of Halsen, was not immediately returned Monday, and Brothman hasn’t returned other messages left by Lookout in recent weeks

In broad strokes, Prospect’s Spiegel discussed the hospital’s history of financial woes.

“For the last couple of years the hospital’s been losing lots of money,” Spiegel told county officials. “And if it wasn’t for MPT stepping up, the hospital could have been in trouble.”

Spiegel didn’t go into specifics about Halsen’s apparent financial difficulties, but he did say he believes Prospect — which has come under fire for its management of medical facilities in other states — has stabilized Watsonville hospital operations.

A Lookout special report last month raised questions about who was in charge at the hospital. Spiegel offered some clarity on that to county officials, too.

“Prospect Medical is known by MPT, and they asked us to come in and manage the hospital,” said Spiegel, who last month was appointed to the commission as the at-large representative for the Watsonville hospital. “So currently we started about eight weeks ago — things are actually looking much, much better. We’re still in our 90-day evaluation period.”

Once that period wraps up Prospect would either stay on or “hand it back” to MPT, Spiegel said.

“MPT does not manage hospitals, they’re just the finance arm,” he said. “They would look for another partner or … another owner. But right now, things are looking good, more physicians are joining the staff.”

Goal to work with Kaiser

The hospital recently hired three general surgeons and is working on strengthening a partnership with health care provider Kaiser Permanente, according to Spiegel. The goal is to have more bed availability for admissions for Kaiser patients, which could reduce out-of-county transfers.

“Our goal is no Kaiser patient would go out of county, that they would go to Watsonville,” Spiegel said. “And we’re trying to bring in all the specialties that they would need.”

Dominican Hospital in Santa Cruz and Watsonville Community are the only two hospitals with emergency departments in Santa Cruz County. With 106 beds and 200-plus physicians, Watsonville serves a high proportion of uninsured patients and MediCal beneficiaries, state records show.

Watsonville 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%.

Reliant on MediCal

It’s not uncommon for hospitals, especially those that serve underserved areas to land in financial trouble, said Dr. David Ghilarducci, Santa Cruz County’s emergency services director.

“Many of them rely a lot on MediCal,” he said. “MediCal payments often don’t pay the bills”

Ghilarducci encountered this issue when he worked for a charity hospital in San Jose in the emergency room. “Every MediCal visit was actually a dollar loss for the hospital,” he said.

One of the biggest problems that happened during the pandemic was that hospitals, like Watsonville Community Hospital, had to cancel elective surgeries that bring in a lot of revenue, Ghilarducci said.

“So I think on the revenue side they, you know, a lot of hospitals are really hurting, but these ones that are kind of struggling, anyway, because of where they are and who they serve are feeling more pressure,” he said.

The management shakeup at Watsonville Community Hospital earlier this year brought with it a bevy of questions, including who exactly owns the hospital. A two-member board of “independent directors” appears to have been brought in to oversee Halsen’s transition out of ownership.

Management post shakeup

County supervisors earlier this month voted to remove Halsen’s Brothman from his role as an at-large representative of hospitals from the Santa Cruz-Monterey-Merced Managed Medical Care Commission. Since he was removed from his management post at the Watsonville hospital, he was no longer eligible for the position on the commission.

The accompanying agenda item noted that administrators of the commission requested Brothman’s written resignation on three separate occasions in February — and that Brothman never responded.

The new management company, Prospect, has also drawn attention. It has come under fire nationally, accused of providing poor patient care and drawing scrutiny from Congress.

The hospital chain is majority-owned by Leonard Green, a private equity investment firm based in Los Angeles. Spiegel helps oversee a half-dozen hospitals in Los Angeles and Orange County, in addition to Watsonville Community.

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 and told Lookout earlier this year that “the publication’s conclusions regarding our company disregards significant evidence we provided.”

Members of Congress in a pair of letters last summer criticized Leonard Green, accusing the private equity firm of acquiring and expanding Prospect to mostly create “a platform to raise debt so it could siphon off hundreds of millions of dollars in dividends and fees.”