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Small California North Coast hospitals seek larger partners to survive

Financial pressures — always a factor in running small regional hospitals — are increasingly driving deals to sell or lease those hospitals to larger players. Lack of fiscal resources to make improvements, such as upgrading buildings to meet earthquake standards or installing electronic medical record systems, play a significant role in these decisions.

In the North Bay, two deals to sell public independent hospitals to join multifacility health care systems await voter approval this fall. A third deal has already gotten the green light.

Acquisitions and partnerships in the hospital industry aren’t new, but have become more vital as COVID-19 threatens the viability of existing hospitals.

The California Hospital Association is currently fighting Senate Bill 977, which would widen the scope of the state Attorney General’s power to approve or nix proposed deals to ensure compliance with antitrust laws.

“(Health care) partnerships today are under the rigorous scrutiny of the Federal Trade Commission, and the Attorney General already has the authority to review sales of not-for-profit hospitals,” Carla Coyle, CEO of the California Hospital Association, said on the Sacramento-based advocacy group’s website. “This legislation would go well beyond federal regulation and existing state law, and expand the scope of the state Attorney General’s authority over the affiliation or sale of hospitals, physician practices, ambulatory surgery centers, imaging centers, diagnostic centers, labs, and more.”

The bill passed the Senate Appropriations Committee in late June, and is now in the hands of the state Assembly. If it becomes law, it will go into effect Jan. 1.

Making moves in the North Bay

On July 1, Adventist Health and Mendocino Coast District Hospital signed a 30-year lease to bring the flailing community hospital into the mix with Adventist’s two existing hospitals in the county: Adventist Health Ukiah Valley and Adventist Health Howard Memorial in Willits. The partnership infuses the newly renamed facility, Adventist Health Mendocino Coast, with greater access to care and shared resources.

Also last month, Providence St. Joseph Health, one of the largest Catholic health care systems, agreed to terms on prospective deals with two North Bay community hospitals — Healdsburg District Hospital and Petaluma Valley Hospital — under its nonreligious affiliate, NorCal HealthConnect. A memorandum of understanding for both hospitals were signed in March. The sales of the two hospitals are contingent on voter approval of the district-owned facilities on the November ballot. If passed, transfer of ownership for both facilities would take effect by year’s end.

Kevin Klockenga, regional chief executive for St. Joseph Health Northern California, said in an email that NorCal HealthConnect is committed to investing in both hospitals’ viability.

“NorCal HealthConnect will update the hospitals’ infrastructure, as needed, maintain and operate emergency services, and provide other capital investments that will improve care for all patients,” Klockenga said. “Because of NorCal HealthConnect’s affiliation with Providence St. Joseph Health, it will offer continuity in a time when hospitals across the country face considerable financial strain.”

For the past decade, both hospitals have been affiliated with St. Joseph Health, which in 2016 merged with Renton, Washington-headquartered Providence Health. Providence St. Joseph Health also operates Santa Rosa Memorial Hospital and Queen of the Valley Medical Center in Napa.

Healdsburg District Hospital

When state Attorney General Xavier Becerra on Oct. 31, 2019, rejected the proposed joint operating company between St. Joseph Health and Adventist Health, the decision also ended talks for the proposed entity to take over Healdsburg District Hospital. But the hospital wasn’t abandoned for long.

On July 31, North Sonoma County Healthcare District, which has oversight for Healdsburg District Hospital, and Providence St. Joseph Health announced they had agreed to terms with NorCal HealthConnect to purchase the hospital, pending voter approval in November.

The Healdsburg hospital has been financially hurting for years, exacerbated by the COVID-19 crisis that put nonessential surgeries — a significant source of income for the hospital — on ice for several months during shelter-in-place.

The purchase price is still being finalized, but the financial investment will be significant, said Jim Schuessler, who took the reins as CEO in May following the retirement of Joe Harrington.

“It will be a very substantial financial investment, and that's really the reason that the discussions transitioned from a lease to a purchase,” Schuessler said. “When you start adding up the cost of just the technical improvements and seismic (requirements), you have a very, very large investment by the new partner. If that investment is going to be made on the basis of a lease, somebody is going to come in and inherit the benefits of all of that capital investment.”

Under the terms of the deal, NorCal HealthConnect would pay $5 million in cash and a minimum $10 million in upgrades for the hospital, to include retrofitting to meet the state’s mandated seismic requirements by 2030, according to the hospital.

The retrofitting expense alone is estimated to cost between $20 million and $50 million, according to engineering consultants, said Schuessler, whose history of bringing hospitals back to financial stability was a key factor in his winning the job. He noted that, in his experience, the estimated cost range for the seismic improvements to the hospital is conservative compared to similar hospitals.

But the first order of business is to bring the Healdsburg hospital into the modern ages.

“One of the things that will benefit the hospital immediately is a plan by Providence St. Joseph Health to make a very substantial capital investment in an information technology system for the hospital,” Schuessler said. “That's probably worth somewhere north of $5 million all by itself.”

The hospital also has a bond issue of approximately $10 million that needs to be retired over the next 10 years, he said.

“That responsibility remains with the hospital district, so a portion of the proceeds from the parcel tax for each of the next 10 years at approximately $1 million a year will be utilized to retire that debt,” he said. “The balance of the parcel tax will go to support the operations of the hospital as it does now.”

Petaluma Valley Hospital

There was one major factor for the Petaluma Health Care District agreeing to sell Petaluma Valley Hospital for $52.6 million.

“The district agreed to a sale because it was the only option that assured the Petaluma community access to a local acute care hospital with an emergency room for a minimum of 20 years,” said Ramona Faith, CEO of Petaluma Health Care District.

As a result of the sale, NorCal HealthConnect will assume responsibility for deferred and ongoing maintenance, capital expenditures and seismic compliance for the 20 years, with the exception of the hospital’s family birthing center, which will continue for a minimum of five years.

Considering birthing centers have been shuttering nationwide over the past couple of years, including in the North Bay at Sonoma Valley Hospital and Adventist Health St. Helena, Faith said it’s a win to have the hospital’s obstetrics unit in the deal.

“This doesn’t mean it will close in five years,” she said. “It means NorCal HealthConnect cannot close the family birthing center before five years. OB services could continue long past the minimum five years.”

Under the deal, if voters approve the sale in November, NorCal Health Connect will maintain community benefit expenditures for the hospital’s service area for at least 10 years, allowing the district to invest in programs supporting the region’s most challenging community health priorities, Faith said. They include health equity, education, mental and behavioral health, senior wellness, homelessness and housing.

The road to securing Petaluma Valley Hospital’s future has been a long and challenging one, Faith noted.

St. Joseph Health has operated Petaluma Valley Hospital on an interim basis since its 20-year lease expired in 2017, according to Faith. Talks to extend the lease ended over financial terms, a non-compete clause and an unwillingness by the Catholic health care operator to provide some female reproductive services, according to previous reporting from the Petaluma Argus Courier, a sister publication of the Business Journal. The deal with secular affiliate NorCal Health Connect takes religious ideals out of the mix.

In 2018, the district chose to lease the Petaluma Valley Hospital to El Segundo-based Paladin Healthcare, but that deal fell apart because Paladin couldn’t invest in an expensive electronic medical record system, according to the Argus Courier.

Then late last year, the hospital — like Healdsburg District Hospital — lost a proposed takeover when the St. Joseph Health and Adventist Health JOC fell by the wayside.

“For the last four years, since our search began for a long-term operator, we have been steadfast in finding a solid future for Petaluma Valley Hospital,” Faith said. “While health care delivery has dramatically changed over the last decade and has put a strain on the viability of community hospitals, we are so thrilled that this community can continue to have a local hospital in Petaluma.”

Mendocino Coast District Hospital

The smallest and lone coastal hospital in Mendocino County had been sinking for years when Adventist Health took over management of the Fort Bragg hospital on May 4 before signing a 30-year lease effective July 1, said Jason Wells, president, Adventist Health Mendocino County.

Under the structure of the lease, Stoney Point Health, Adventist Health’s separate 501(c)(3) corporation, leased the assets of the district for fair market value.

Mendocino Coast District Hospital — now renamed Adventist Health Mendocino Coast — has lost millions of dollars over the last couple of years and is emerging from a bankruptcy, Wells said. The hospital filed Chapter 9 bankruptcy on Oct. 17, 2012, according to the district.

In January 2019, board members from Mendocino Coast District Hospital contacted Wells and said they would be putting out an RFP (Request for Proposal) to seek a partner because they were struggling, Wells said.

“They needed tremendous help,” he said. “Fort Bragg on the Mendocino Coast is a beautiful area, (but) it is certainly remote and removed from other hospitals.”

Under the deal, which received 92% voter approval in March, the district hospital became part of Adventist Health’s network in Mendocino County, Wells said. The hospital is now integrated with Adventist’s network in the county, which includes its hospitals in Ukiah and Willits, as well as 26 outpatient medical offices, a family medicine residency program, oncology care, joint replacement surgery and additional specialty care services.

“(Under) the agreement, we're paying the district to lease their asset because it’s staying their asset,” Wells said, noting the first step is to make health care sustainable on the coast. “I believe we can or we wouldn't have responded to the RFP.”

Work ahead includes bringing the hospital to seismic standards, whether that means retrofitting the existing hospital or building a brand-new facility is to be determined, he said.

Facilities management work is already underway, as are efforts to recruit more surgeons to perform operations at the small hospital, a challenging undertaking that’s moving ahead, albeit slowly because it can be difficult to find physicians willing to relocate to a rural, remote area, Wells said.

“Sometimes, when you're this far off the 101, people forget about us,” Wells said, adding the county has only 100 inpatient beds to serve 90,000 community members. “We are far more rural and don't have as many health care resources as Sonoma or Marin, or certainly all the (North) Bay Area's six counties. We’re just very, very under-resourced when it comes to health care, and so that is the importance of the three hospitals coming together.”

Staff Writer Cheryl Sarfaty covers tourism, hospitality, health care and education. Reach her at cheryl.sarfaty@busjrnl.com or 707-521-4259.

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