Against the odds, Watsonville Community Hospital survived bankruptcy. Will it survive the next few years?

In early October, a small crowd mingled under the main entrance portico at Watsonville Community Hospital. Joined by a revolving door of on-the-clock nurses and hospital administrators, the group of local dignitaries, health care executives and political leaders gathered around cocktail tables to sip wine, pick at plates of cheese and fruit, and celebrate the hospital’s first re-birthday — one year since the community rescued Watsonville Community Hospital from closure and transitioned to public ownership.

“In Watsonville, everything went right,” state Sen. John Laird told the crowd. Laird had helped secure part of the $65 million in funding for the community to buy the hospital and bring it back from the brink of financial ruin.

In the state legislature, Watsonville Community Hospital is seen as a model for how to save a distressed hospital from closure, he said. “I know we have much more to do and we have to make sure that it’s sustainable going forward. But if you look back to December a year ago, this is not where we thought we’d be.”

However, a well-understood subtext complicated the celebratory atmosphere. Only weeks earlier, the state had determined that Watsonville Community Hospital was in such dire straits that it required a no-interest loan of more than $8 million to stay afloat. The hospital was still losing millions a year, administrators said they sometimes struggled to make payroll, and the facility’s financial future remained, at best, precarious.

“I’m glad we’re doing this, it’s important,” Marcus Pimentel, the hospital board’s treasurer, said of the one-year anniversary party. “If it were me, I’d say we can’t celebrate yet. But it’s important to recognize the political heroes and the staff that could have jumped ship, or, some could say, maybe even should have jumped ship.”

Since last fall, local community leaders have overcome huge obstacles to keep the 106-bed hospital running. They have purchased the hospital out of bankruptcy from its former for-profit owners, formed a health care district to oversee the facility, and wiped away $16 million in operating losses with no layoffs.

In September, the hospital board announced it had hired an experienced health care executive as its CEO, Stephen Gray, the chief administrative officer at Sutter Bay Medical Foundation – Santa Cruz Division. He started last week. The hospital is now preparing to expand services to bring in more revenue. And, Pimentel said, the hospital was attracting talented staff rather than watching them leave.

But while the state legislature might see Watsonville Community Hospital as a model for how to save a distressed hospital, others see it as a model for what’s broken about the state’s health care system, which has seen several community and rural hospitals close or teeter on the edge of bankruptcy over the past three years.

Some warn that without significant changes to its finances, the hospital’s future is far from certain. Beyond celebrating its one-year anniversary, the hospital should be sounding a public alarm about its dire financial circumstances, said Larry deGhetaldi, who earlier this year retired from Sutter Health as vice president of governmental medical affairs.

Without a change to its funding, such as better rates for both government-insured and privately insured patients, or boosting the volume of commercially insured patients, deGhetaldi estimated that the hospital would likely need a $10 million annual bailout from the state to stay in business. Otherwise, he believes Watsonville Community Hospital could close in as little as two or three years.

“If they can’t do that they will fail,” he said.

Wiping away $16 million in losses in one year

To understand where the hospital is today, it’s important to know how far it’s already come.

The hospital that the community inherited little more than a year ago was a financial mess. For more than two decades, the hospital struggled under changing, for-profit owners and a revolving door of 20 different CEOs. For fiscal years 2021 and 2022, the facility recorded more than $20 million in annual losses. Both the hospital and its previous owners, Los Angeles-based Halsen Healthcare, filed for Chapter 11 bankruptcy in December 2021.

Foreseeing the bankruptcy that summer, local government agencies and community organizations scrambled to form the nonprofit Pajaro Valley Healthcare District Project. The project worked with Laird to create a health care district and raise the money to buy the hospital out of bankruptcy in September 2022.

Transitioning Watsonville Community Hospital to public ownership was very important for the long-term success of the facility, says Steven Salyer, who was the hospital’s CEO until March, when he moved to Austin, Texas. He is now the CEO of the Austin Radiological Association.

“Keeping all profits local and 100% reinvested back into the organization is essential,” he said. “You wouldn’t get that with a for-profit company that might be owned by an outside state entity. That cash would be siphoned away.”

Dr. David Claypool, the hospital’s emergency department medical director since 2017, said the shift to public hands has improved the hospital’s relationship with the community and contributed to a sense of local ownership.

“This hospital has been so financially strapped for so long. And over time, and long before I got here, there’s been cutting of services,” he said. “So there’s a lot of optimism in the air now that hasn’t been there for a long time.”

Claypool said, for example, the emergency room has a 12-year-old ultrasound machine, an important diagnostic tool that doctors have been wanting to upgrade for years. A recent fundraising campaign by the hospital’s auxiliary club to buy a new ultrasound machine, which can cost anywhere from $40,000 to $100,000, is evidence of the community’s shifting attitude toward the hospital in the past year, he said.

Previous owners also failed to invest in upkeep of equipment like a cardiac catheterization lab, where doctors use imaging to view arteries and blood flow to the heart to diagnose and treat cardiovascular disease. The cath lab lost its accreditation and had to close in 2017.

After moving the hospital into public hands, the district worked to implement the business plan it had used to convince the court that it should be allowed to buy the hospital out of bankruptcy. Two of the most significant changes were to renegotiate the rates that insurance companies pay the hospital for their patients’ care, and to change the hospital’s nursing schedules to rely less on costly travel nurses.

Under the previous for-profit management, which community leaders have said failed to keep on top of insurance collections, the hospital was getting paid far less by insurance companies than other neighboring facilities for providing the same types of services. Salyer estimated that the hospital was getting paid just 25% of what other local hospitals were paid.

The hospital worked to get buy-in from insurance companies for higher reimbursement rates. Hospital leaders told the insurance companies “that we need to partner together for this hospital to survive so that we can take care of your patients,” Salyer previously told Lookout.

By renegotiating better rates with major insurance companies, including Kaiser Permanente, Aetna, Blue Cross, Anthem and Central California Alliance for Health, hospital leaders estimate that the new contracts now generate over $12 million in additional annual revenue for the hospital.

The hospital also carried out a variety of smaller strategies to cut costs. By switching the vendor it uses to purchase everything from food to medical supplies, the hospital says it’s saving about $500,000 annually.

A more contentious challenge has been the hospital’s efforts to move more nurses to full-time schedules from part-time. Staffing costs make up 60% of the hospital’s budget, said district board chair John Friel. Santa Cruz County has the highest hospital wage index in the country, a measure of the average wage of hospital employees.

The hospital said by shifting nurses to more full-time positions, it’s saving hundreds of thousands of dollars in labor costs from both wages and employee heath insurance.

Nancy Gere, the hospital’s spokesperson, said the facility has reduced the number of travel nurses — who work temporary contracts to fill in staffing gaps — from a peak of 60 down to 22.

Staff nurses make between $65-$108 an hour depending on experience, while the hospital pays between $130-$150 an hour for every travel nurse, who make up for the hours of part-time nurses. Gere said hospital spent over $8 million on travel nurses in 2022 and is on track to spend over $7 million this year.

Before the transition to public ownership, the hospital employed 192 staff nurses working average of 30 hours per week, according to a human resources document. By this past May, it employed 183 nurses working an average of 36 hours per week. That amounts to nine fewer regular nurses providing nearly 500 more patient care hours each week, according to human resources.

Nurses against staffing changes

However, the change has sparked a backlash from the hospital’s nurses, who are engaged in contentious contract negotiations that have been going on since July. The nurses’ contract expired in May, and after several extensions, expired again Oct. 15.

In June, dozens of nurses staged a protest, saying the changes to the employment arrangements had led to an exodus of 42 health care workers, threatening patient safety. Weeks later, the hospital’s human resources department countered in a report that 29 nurses had left the hospital since the transition, and only five of those had part-time positions that were changed to full-time.

“The hospital has not experienced an increased rate of resignations since the transition,” the report said.

Quiché Rubalcava, a registered nurse in the ER, said in an emailed statement that there is still an overuse of temporary travel nurses and that hospital executives are pushing “to erode union RNs’ contracts and balance administrator’s budget on the backs of frontline nurses and our patients.”

Gere said the hospital is open to increasing part-time positions, but if it moved forward with the nurses’ proposal, the hospital would lose about 400 hours of nursing time per week. “So we’d have to staff that some other way, including paying high-cost traveler [nurses] while trying to hire about 11 new full-time nurses,” she said.

Neither the union nor the hospital would elaborate on the details of the nurses’ proposal. Nursing representatives told Lookout they won’t discuss their demands because they want to negotiate in good faith.

Reimbursement woes

But the biggest challenges facing the hospital are harder to solve than renegotiating nursing contracts.

In August, the hospital said it was concerned about making payroll and announced it was receiving an $8.3 million no-interest loan from the state’s Distressed Hospital Loan Program.

Watsonville Community Hospital is hardly alone. The $300 million distressed hospital program is supporting 17 hospitals across the state. What’s more, one in five acute care hospitals in California is at risk of closure, with 52% of hospitals operating with negative margins and 71% with unsustainably low margins, according to a recent report by Kaufman Hall, a national health care consulting firm. In total, California hospitals lost a collective $8.5 billion last year, the report found.

Hospitals are facing increasing financial pressures thanks to inflation, rising labor costs and the lasting impacts of the pandemic, when many were forced to pause nonemergency surgeries to care for COVID patients.

“Even now our [elective surgery] levels haven’t returned,” said Jan Emerson-Shea, external affairs vice-president of the California Hospital Association, a not-for-profit lobby group that counts Watsonville Community Hospital as a member.

The hospital’s ongoing financial problems stem from how it is reimbursed for caring for its patients, both government-insured and commercially insured.

More than 75% of Watsonville Community Hospital’s patients are insured through either Medicare, the federal health insurance program for people 65 and older, or Medi-Cal, the joint state and federal health insurance program for low-income patients.

Emerson-Shea said California hospitals have long been struggling with low reimbursement rates from the two government payers. Medi-Cal, which covers about 40% of Californians, had not seen rates increase in decades, in part because the state hasn’t prioritized adding funds, which are then matched dollar for dollar by the federal government, she said.

DeGhetaldi argues that governments need to significantly improve funding for Medicare and Medi-Cal patients if they want to avoid having to continually bail out struggling community hospitals like Watsonville’s.

“The solution is the state of California needs to argue that the Medicare rates in Northern California need to go up for hospitals and doctors and be generous with Medi-Cal, too, so that Medi-Cal pays even more than Medicare for doctors and hospitals,” he said. “Or the state’s going to need to give a lot of hospitals $10 million every year. No payback.”

At the anniversary party to celebrate one year of public ownership, Laird noted that the state legislature recently increased Medi-Cal rates for the first time in years but said more could be done. He added that the state can’t guarantee future cash bailouts like this year’s distressed hospital loan.

Still, with 75% government-insured patients, Watsonville Community Hospital is not that different from similar hospitals in the area, such as Dominican Hospital in Santa Cruz and Community Hospital of the Monterey Peninsula and Salinas Valley Health, where about 72% of patients are government-insured.

The real difference stems from the amounts those hospitals are collecting from private insurers. In 2022, Watsonville’s hospital made more than $8 million from commercially insured patients but lost more than $35 million caring for government-insured patients, according to data reported to the state. The data doesn’t reflect the newly renegotiated contracts, which hospital leaders say could bring in additional annual revenue of about $12 million.

In comparison, in 2022, Salinas Valley Memorial Hospital lost more than $186 million caring for government-insured patients, but made more than $272 million from commercially insured patients, a surplus of $84 million.

DeGhetaldi says major changes have to happen to get Watsonville closer to the financial standing of hospitals like Salinas Valley — where payments from private insurance companies more than cover the shortfall from government-insured patients.

“The only way they can stay open-long term is to recover those losses by being very profitable in caring for commercial patients,” he said. “And Watsonville Hospital at this point in time has not been able to do that. That’s a tough one to get to.”

A primary way to boost private insurance payments is for the hospital to attract more specialist doctors to continue to bring in more privately insured patients.

Salinas Valley, for instance, has specialists and equipment to perform more complicated procedures like open heart surgery that pay higher reimbursement rates from private insurers, says Matko Vranjes, Watsonville Community Hospital’s chief operating officer and former interim CEO. “We don’t do open-heart surgery so we’re not going to get that — whatever it would cost — $100,000-plus payment for that feature.”

Hospital leaders say they’re working to make changes that will improve private insurance payments. On Friday, his third day on the job, CEO Stephen Gray said he is focused on restoring the hospital’s reputation within the community and among local doctors to encourage more patients to choose Watsonville’s hospital for procedures instead of going to other neighboring facilities.

He argues that the hospital’s publicly reported quality and patient safety data are just as good as some other local hospitals and says he wants to earn Watsonville national recognition for its care.

“We have physicians in the community who are like, ‘Don’t go to Watsonville, I want you to go somewhere else,’” Gray told members of Leadership Santa Cruz, a group that educates people serving in leadership roles across Santa Cruz County, during a meeting at the hospital Friday. “And we need to change that perception.”

The hospital is also preparing to open a new cardiac catheterization lab. The $2.5 million lab, paid for with money from the hospital’s original $65 million fundraising campaign, is expected to start operating in the first quarter of next year. Vranjes said it could generate about $100,000 in its first year of operation, and the hospital predicts that will ramp up over time.

Gray said the hospital is looking at updating its outdated electronic medical records system. And the facility has also started upgrading equipment and services, including replacing a da Vinci robotic surgery system, which performs minimally invasive surgeries. “It essentially will bring us volume that we didn’t have otherwise,” said Vranjes. “If people are looking for those procedures that are performed by these devices and we don’t have them here, they’ll go somewhere else.”

Another financial lifeboat that the local leaders are exploring is a bond measure to raise funds to purchase the buildings and land that the hospital sits on.

Currently, the hospital leases the buildings from Alabama-based Medical Properties Trust — a real estate investment trust that buys the physical assets of distressed hospitals — for $250,000 a month. Hospital administrators plan to ask the board to approve a bond measure to put on the March 2024 ballot, which would require a two-thirds vote to pass, Pimentel said.

The hospital has the rights to buy the property for up to $40 million, though Pimentel expects the purchase price to ultimately be less. “Our big initiative next year is going to be to negotiate what the purchase price could actually be,” he said. Hospital leaders will still have to determine how much money to ask taxpayers to support through a bond. Pimentel said the ongoing property tax revenue could be leveraged to issue debt to help pay for the hospital.

With a new CEO in place, a cash infusion from the state and plans for a bond, hospital leaders say there is much to be thankful for in spite of the facility’s uncertain future.

“The financial situation is urgent without a doubt,” Pimentel said at the one-year anniversary party, adding: “I don’t know of another hospital that, in one year, has solved for 60% of our budget without layoffs. We’ve done that and it’s great.”

But for Watsonville Community Hospital, the real test will be whether executives, politicians and health care workers will be in just as celebratory a mood as they mingle over wine and cheese plates at a second-anniversary party this time next year.

— Christopher Neely contributed to this report.

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