Palomar Health CEO Promised Big Financial Gains But Fell Short

By Tigist Layne, the Voice of San Diego

December 11, 2023

For Palomar Health’s top executive, it wasn’t a question of if it happens, it was a question of when.

That’s what CEO Diane Hansen told the Escondido-Times Advocate in July when asked about Palomar Health’s optimistic financial goals for the 2024 fiscal year, despite a poor financial performance the year before.

“We’re looking at a $55 million bottom line for next year,” she told the Times-Advocate. “That would be the best year this organization has ever had.”

She said the healthcare district would start seeing those financial gains by October of this year. It hasn’t.

Instead, Palomar Health’s first quarter financial reports show a still struggling hospital system.

The North County public healthcare provider – which operates Palomar Medical Centers in Escondido and Poway – finished its first financial quarter of the fiscal year with a net operating income of -$11.8 million, which means the healthcare district is still in the red. That number is $24.7 million less than where Palomar officials expected to be at this point in the year, according to a financial report presented to the board on Nov. 13.

Across the country, hospitals are seeing revenue declines that have resulted in cuts to entire departments, massive layoffs and in some cases, mergers and acquisitions between hospitals. One San Diego hospital had to suspend its labor and delivery unit because of its financial troubles before finding a partner that would reopen the unit and bring the hospital back to financial health.

In June, 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 fiscal year 2023, which ended on June 30.  

Palomar saw its operations income plunge from roughly $42 million in 2022 to $9 million in 2023, according to a June budget report. After paying increased interest rate costs on its outstanding revenue bonds, Palomar ended the year $1.3 million in the red, according to the report.  

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.  

For fiscal year 2024, which started July 1, Palomar Health projected $55 million in operating income – that’s about a $46 million increase from 2023. The hospital district also estimated that cash reserves would climb from $184 million to $205 million this year.

The hospital district’s leaders disagreed with our reporting. Though Hansen admitted to the Times-Advocate that Palomar had “taken a dip,” she was confident they would recover quickly.

In a video message sent to all Palomar employees on July 7 Hansen said Palomar was anticipating its “best year ever this coming year, the best year in the history of the organization.” 

But a financial report for the quarter ending on Sept. 30 shows it’s taking Palomar longer to bounce back than its leaders were expecting.

It’s part of a larger trend of hospitals across the nation seeing declines in patient volume and overall revenue. 

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. 

Locally, Tri-City Medical Center, another public health care district, has seen its own financial hardships in recent years. The hospital system lost about $25 million in fiscal year 2023 due to supply cost inflation and elevated labor costs.

It even suspended its labor and delivery unit in July because of “current and expected financial losses,” said a July 27 memo to the Tri-City board.

Tri-City is now moving forward with a partnership with UC San Diego Health, which will transfer Tri-City’s property and outstanding debt to UCSD and will eventually lead to the reopening of the labor and delivery unit.

On top of the revenue decline, Palomar Health is also going through a change in its longtime partnership with Kaiser Permanente. Palomar’s contract with Kaiser is set to expire in December 2024, and a few months ago, Kaiser opened its new San Marcos Medical Center just down the road from Palomar’s Escondido campus.

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 back in August, which is about a third of Kaiser’s total membership in San Diego County.  

All those Kaiser members are now able to seek medical care at Kaiser’s new San Marcos hospital instead of at Palomar Medical Center. 

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. 

Hansen told the Times-Advocate in July that they don’t expect to lose money from the contract ending because they’ve “been planning for it.” 

However, Palomar staff said at the Nov. 13 board meeting that they have seen a significant drop in smaller, outpatient surgeries that Kaiser was bringing to Palomar Health. Palomar had about 50 percent less outpatient surgeries in its first quarter than expected, according to the financial report.

Outpatient surgeries are procedures that don’t require patients to stay overnight in a hospital.

Financial details of the agreement between Palomar and Kaiser, such as how much Kaiser is paying Palomar, have never been disclosed, so it’s unclear exactly what financial impacts those outpatient surgery declines have had on the hospital district.

Palomar staff said during the Nov. 13 meeting that it’s still early in the year, and they are seeing outpatient volumes pick up in the current quarter and are expecting those numbers to continue to increase.

The district’s total cash on hand also dropped by about $80 million from the end of fiscal year 2023, according to the Nov. 13 report. Palomar went from 67 days cash on hand at the end of last fiscal year to 54.5 days cash on hand by Sept. 30.

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 can be an important indicator of a hospital system’s financial stability. 

Palomar Health officials did not respond to a request for comment.

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