[caption id="attachment_35455" align="alignnone" width="448"] Palm Drive Hospital in Sebastopol is set to close Monday after running out of cash and amassing nearly $7 million in debt.[/caption]

With the closure of long-struggling Palm Drive Hospital in Sebastopol all but assured, hospital executives and health care experts are pointing to the failed facility as perhaps the most vivid example of the myriad challenges facing the hospital industry as a whole.

Despite countless last-ditch efforts to save 37-bed Palm Drive, the district board that oversees Sonoma County's smallest hospital last week voted to go ahead with a planned closure of all operations, including emergency care, on Monday, shortly after declaring Chapter 9 bankrupting for the second time in seven years.

Although the issues leading to Palm Drive's closure were multifaceted, in some cases specific to geographical challenges, the small but beloved hospital is far from alone in the ongoing evolution of the Affordable Care Act world of health care reform, experts said.

"Unfortunately, Palm Drive is not an isolated case," said Jan Emerson-Shea, a spokeswoman for the California Hospital Association, echoing a sentiment  repeated throughout Palm Drive's process to shutter operations and cited by scores of hospital administrators across the North Bay. "There are hospitals across the state that are really struggling to remain open and operating."

At least eight hospitals -- including Palm Drive -- across the country have either filed for bankruptcy or closed just in 2014, according to Carr Consultants, a national health care adviser. In the greater Bay Area, oft-financially strapped district hospital Doctors Medical Center in San Pablo is similarly teetering on the edge of its second bankruptcy since 2008. The same adviser for Palm Drive, Chicago-based Huron Consulting Group, is counseling Doctors in San Pablo, a safety-net hospital for western Contra Costa County.

No hospital is immune to the issues, which include reduced Medicare and Medi-Cal rates, a move away from costly inpatient care to the outpatient setting and a multitude of regulations unique to the state that make California particularly challenging, Ms. Emerson-Shea said.

To that end, hospitals across California are facing $23 billion in payment cuts between now and 2023, she said. Of that, $17 billion is related to the Affordable Care Act, which places a high value on prevention versus hospitalization. That's likely a positive development for patients, but it spells a tough road ahead for hospitals both large and small. Districts at a disadvantage

Yet smaller, publicly run hospitals like Palm Drive can be particularly vulnerable, often lacking the organizational structure and size to cope with the fast-moving landscape, health experts said.

Excluding Palm Drive, which will allow its hospital license with the state to be suspended come April 28, the North Bay is home to four other district-owned hospitals, all of which have embarked on different strategies in hoping to not fall victim to the economic realities.

Those four hospitals -- Marin General, Petaluma Valley, Sonoma Valley and Healdsburg District -- have to contend with multiple health care giants, including Kaiser Permanente, Sutter Health, St. Joseph Health and Adventist Health. At one point, Palm Drive considered an affiliation with Roseville-based Adventist Health, which owns and operates St. Helena Hospital, St. Helena Hospital Clear Lake and Ukiah Valley Medical Center, but opted instead to affiliate with Marin General.

Parallels often are drawn between Palm Drive and both Healdsburg District and Sonoma Valley because of their sizes. Healdsburg, in particular, will face a strong challenge later this year when a new $284 million Sutter Medical Center opens on the northern end of Santa Rosa, just 15 miles from 43-bed Healdsburg, which is owned by the North Sonoma County Healthcare District.

But executives at Sonoma Valley and Healdsburg said they are well-positioned, though they readily acknowledge the increased economic pressures in the industry.

"We budgeted last year as a $55 million organization," said Kelly Mather, CEO of the 83-bed Sonoma Valley Hospital, overseen by the Sonoma Valley Health Care District. "This year we're budgeting $52 million, so we have to cut $3 million out of our budget.

"We're staying ahead of the curve as much as we can. It is a tough time for all hospitals -- yes -- but we watch our revenues."

Likewise at Healdsburg, CEO Nancy Schmid said the small rural hospital is stepping up efforts to address the foreseeable challenges, and that an array of services and strategies should ensure continued operations.

"We've started new programs in 2013 to increase patient volumes, one of which is adding hospitalists 24 hours a day, seven days a week to better manage our patient admissions," Ms. Schmid said.Different strategies

Part of the small-hospital strategy across the North Bay has been striking key alignments with larger entities. Such is the case with 80-bed Petaluma Valley, owned by the Petaluma Health District but operated by St. Joseph Health, which owns the county's biggest hospital, level 2 trauma center Santa Rosa Memorial, as well as level 3 trauma center Queen of the Valley in Napa.

Marin General -- the largest district hospital in the North Bay at 235 beds -- has spearheaded affiliations with Sonoma Valley and Palm Drive, though in the case of the latter, little could be done to save Palm Drive, according to Ms. Mather of Sonoma Valley and Jon Friedenberg, chief fund development officer for Marin General.

"We've been working with Marin since 2011, and we've found it works very well," Ms. Mather said. "We worked on system-level initiatives and physician recruitment. I don't think any organization could have saved Palm Drive, but we sure made a good effort to help them."

At Palm Drive, over the past month officials cited a precipitous drop-off in inpatient volumes, going from about 12 per day to as few as seven. Perhaps the biggest factor, however, is proximity to Santa Rosa -- less than 10 miles -- and the three major systems that operate large-scale hospitals: Kaiser Permanente, which dominates the insured market in Sonoma County, St. Joseph Health and Sutter Health.

"Their options are limited because they're so close to other hospitals," said Suzanne Ness, North Bay regional vice president for the Hospital Council for Northern and Central California.

Tom Harlan, CEO  of Palm Drive, often cited that as a key piece of the complicated puzzle that ultimately spelled Palm Drive's demise, in addition to a payer mix that includes two-thirds of its patients on Medicare or Medi-Cal, both of which reimburse at substantially lower rates than commercial insurance.Key differences

A key distinction between Palm Drive and Healdsburg is that Healdsburg was able to obtain a "critical access" designation, which means a better reimbursement rate on Medicare patients because it services a broad, rural region of Northern Sonoma County and Southern Mendocino. Palm Drive attempted to achieve the designation but was never successful, even though proponents of the West County hospital repeatedly cited a similarly rural landscape in areas west and north of Sebastopol.

"We were designated 'critical access' in 2005," Ms. Schmid of Healdsburg District said. "It's very important because it provides additional reimbursement for Medicare patients. It also speaks to the critical placement of our hospital for rural access. For many in our district, we're the closest hospital from where they live."

Critical-access designation is for facilities with 25 beds or fewer. Healdsburg District is licensed for 43 beds, but the critical-access license applies to its medical-surgical and ICU units, which have fewer than 25 beds, and the beds in the subacute unit are designated as "distinct part" and are therefore exempt from requirement, according to Ms. Schmid.

And despite Sutter opening the new hospital later this year – which Healdsburg District and Palm Drive unsuccessfully tried to block – 15 miles from the hospital, Ms. Schmid said that won’t affect its better reimbursement rates under the distinction.  

"It would take an act of Congress to change our critical-access designation, which we don't see happening in the foreseeable future," she said. "Therefore, Sutter's proximity to us does not affect our critical-access designation.

"It's the proximity of our residents to our hospital," Ms. Schmid added.

Mr. Friedenberg, of Marin General, said that while the three-hospital affiliation with Sonoma Valley and Palm Drive was designed to help smaller districts survive, the environment for all hospitals is simply too challenging for some.

"There are hospitals across the country, including in California, that have for the last five or six months announced significant layoffs, others with wage freezes, hiring freezes, and others that have gone into bankruptcy," he said.

Healdsburg District itself reduced staff by 8 percent in November last year, cutting 30 positions.Financial health improves

While challenges remain, both Healdsburg and Sonoma Valley cited healthy patient censuses and stable finances as proof that they are adapting well. 

At Sonoma Valley, the latest financials indicate that the hospital had 300 total acute patient-days through February 2014 on a budget of 440 acute patient-days and compared to 449 in the prior year. That resulted in a negative net revenue variance of $628,000.

Total operating revenues for January were $3.5 million, compared with $4.3 million budgeted, the bulk of the negative variance attributed to the dropoff in inpatient acute care days.

But January expenses came in under budget -- $4.3 million on $4.8 million budgeted, attributed to the new $39 million emergency department that opened last year.

Year-to-date through February, Sonoma Valley Hospital had budgeted $134.9 million in gross patient revenues and actually took in $134.5 million, up from the year prior, when gross receipts were about $127.4 million.

Total inpatient revenues were down -- $40.3 million compared to $42.5 million the year prior. But outpatient and emergency room revenues rose to nearly $73 million, compared with about $66.6 million the year prior. Both skilled nursing and home care had positive margins, as well.

"We usually come in at about break-even every year," Ms. Mather said.

She pointed to a number of other programs that shift revenue streams to the outpatient realm, including a "very active" physical therapy and occupational health program used by about 250 employers in Sonoma Valley. Skilled home care services, which are in the process of being expanded, and diagnostic imaging also help, she said.

"Inpatient is the most expensive thing we do, but we have other departments that help our margins," she said.

Sonoma Valley is in a unique position, because the region surrounding Sonoma is much more consolidated, she said. Residents are far more likely to utilize the local hospital versus going to Santa Rosa, particularly in an emergency. 

"I think all hospitals are facing difficult times, but honestly I believe the model we have here in Sonoma will be replicated in many areas," she said, calling the region a "captured market. "Seventy-seven percent of our primary market uses our emergency department."

Not being near Highway 101 actually plays into Sonoma Valley's favor in this instance, with the closet competing hospitals being much harder to access. Santa Rosa Memorial is 20 miles away, while Queen of the Valley in Napa is about 15 miles. But traffic is a major factor in either direction.

The hospital is currently staffed for about 38 beds, which Ms. Mather said is a healthy figure that accounts for demand, pointing to 47-bed Novato Community Hospital, a Sutter affiliate, as a better comparison.

Sonoma Valley has a payer mix that is about 20 percent commercially insured, 14 percent Medi-Cal and the remaining 66 percent being Medicare. While Medicare has a lower reimbursement rate than commercial insurance, it gives a better return than Medi-Cal. And the Medicare population, particularly in demographically older Sonoma Valley, is likely to have much higher utilization rates, Ms. Mather said.

In Healdsburg, Ms. Schmid also said patient volumes were healthy.

“Our focus has been increasing patient visits on every service we provide,” she said. “We’re pleased that our census is up; our net patient revenue for the first three months of this year is up 7.8 percent from last year. Our daily census is up 3.5 patients a day for this year.”

Healdsburg District's payer mix is similar to Sonoma Valley's -- 62 percent Medicare, 22 percent Medi-Cal and about 16 percent commercially insured or self-pay .

Year to date, Healdsburg District net revenues increased 6.8 percent to $9.8 million from $8.9 million the pace last year, according to the hospital's most recent balance sheet.

Total operating expenses fell by 1.1 percent year to date to nearly $10.4 million from $10.2 million a year before.

Total patient days at Healdsburg last fiscal year reached 2,203, compared with 2,284 for fiscal 2014. The average daily census was up 3.7 percent so far this year.Palm Drive's woes[poll id="117"]

Contrast Healdsburg's and Sonoma Valley's financials with Palm Drive's, and a clear picture of the severity of its financial woes becomes immediately clear.

Over the year, accounts payable for Palm Drive increased to nearly $6.5 million at the end of February from about $5.8 million in June 2013, according to Mr. Harlan, CEO, 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.

The hospital also owes vendors nearly $7 million, according to its Chapter 9 filing. 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.

It wasn't for lack of effort, though. Palm Drive attempted a number of strategies to increase patient volumes, including becoming stroke care--certified and working with the Prima Medical Group to increase outpatient services. And it's especially bittersweet for all involved after Palm Drive, just before the financial tailspin, was named the fifth best hospital for patient safety in the U.S. by Consumer Reports magazine, an indication that quality measures are not what spelled the end, but rather ever-shrinking patient volumes, lack of revenue and proximity to Santa Rosa.11th-hour action

With the closure of Palm Drive expected Monday -- amid vows of civil disobedience from physicians trying desperately to save the hospital -- the district and CEO Mr. Harlan have proposed a number of other options that could be better-suited for the small community, including round-the-clock urgent care and more lucrative outpatient surgeries.

It's simply not feasible, however, to operate an acute care hospital with an emergency room, given the low volumes, the board has said.

Residents and physicians repeatedly cited the need for a functioning emergency room, and the hospital looked at scenarios to maintain the service. But in order for an emergency room to function, state law mandates that all hospitals must have adequate inpatient services, along with labs, radiology, an ICU and inpatient acute care.

A last-minute proposal by the Palm Drive Health Care Foundation, in collaboration with telemedicine specialist Dr. James Gude and former board president Dan Smith, attempted to save the hospital by significantly scaling back the facility.  It would have effectively shuttered the 35-bed inpatient ward of the hospital while preserving a two-bed intensive care unit, three inpatient beds and the emergency department. It would also create new lines of revenue in specialty care such as telemedicine, physical therapy, neurology and infusion, and make a strong shift toward outpatient care.

But the board last week said the proposal also didn't address the hospital's desperate need for cash and instead relied on projections from accounts receivable to be used for startup costs on the foundation model. The board and attorneys for the district have said that any reserves and incoming cash needs to cover Chapter 9 bankruptcy costs and pay off nearly $7 million owed to vendors.

"Neither the proposal nor the cash flow projections address the costs associated with the Chapter 9 case and any anticipated plan of debt adjustment that would need to be approved by the bankruptcy court," Mr. Harlan stated in a memo to the district board.

As such, the board voted to continue with the planned closure while also agreeing to have further discussions with the foundation about what possible plans might emerge for long-term viability.

"I think it's the right outcome," Mr. Harlan said. "We will re-emerge. I can understand the emotions of the community. I live here, too."