Editor's note: The headline in this story was corrected. The original wording that stated a net operating loss of 41.7 million was "putting the hospital in the hole" created confusion and does not correctly apply to a net operating loss over a nine year period. BenitoLink apologizes for this error.
This is the second in a series of articles on Hazel Hawkins Memorial Hospital (HHMH), which for a time was discussing a possible collaboration with Salinas Valley Memorial Healthcare System (SVMHS). On Sept. 21, it was announced there would be no partnership between the two. This article looks at HHMH’s finances and arguments for and against seeking a partnership.
Read the first article here.
The explanation that Salinas Valley Memorial Healthcare Systems (SVMHS) gave to Hazel Hawkins Memorial Hospital (HHMH) about why the two would not be partnering was ambiguous at best. “The timing wasn’t right,” said Hazel Hawkins Chief Executive Officer Ken Underwood, who told BenitoLink that Salinas Valley would not tell him why they were walking away.
“What does that even mean?” Underwood asked rhetorically. “I asked them ‘what am I supposed to do, read between the lines?’ Maybe it’s because most of their board is up for reelection. I don’t know. Maybe it will be better six months from now. We’ll just have to wait and see.”
To better understand Hazel Hawkins’ finances, BenitoLink obtained annual financial summary disclosure reports for the past nine years. Over that time period, the hospital had total operating revenues of more than $781.6 million and total operating expenses of $823.4 million, for a total net loss from operations of $41.7 million.
The major expense each year during that nine year period was wages and salaries, which accounted for 59 percent of operating expenses during that period.
The most recent figures available are for fiscal year 2016-17, which show total operating revenues of $109.9 million and total operating expenses from business operations exceeding $116 million, for a loss of $6.1 million from operations.
Those familiar with the hospital budget say that as these figures are growing, it is becoming more difficult for Hazel Hawkins to offset these losses with property taxes, bond repayment taxes and/or donations.
If costs stay on this trajectory, they say, the losses will likely impact the hospital's services.
Looking for a bailout
Underwood said during an April 2018 town hall meeting that because of the continuing revenue losses, he saw no choice but to reach out to other healthcare organizations for a possible partnership. He said 10 organizations had been approached, and that of those, only Salinas Valley considered collaborating with Hazel Hawkins.
“With board approval, Hazel Hawkins and Salinas Valley Memorial Healthcare System entered into an exclusive negotiating agreement to take an in-depth look at how combining resources might help our respective communities,” Underwood told BenitoLink in September. “Our board of directors’ vision for collaboration with a larger health system is aimed not only at financial, but also at enhancing the population health of our community, improving care of chronic diseases, using network platforms for preventative care and wellness, and adapting better education modules to continually improve our staff competencies.
“To ensure San Benito County has the most robust, sustainable health system possible, we believe the next smart step is partnering with another forward-thinking health care system,” he said.
While Underwood seemed convinced there were no alternatives to a collaboration with SVMHS, Ariel Hurtado, the only doctor on the five-member San Benito Health Care District board, said it’s a mistake to seek a partnership with Salinas Valley or any other hospital. He told BenitoLink that if the board seeks a partnership there should be a competition between possible partners, and that he favors going with a professional management company rather than joining forces with another district hospital.
For the past 20 years, he said, Hazel Hawkins has not filled people’s expectations for a local hospital.
“I’d like to see some competitive offers and explore all possibilities to replace or redesign our entire [management] structure,” Hurtado said. “We need to take a look from the outside to see how we rebuild internally. To do that I need support from the other board members, so that’s why I can only speak for myself.”
Martin Bress, an internal medicine physician who served on the San Benito Health Care District board for eight years in the 1970s, is also skeptical of any deal with another hospital, especially SVMHS. Bress said what might be good for SVMHS would not necessarily be good for Hazel Hawkins. He said the hospital’s financial predicament is the result of 10 years of mismanagement by Underwood.
Underwood said Hazel Hawkins is not in any immediate financial danger, referring to statistics auditors presented at board meetings and reported by the California Office of Statewide Health Planning and Development. He said HHMH has been proactive in evaluating ways to contain costs, increase reimbursements and develop new revenue.
Bress said Underwood’s assessment was created through accounting maneuvers and that it isn’t appropriate to “give away the store to Salinas.”
He added that Hazel Hawkins was doing many more procedures 10 years ago.
“It’s not being well-managed; therefore, it’s not meeting its potential. The way our community is growing, it should be doing just fine.”
Underwood said the two hospitals already have a strong collaborative relationship that cuts expenses through combined purchasing contracts. He said an even more extensive relationship could add more specialists and streamline services to San Benito County.
According to the Sept. 21 press release, Salinas Valley Memorial CEO Pete Delgado said the hospital looked forward to “continuing the cooperative relationship we have developed between our two hospitals over the years” and would “continue to work with Hazel Hawkins Memorial Hospital to support the needs of the patients in our communities.”
A recent poll of San Benito County residents conducted by J. Wallin Opinion Research company and paid for by Hazel Hawkins found that 82 percent of 300 residents polled felt that a partnership with a larger health system would help their community. (See PDF of survey below.)
The plight of rural hospitals
In his Sept. 27 report to the board, Hazel Hawkins Chief Financial Officer Mark Robinson said the hospital district lost $250,000 in the month of August. He said that from fiscal year start to date [June to September], the district is $591,000 over budget. He remarked that even though more people are moving to Hollister, the number of patients admitted continues to drop.
“A lot of those people moving into town have Kaiser insurance and they won’t come to the hospital, except through the emergency room,” Robinson said. “We also have a lot of insurance pushing people out of the hospital. This is industry-wide, keeping people out of hospitals and more toward outpatient care.”
Gordon Machado, who is running for Hollister mayor in November, was a 17-year member of the San Benito Health Care District board and was on the board when Underwood was hired in 1999. He agrees with Robinson about why the hospital has fallen on hard times, saying the blame belongs with Medicare and Anthem Blue Cross, not Underwood.
“When I came aboard, the government was encouraging rural hospitals and supporting them financially with reimbursements,” Machado said. “After about 10 years, they reduced reimbursements. During the same time, [Anthem] Blue Cross, the biggest provider of health insurance, squeezed us because we were a small, rural hospital.”
According to Machado’s recollections from his time on the board, Anthem Blue Cross reduced reimbursements to Hazel Hawkins by as much as 65 percent per procedure, while SVMHS and Community Hospital of Monterey Peninsula (CHOMP) received twice as much. He estimated there used to be approximately 80 district hospitals in the state. That number, he said, has been reduced to around 40 primarily because of Anthem Blue Cross.
According to a Jan. 9, 2018 article in The Atlantic, the National Rural Health Association estimated that of more than 2,000 rural facilities, 673 were at risk of closure and said with mergers of drugstore chains and insurers, the problem will only get worse.
“In response,” the article’s author wrote, “stand-alone nonprofit hospitals have been auctioning off their real estate to investors, selling themselves to for-profit chains or private-equity firms or folding themselves into regional health systems. The implications of those moves can be profound, as consolidation can hurt hospitals and the smaller cities and towns they’re located in. Not only are community hospitals vital to many places’ social fabric and image of themselves, but they are often the largest local employers now that manufacturing jobs have faded.”
Put it on the ballot?
Since the partnership with Salinas Valley did not materialize, the next question is, what is Plan B? One possibility has played out recently as the nonprofit operator of six California hospitals filed for Chapter 11 bankruptcy protection, according to a San Francisco Business Times story dated Aug. 31.
Machado said he has supported partnering with another hospital for five years. He said a merger or partnership between two district hospitals would have been an easy transition because “there would be no need for a vote by the people,” yet the board would still represent them.
Hurtado, though, says voters should have a say and a referendum needs to be on the ballot.
Machado believed a Hazel Hawkins-Salinas Valley partnership would have benefitted both by eliminating duplication of procedures if they split up the specialties between them. He said because of the 30-year, $31.5 million bond passed by voters in 2005, HHMH has been modernized to a point where it can offer cutting-edge treatment, including an expanded emergency room and the recently opened 42,000-square-foot Women’s Center building, and would be complementary to the larger SVMHS.
He maintained, though, that with all the new building and expansion of medical capabilities over the last few years, the hospital is still a valuable asset as a “package to negotiate with.”
Hurtado and Machado agree that with more than $100 million in infrastructure and business, Hazel Hawkins Memorial Hospital would be a lucrative acquisition. But Hurtado pointed out that in the case of Salinas Valley, it would have had the majority vote on a combined board and any decisions would most likely have favored SVMHS.
“I don’t want to see control leave the citizens because anytime someone comes in with some type of investment money, you have a loss of control,” Hurtado said. “I will not vote for anything that will bring that about. And no matter what we do with the same [management] structures in place, we’re not going to get a different result. My plan would be to keep local control at all costs, but change the management.”
Underwood said Hurtado’s assertion that the San Benito Health Care District board would be weakened if combined in a joint board is a “baseless assumption.” He contended that partnering with a larger health system would only strengthen Hazel Hawkins.
Hurtado said he is the only board member speaking out against any merger with a district hospital and he hopes to convince some of the other four members to come to his way of thinking. Having worked at Hazel Hawkins for 20 years, Hurtado said he has studied the budget that showed the hospital has made $3 million to $4 million annually. He said it only looks like the hospital is losing money because it has included depreciation charges each year.
“We’re a rich county and the sky’s the limit because of our proximity to Silicon Valley,” Hurtado said. “We make $13,000 a year more in median income than people in Monterey County, so I don’t see why this hospital can’t be successful. I think as a hospital, we’ve been underperforming.”
Machado pointed out it might come down to politics because both hospital boards have openings that will be filled during the November elections. He intimated that what some might be looking at as a setback, could actually be a good thing.
“It might be good to wait four or five months to see how the new boards gel,” he said, prior to Salinas Valley’s decision not to partner. “Both CEOs would probably like to see how they settle in. If I was still on the board, I’d say ‘let’s take a deep breath and wait awhile.’”
Without identifying which ones, Underwood told BenitoLink prior to the decision that if the deal did not go through with Salinas Valley Memorial Healthcare System, the board would consider other healthcare groups that focus on providing services in rural communities.
Machado didn’t appear hopeful that Underwood would be successful in finding another potential partner.
“They pretty well shot-gunned it, so it will be hard to focus when all the people in your area have been asked,” he said.
“The idea they’re desperate and they could close without someone coming to save them is a fantasy,” Dr. Bress said, contradicting Machado. He added that Underwood has done his best to discredit Hurtado at board meetings. “When they were talking about certain issues, [Underwood] would say ‘you [Hurtado] can’t talk about that because you’re a doctor’ and ‘it would be a conflict of interest.’ That was not correct. It’s bizarre you’d try to run a hospital with people [on the board] with no medical or organization experience,” Bress said.
Asked earlier if they would comment about the possible partnership with Salinas Valley, board members Josie Sanchez and Jeri Hernandez said they supported it, and Angie De La Cruz declined to comment. Board member Mary McCullough did not respond.
Despite Hurtado’s opposition to any agreement between the two hospitals and other board members’ reluctance to respond, Hazel Hawkins Hospital released a statement Sept. 10 attributed to the entire board:
“Hazel Hawkins Memorial Hospital is not for sale. We do however believe that joining with a capable partner will lead to an even higher level of health care services and specialties for our steadily growing community and ensure San Benito County has the most robust, sustainable health system possible.”
Hurtado said he did not see the statement prior to it being sent out.
Hollister City Council candidate Marty Richman, who has attended numerous Hazel Hawkins’ board meetings and is familiar with their finances, told BenitoLink that the board has been ineffective because it never challenges Underwood.
“I don’t think they do their homework, they never argue a point and they just don’t do their job,” Richman said. “It has to be a deal that strengthens the district and its mission to provide healthcare to the county residents, not just the only deal we could find.”
Calls for new management
Frank Barragan, who is running for San Benito County Health Care District Zone 2, said in a comment on BenitoLink in response to the first story in this series that he was in full agreement with Hurtado, and that “selling our hospital will not benefit our community.” He said if Hazel Hawkins were to partner with Salinas Valley Memorial, a significant percentage of the community would be forced to seek health care north of San Benito County.
“A mere change in management can steer our hospital in the right direction to serve our community,” Barragan wrote. “As stated by Dr. Bress, ‘if it’s good for Salinas it won’t be good for Hollister.’ Let’s keep local control and work together for a change.”
Ross Blasingame, who is running in Zone 2 against Barragan as well as incumbent Josie Sanchez, also responded to the first story in this series by writing in the comment section on BenitoLink that he does not support a merger or partnership. He called for the recruitment of more doctors who will bring new services to the community, which he believes will generate more revenue.
“We also need to recruit and retain the best healthcare staff possible,” Blasingame wrote, and “increase the quality of care, provide new services, listen to the heartbeat of our community and increase the profitability of our hospital.”
Meanwhile, Hurtado said Underwood still won’t consider a management company, but he intends to continue to push for it to happen. Asked why Underwood is so intent on partnering with another hospital, Hurtado said, “I think he wants to keep his job.”
Three other doctors who spoke with BenitoLink also believe Underwood pushed the partnership with Salinas Valley because he wants to keep his job, possibly in Salinas, managing HHMH and sweetening his benefits package.
Underwood responded: “Certain doctors critical of the board’s decision to seek a partnership lost significant bonus income from a recently terminated contract with the board [in 2016]. They have an ax to grind.”
Hurtado responded to Underwood’s remark about the doctors stating that he is not a member of San Benito Medical Associates, the medical group Underwood was referring to.
“I do not have a contract with the hospital in any shape or form,” Hurtado continued. “I have my own independent community-based practice. As a board member, I would take a step back and ask how can a medical community be so divided that the local doctors and the local hospital can’t trust each other? Can it be repaired? Why did it get to this point?”
Other BenitoLink articles on Hazel Hawkins Hospital:
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