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April 1, 2014

SEBASTOPOL -- With the decision to suspend all core services, including emergency care, at Palm Drive Hospital by the end of this month following its second bankruptcy filing in seven years, health officials are now scrambling to come up with a viable health care model for west Sonoma County.

But before any new model or new ownership structure can occur, hospital administrators and the district board that oversees the facility are similarly dealing with more immediate issues, such as restructured interest rates to bond holders and mountings losses.

North Bay Assemblyman Marc Levine, D-San Rafael, is currently crafting legislation that would permit Palm Drive to renegotiate its interest rates. Palm Drive Healthcare District is also working with the county on a possible bridge loan that would help it service the bondholders directly through tax rolls, according to Tom Harlan, CEO of the hospital. 

The district board is set to meet Friday afternoon to consider issuance of county tax- and revenue-anticipation notes totaling up to $1.8 million, according to the agenda circulated Thursday.

Accounts payable for Palm Drive increased to nearly $6.5 million at the end of February 2014 from about $5.8 million in June 2013, according Mr. Harlan, citing an October audit of the hospital prepared by Moss Adams for the 2012-2013 fiscal years. Accounts payable increased by nearly 75 percent since 2012.

Total liabilities were $9.6 million, up 54.8 percent from fiscal year 2012 and even more in the first months of fiscal year 2014, hospital officials said.

While total operating revenues of $29 million had increased 3.4 percent year-over-year, Palm Drive was still $4.2 million short of covering its operating expenses as of June 30. The hospital ended the year with an ongoing $7.9 million deficit, a net position that had worsened by $1.4 million since the end of fiscal year 2012.

“We’ve just run out of money, and we’re at a point where to keep the doors open, even for another few weeks, it was just too much,” said Chris Dawson, president of the Palm Drive district board. “That was really the only solution at this point, to close and suspend the license. Based on where our money was, it was inevitable -- this was the correct thing to do.”

Inpatient volume has dropped precipitously over the year, from about 12 a day at one point to seven a day in February and to as little as five a day so far in April, according to the health care district.

“The current operation is certainly relevant,” Mr. Harlan said, noting that Palm Drive was recently ranked fifth in the nation in patient safety from Consumer Reports -- no small achievement for the small hospital. “But it’s not sustainable financially. We just don’t have adequate inpatient volume.”

By April 28, the hospital’s license will likely be suspended, not revoked, with hopes of eventually devising a new, more sustainable health care delivery model, Mr. Harlan said.

Other factors are driving the impending closure, including two-thirds of its patients being on Medicare or Medi-Cal, which both pay substantially lower rates than private insurance. Competition with and proximity to Santa Rosa’s big system hospitals -- Kaiser Permanente, Sutter Medical Center and Santa Rosa Memorial -- and a broader, national trend to outpatient services away from the inpatient acute-care setting are also key factors. Kaiser, already with a dominant share of insured West County residents, is also in the planning stages of a medical office building on the western edge of southwest Santa Rosa near Corporate Center Parkway -- under 5.5 miles from Palm Drive.

The proximity to Santa Rosa means Palm Drive has been unable to capitalize on a common rural hospital benefit, known as Critical Access designation from Medicare that includes higher reimbursement rates. Similarly sized Healdsburg District Hospital -- which has similarly faced financial challenges -- achieved the designation, but various boards at the Palm Drive district tried unsuccessfully over the last decade or so, board president Mr. Dawson said.

“Palm Drive tried for years to get that because that is a different reimbursement structure,” he said.  

Hospital staff, physicians associated with Palm Drive and residents of West County have all expressed a strong desire for a new plan to quickly emerge, likely including around-the-clock urgent care and outpatient services. Residents, who pay a $195 per year parcel tax to support Palm Drive, have repeatedly cited concerns that without some level of emergency care, the region is more vulnerable if it has to rely solely on Santa Rosa’s three hospitals.

The impact of one less emergency department that serves wide swaths of the sprawling, rural landscape is significant, said Bryan Cleaver, emergency medical services administrator for Coastal Valley EMS, which serves coastal Sonoma and Mendocino counties.

“If the emergency department does indeed close, that basically translates into ambulances having to provide longer transport times out of West County, probably into Santa Rosa,” Mr. Cleaver said. “Any time you increase those transport times, that increases times on task. It really requires additional resources in the area to make up for those increases in task.” Mr. Cleaver said the impact for trauma patients in West County doesn’t change, since those patients are typically taken straight to the Santa Rosa Memorial level 2 trauma center, but for critically ill patients such as stroke victims or with cardiac arrest, the extended transport time is a vital factor in achieving the best outcome.

In an attempt to come up with viable solutions as quickly as possible, a committee has been formed by the district that last week issued requests for proposals from any party interested in partnering on a new model.  Another committee has been established to determine a longer-term plan.

Already, there are two separate proposals from two of the hospital’s physicians, Dr. James Gude and Dr. Michael Bollinger, both of which seek to keep the license in operation while shifting much of the focus on outpatient surgeries and urgent care. Dr. Bollinger's proposals aims to preserve the emergency care, while Dr. Gude has said his proposal, in conjunction with the Palm Drive Health Care Foundation, would convert the facility to urgent care.

Both physicians said they fear the hospital will never reopen, in any capacity, if the license lapses since doctors, nurses and other staff will likely not return.

Despite those last-minute proposals, California state law is clear that no hospital can operate a free-standing emergency room, Mr. Harlan said. Acute inpatient care and outpatient services are all tied to the same license, he added, meaning all operations essentially need to cease by the end of this month.

“Those are two (proposals) that we’re aware of and there may be others,” Mr. Harlan said, noting that they certainly deserve merit. However, “there are license issues.” A general acute-care license “covers all inpatient and outpatient hospitals. So when we talk about suspending that license, what we’re talking about, unfortunately, is everything,” he said. “To carve things out of that is very difficult when you suspend a license."

Mr. Harlan, while hopeful that a viable plan will emerge, said that any new model won’t happen overnight, or even over a month, as Palm Drive grapples with bond holders and annual operating losses of more than $6 million.  It also owes vendors another $6 million, according to the Chapter 9 filing.

“Unfortunately, the answers to those questions are changing by the hour,” he said. “This is a very dynamic situation."

Major creditors include Utah-based Innovasis, a developer of spine implant devices that is owed more than $1.6 million; San Francisco-based McKesson Technologies, which is owed just shy of $1 million; and PG&E, which is owed about $334,000.

In 2010, three years after filing for Chapter 9 and posting operating losses of close to $7 million per year, the hospital reemerged from bankruptcy after the sale of $11 million in bonds. Those funds have since been depleted and much is owed to bond holders.  Bonds currently stand at 7 percent on 15-year notes of $4.3 million and 7.5 percent on 25-year bonds of $6.7 million, stemming from the previous bankruptcy filing in 2007.

As it emerged from bankruptcy then, the hospital sought long-term stability by aligning itself with Marin General and Sonoma Valley hospitals -- an effort that was effective in keeping costs down and offering new services. But it simply was not enough to offset the declining patient census, Mr. Dawson said, the consensus being universal among its partners at Marin General and consultants working with the district.

According to a recent report from health care consultant Alvarez & Marsal, in mid-March the hospital -- licensed for 37 beds but staffed for only 12 -- had just $17,000 in cash on hand after payroll of about $500,000 through April.

“It really is a wonderful place, the safety scores from Consumer Reports shows that,” Mr. Dawson said. “It’s also financially unsustainable.”

Business Journal Staff Reporter Eric Gneckow contributed to this report.