Palomar considers 'creative pivot' to new leadership structure

Escondido, Calif.-based Palomar Health is proposing a structural reorganization under which health system executives would be employed by a nonprofit, outside management organization rather than a public entity. 

The proposal is a 15-year contract with Mesa Rock Healthcare Management. Under the proposal, the existing board for the public healthcare district — which is accountable for oversight and implementation of policies, including financial policies, and monitoring of Palomar's performance — would remain in place, Palomar President and CEO Diane Hansen told Becker's during a phone interview. A nonprofit, private board would be responsible for the management of the hospital operations, and Mesa Rock would hire Palomar's executive team. The same team would then manage the operations of the public healthcare district but would not own the assets. No hospitals or equipment would be transferred to outside ownership. 

"The contract that was proposed allows [Palomar] to remain independent as a [public] healthcare district," Ms. Hansen said. "We are the largest healthcare district in the state of California. So we bear some responsibility to the state and to our community. 

"The idea is that we allow for the continuation of this healthcare district to stay intact. And we have the ability to operate in a different fashion that gives us more flexibility to make decisions to partner with other organizations or affiliate with other organizations in a different way without having everything negotiated in public."

The proposed change comes as the health system faces financial challenges. On Feb. 23, Moody's Investors Service placed Palomar's debt "under review for downgrade," citing "a material and unexpected decline in unrestricted cash reserves ... that has resulted in roughly 39 days cash on hand," The San Diego Union-Tribune reported. 

John Kern, an attorney with Holland & Knight who Palomar hired to create the management agreement, argued that the contract with Mesa Rock would allow the health system to operate more nimbly and compete with for-profit hospitals while preserving the public health core of the organization.

"The board and the executive team are absolutely locked up in unison that they want to remain a healthy public institution," Mr. Kern told Becker's. "The problem is that the laws that gave rise to the creation of healthcare districts in California were passed just after World War II and also put into place a lot of rules and restrictions about how public hospitals like Palomar can operate.

"When they passed those laws 80 years ago, no one envisioned healthcare economics being what it is today. And it's simply not realistic for an institution like Palomar to sustain and compete with for-profit hospitals in its region without making some type of creative pivot. And so the idea of the agreement is to partner with an outside nonprofit organization that will then hire Palomar's executive team. And then through that vehicle, be able to enter into affiliation relationships with other regional health partners that, under the current public structure, it could not."

Attorneys confirmed to the Union-Tribune that if the contract is approved, Mesa Rock's appointed board of directors would have the authority to directly terminate Ms. Hansen or any future CEO, but the existing Palomar board would retain the right to end the Mesa Rock contract or veto a new CEO hire proposed by Mesa Rock. Palomar's existing elected board would also still control the annual budget.

Attorney David Holtzman, also with Holland & Knight, who has been involved with the proposal, told Becker's: "The same publicly elected officials representing their various constituencies would still exercise control and oversight. So, in terms of leadership structure, there should be almost no change at all, other than freeing up and adding to the flexibility of the executive team to work for the benefit of" Palomar. 

Ms. Hansen said the executive team will ask the existing public healthcare district board on Feb. 29 to vote to approve the contract between Mesa Rock and Palomar. If approved, Mesa Rock may enter into new joint affiliation and investment relationships with, among others, regional health systems.

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