SEBASTOPOL and ST. HELENA -- Palm Drive Hospital is in talks with the St. Helena Region of Adventist Health about possible affiliation as it seeks long-term financial stability after years of uncertainty.

The 37-bed Sebastopol hospital, which just last year emerged from Chapter 9 bankruptcy protection, has identified the Roseville-based health group as a possible parent that could help chart a return to solvency and possibly increased services, according to Palm Drive Healthcare District board officials.

Palm Drive has made it known that it would seek as many strategic alliances as it could, as consensus emerged that a stand-alone hospital, overseen by the Palm Drive Healthcare District, would struggle to survive on its own at current fiscal projections. A committee was set up to explore such options earlier this year, said Jared Dreyfus, a board member who sits on that committee, and the talks with Adventist are a result of that.

“Two things really made [Adventist Health] really attractive to the committee -- one was the team that is coming to look at us is the team that is running the St. Helena Region, and that team made a very dramatic turnaround in St. Helena,” Mr. Dreyfus said. “The second thing was we learned early that the St. Helena Region itself had done a very similar deal with Red Bud Community Hospital in Clearlake.”

Terry Newmyer, chief executive officer of the St. Helena Region, echoed Mr. Dreyfus’s points in confirming that Adventist Health is exploring the possibility of adding Palm Drive to its regional portfolio.

Mr. Newmyer said it was too soon to say exactly how an affiliation would work or even if one would emerge, but Adventist Health has a very recent track record of taking troubled district hospitals and turning them around.

“It’s difficult to determine whether we could help. However, we have a favorable bias to help Palm Drive if possible, so we’re conducting a situational assessment.” Mr. Newmyer said.

A decision could be made by as soon as the end of July, Mr. Newmyer and Mr. Dreyfus said.

“We’re still working through the details, but we should be able to accomplish the review within the next 45 to 60 days,” Mr. Newmyer said. “We wouldn’t go through the exercise if we did not have a bias that we could be helpful. We think there may be a good potential.”

Ten years ago, Adventist Health took over operations at Red Bud, now called St. Helena Clear Lake, a 25-bed critical access hospital that was struggling for survival. Last year, the hospital embarked on a $12.1 million project that will rebuild the emergency department. And just in the past two weeks, voters in the Central Valley city of Reedley approved the sale of bankrupt Sierra Kings District Hospital to Adventist Health.

One element that makes Palm Drive attractive to the St. Helena Region is Dr. James Gude, Palm Drive’s well-known telemedicine specialist, who already works with two other Adventist Health affiliates in Mendocino County -- Frank R. Memorial and Ukiah Valley, according to Mr. Newmyer.

Mr. Newmyer also said that St. Helena Hospital, the oldest operating hospital north of San Francisco, was losing $1 million a month when he came on as the regional CEO in 2008. Subsequently, the hospital is in the black and has grown its operating revenue in the region, which stretches from Vallejo to Lake County, from $170 million in net revenue in 2008 to $270 million currently.

“It was a perilous time at St. Helena,” he said. “We still have a fragile balance sheet, but we do have a favorable bottom line. This gives metrics to the leadership at Palm Drive.”

The St. Helena Region has grown its workforce by 400 in that same time frame, Mr. Newmyer said. The region has added some 83 physicians over the past two years as well, and Palm Drive could potentially have access to that same pool of physicians.

Palm Drive has, in contrast, reduced staff while corrections in billing and improved reimbursement have helped contribute to a healthier balance sheet since filing for bankruptcy protection in 2007, when it was losing nearly $7 million a year in operating revenue, according to Neil Todhunter, regional vice president of operations for Healthtech Management Services’ Western Region.

The hospital entered into a three-year, $250,000 annual agreement with Tennessee-based Healthtech -- formerly known as Brim Healthcare -- in 2009. Mr. Todhunter said finances have significantly improved since then, but that in April of this year, operating income was lower than expected.

The operating loss at the end of May  was nearly $2.6 million compared to about $1.76 million the year prior, according to David Glassburn, interim CFO of Palm Drive.

Despite the unexpected drop off in revenues, Mr. Todhunter said the hospital is poised to return to stability.

He also said Healthtech would support Palm Drive if it sought to align itself with Adventist or another larger entity, agreeing with the sentiment that the hospital would have a difficult time remaining afloat on its own.

“We have communicated with the board that we believe Palm Drive needs to find a partner to go forward,” he said. “And we would assist in that.”

Mr. Todhunter added that Healthtech would remain in place with the hospital if the board asked it to do so. The contract ends in November 2012.

Depending on Adventist Health's findings, Palm Drive could either affiliate with the non-profit health group or receive advice on strengthening financial results.

Mr. Newmyer said Palm Drive is far from alone in its financial troubles.

“It’s difficult to do business in any industry, but it’s especially complex in health care. Reimbursement rates are dropping, competition is robust and it’s difficult to provide a favorable economic yield,” he said. “An organization needs influence and economies of scale, and so an organization that is independent, a small, stand-alone hospital, will find it very difficult to achieve a turnaround.”

He added, “The physicians that come to the organization have to have confidence in the organization, and I think it’s evident that Palm Drive would benefit from volume-building services.”