Palomar Health’s top staff are on a mission.
For weeks, they’ve been giving media interviews and communicating with staff that the healthcare district’s finances are in good health despite sharp revenue declines, warnings from a credit agency, increased competition and high debt costs.
Here’s why and how it’s unfolding.
A couple of months ago, Voice of San Diego reviewed Palomar Health’s public financial statements and budget reports. We reported that the healthcare district had seen a significant financial dip during its most recent fiscal year.
The North County public healthcare provider – which operates Palomar Medical Centers in Escondido and Poway – saw its operations income plunge from roughly $42 million in 2022 to $9 million in 2023, according to a June budget report.
Palomar has also borrowed a lot of money over the past several years: it currently has around $709 million of outstanding debt. After paying increased interest rate costs on its revenue bonds, Palomar ended the last fiscal year with $1.3 million in the red. That brought its operating margin to -0.2 percent, according to the report.
How it works: A hospital’s operating income refers to the profit it earns from its core operations, which is mainly patient care, as well as things like gift shops, parking and cafeterias – it’s the difference between a hospital’s total operating revenue and its total operating expenses.
The operating margin is the ratio that measures how profitable the hospital is when looking at the performance of its core operations.
The district’s total cash on hand also dropped by about $70 million from 2022 to 2023, according to the report. Palomar went from 105 days cash on hand in 2022 to 67 days cash on hand in 2023.
Days cash on hand is a common metric used to describe financial reserve levels. For example, if an organization has 100 days cash on hand, that means it would be able to meet its operating expenses for 100 days if revenue was suddenly shut off.
Cash reserves are an important indicator of a hospital system’s financial stability.
In June, Moody’s, the Wall Street bond rating firm, announced that it downgraded its outlook of Palomar, which has about $700 million of outstanding debt, from stable to negative. That’s because of “increased hurdles to restoring operating cash flow and consequently to debt and days cash on hand,” the announcement said.
The credit rating agency also affirmed Palomar’s Baa3 revenue bond rating, which represents bonds that are considered to be worthy of investment with a reasonable level of risk and low likelihood of default.
Moody’s is considered one of the Big Three credit rating agencies. It independently assesses a company or government entity’s creditworthiness.
They Are ‘Going to be in Pretty Good Shape’
Palomar is now projecting $55 million in operating income in fiscal year 2024, which started July 1 – that’s about a $46 million increase from 2023. The hospital district is also estimating that cash reserves will climb from $184 million to $205 million this year.Palomar Health’s CEO Diane Hansen has been emphasizing these projections to news outlets and the hospital’s stakeholders in response to our reporting.
Palomar Health officials have repeatedly ignored our requests for comment.
Hansen first released a video message to all Palomar Health employees on July 7, which Voice obtained. It was titled “An important and timely message from Diane Hansen, president and CEO of Palomar Health.”
She referred to the Voice article as containing “false and misleading information about our organization and its stability.”
Then, Hansen admitted the hospital system did face financial difficulties.
“We are a very strong organization and much like many of the organizations across the nation, we had to take a little bit of a step back this year,” Hansen said in the video message.
She later told the Escondido Times-Advocate that Palomar Health had “taken a dip.”
It’s true that hospitals nationwide and locally are seeing declines in patient volume and overall revenue, as we reported.
A report by the American Hospital Association called 2022 the worst financial situation for hospitals since Covid. The California Hospital Association reported that half of all hospitals in California finished 2022 with negative margins.
But in addition to these widespread financial declines, Palomar Health’s longtime contract with Kaiser Permanente is set to expire in December 2024. And earlier this month, Kaiser opened its new San Marcos Medical Center.
For 20 years, Kaiser has paid Palomar to allow its North County members to have access to Palomar Medical Center in Escondido, Kaiser spokeswoman Jennifer Dailard said in an email back in June. Kaiser’s other San Diego hospitals are in Kearny Mesa and Grantville.
There are 188,000 Kaiser members in North County, COO of Kaiser North County Max Villalobos told Voice, which is about a third of Kaiser’s total membership in San Diego County.
That’s a lot of Kaiser members that will now be able to seek medical care at Kaiser’s new San Marcos hospital instead of at Palomar Medical Center.
Villalobos said Kaiser will still be directing trauma patients to Palomar because Palomar is the only designated trauma center in North County. It will also be sending patients to Palomar for certain types of surgeries like neuro and vascular surgeries.
Otherwise, Kaiser members will move over to the new Kaiser hospital along with Kaiser’s physicians, Villalobos said.
And the new $400 million, 206-bed hospital is just down the road from Palomar’s Escondido campus.
Still, Hansen told the Times-Advocate that they don’t expect to lose money from the contract ending because they’ve “been planning for it.”
Financial details of the agreement between Palomar and Kaiser, such as how much Kaiser is paying Palomar, have never been disclosed. Hansen didn’t provide any of those financial details to news outlets.
She did, however, tell the Times-Advocate that Palomar will start seeing financial gains as soon as this October, echoing a statement she made in the video message about Palomar anticipating its “best year ever this coming year, the best year in the history of the organization.”
When asked how Palomar is going to do this, Hansen told the U-T that Palomar has been making significant investments over the past few years that they “really believe are going to start to pay off in this next fiscal year in a much bigger way.”
She cited a new infusion center, new medical office buildings and new ambulatory surgery centers.
She also referenced a new nurse incentive program that pays nurses up to a $100,000 bonus over three years. It’s supposed to be less costly than what Palomar spends on contracted labor, which are nurses and other medical professionals hired on short contracts.
As of last month, 1,273 Palomar registered nurses had committed to the program, but Palomar did not provide Voice or the U-T with an updated enrollment figure or details on how many nurses signed up for each level of the incentive program, so it’s still unclear how much the program will end up costing.
Hugh King, Palomar’s chief financial officer, told the U-T that Palomar is “going to be in pretty good shape,” and that he wants to share the numbers, but has to share them with the finance committee and the board first.
Palomar Health declined multiple requests for comment.