Watsonville Hospital: New Owner Could Be Chosen Soon

WATSONVILLE, CA — If everything goes as planned, the bankrupt Watsonville Community Hospital will have a new owner by the end of next month.

Who that will be depends on the outcome of an auction sale authorized in San Jose last week by M. Elaine Hammond, U.S. Bankruptcy Judge of the Northern District of California. What’s uncertain is how many bidders will participate.

In an order signed Jan. 10, Hammond set a Feb. 14 deadline for pre-qualified bidders to submit bids, with the court-supervised auction sale to be conducted on Feb. 17 and a hearing to approve the sale scheduled for Feb. 23.

A sale could write the end to a two-decade saga of money problems at the 106-bed, for-profit regional hospital, which provides critical health care services to a diverse rural population. In 2020 the hospital served 23,000 patients in its emergency room and provided surgical services to 1,800 patients, state data shows.

So far the only identified bidder is Pajaro Valley Healthcare District Project (PVHDP), a nonprofit corporation formed last summer by Santa Cruz County, the City of Watsonville, Community Health Trust of Pajaro Valley and Salud Para Le Gente, a healthcare provider to farm workers and other underserved populations.

But Judge Hammond was told at a Jan. 7 hearing there may be others interested in purchasing the hospital.

Court documents show that Cowan & Company, a New York investment bank retained to find other potential buyers, had sent out more than 120 solicitations and received at least nine responses from companies willing to sign nondisclosure agreements permitting them to examine the hospital’s internal financial records. It is unknown how many, if any, of those expressing interest will actually submit bids.

For several months PVHDP has been in discussions with the hospital’s owner about purchasing the facility and three weeks after the bankruptcy was filed a purchase agreement was negotiated. If PVHDP is the successful bidder and a healthcare district is formed, ownership would ultimately be transferred to the district.

Last November Santa Cruz County committed $500,000 to PVHDP for preliminary work on hospital acquisition and formation of a healthcare district.

However, that agreement contained several conditions including certain milestones for the state legislature to approve a bill creating the healthcare district and the requirement for a $4.4 million deposit at the time the PVHDP bid is submitted.

The first step in the legislative process was taken Wednesday when the State Assembly Standing Committee on Local Government unanimously approved sending a bill creating the district to the full assembly, which is expected to vote next week. If approved, the bill would head to a senate vote.

That bill was authored by state Sen. John Laird, who testified time was of the essence in passing his bill. “The (hospital’s) bankruptcy bought time,” Laird told the committee, “but it’s urgently needed because it allows for the purchase to happen bids are being prepared."

One reason for the urgency of legislative action revolves around conditions on a loan of several million dollars made to the hospital by MPT to insure the hospital would stay open through March, providing time for the sale. That loan will be repaid from proceeds of the sale.

Mimi Hall, a former Santa Cruz County health official and now PVHDP’s president, testified that committee approval of the bill was “crucial to residents of the area,” pointing out that Watsonville Community was one of only two hospitals in the county with emergency rooms and nearly half its patients were on Medi-Cal.

Money to cover the deposit was secured when one of PVHDP’s member organizations — the Community Health Trust of Pajaro Valley — committed enough for the deposit. On Tuesday the Central California Alliance for Health board of directors approved an additional $3 million grant to PVHDP to support the purchase.

The alliance, which is the Medi-Cal managed health plan for Santa Cruz, Monterey and Merced Counties, said in a statement that the funds were made available through a grant program.

“PVHDP’s proposal to create a healthcare district and to purchase the hospital fully aligns with our mission of accessible, quality health care guided by local innovation, said alliance CEO Stephanie Sonnenshine in the statement. “We’re pleased that our board voted to make grant funding available to support local action to ensure that Pajaro Valley residents keep access to needed health care services in the community.”

For more than two decades under private ownership the hospital has experienced ongoing fiscal problems since its purchase by Community Health Systems in 1998. Financial disclosures filed with the state show the hospital continued bleeding even more money after Halsen Healthcare, an obscure Southern California hedge fund, acquired the facility in 2019 from Quorum Health Corporation for $40 million.

Quorum was created as a spinoff by Community Health during a restructuring in 2015 and itself filed bankruptcy in 2020.

As part of its acquisition from Quorum, Halsen sold the hospital property and building to Medical Properties Trust (MPT), an Alabama-based real estate investment trust, which immediately leased the facility back to Halsen, a transaction that has complicated the hospital’s bankruptcy.

Halsen operated the hospital through at least two subsidiary companies until MPT removed Halsen from its management role early last year for failure to meet various financial obligations. Prospect Medical Holdings of Los Angeles took over hospital management.

Financial reports submitted to the California Department of Health Care Access show the hospital lost $14.3 million in 2019 and $17.9 million in 2020. Last year the hospital lost more than $32 million, court documents show.