Palomar Health board approves agreement that gives oversight of C-Suite to private company


Palomar Health’s board of directors approved a 15-year management services agreement Thursday that will have its top management begin working for a private not-for-profit company, a decision intended to stabilize the public health care district’s declining finances.

Some in the community said they were uncomfortable with the move, calling it a hasty reduction of the elected hospital board’s administrative powers.

But a majority of the board said they believe the unique agreement with Mesa Rock Health Care Services will better equip the state’s largest public health care district to compete and collaborate with private medical providers such as Kaiser Permanente, Sharp HealthCare and Scripps Health.

The vote came after hours of discussion that returned to several key aspects of the proposal, which was first presented before the public just one week earlier. Lawyers once again reviewed a contract between Palomar and Mesa Rock, which is a newly created legal entity with its formation paperwork filed just last week and its bylaws still unapproved.

Dr. James Schultz, a former Palomar physician and now chief medical officer of a local community health center, urged the board to slow down.

“I don’t believe this decision is in the best interest of the residents,” Schultz said. “This essentially sidelines the medical staff from any influence over management.”

Saying the move may draw the attention of the California Medical Association, Schultz called the deal one that “commits you as a board to a bystander position.”

But others disagreed. Ellen Riley, a senior vice president at the international consulting firm Kauffman Hall, praised the board for pulling together a hybrid agreement that keeps assets public while enhancing management’s ability to access deals among private peers.

Though she said her company had nothing to do with the agreement, Kiley applauded “the boldness that you’re all demonstrating in creating another avenue to preserve health care for the community.”

Many of Thursday’s comments revolved around the accountability of top management, especially Palomar’s CEO, Diane Hansen. She and her top C-suite executive team would no longer work directly for the elected board, though its members could sever Palomar’s agreement with Mesa Rock. While they would have veto power on hiring a new CEO, the elected board would no longer be able to fire the CEO if they were unhappy with her performance.

That change was a major sticking point for some.

“You cannot take away the rights to hire and fire the CEO,” said director John Clark.

“We cannot, as elected board members, give away our power,” added director Laurie Edwards-Tate.

Both voted against the Mesa Rock contract. Some have noted that these types of deals are indeed possible. Decades ago, for example, the Grossmont Healthcare District leased all of its assets to Sharp HealthCare, which the organization confirmed Thursday afternoon is run by a private appointed board.

But the majority of board members said they were satisfied that the board retained enough of its power to still be in control of Palomar while giving top executives a bit more room to do deals with private partners who are often reluctant to get involved with public agencies.

Director Michael Pacheco of Valley Center, who served a 40-year career in emergency services, rejected assertions that the authority of the public board was not well-enough protected. He noted that the elected board retains its budget-approval authority and its ability to clear away top management if they don’t perform for the public.

“We as a board have the ability to say, ‘you are not meeting what we want you to, therefore you need to fix it,” Pacheco said. “And if you don’t, we will terminate the contract.”

Palomar, like many health providers, faces fierce financial headwinds and is likely to post a significant bottom line loss at the end of its fiscal year in June. Attorneys who explained the Mesa Rock deal Thursday said that many private organizations are reluctant to build deep relationships with public entities like Palomar because of the fear that doing so will put private information into the public realm, perhaps allowing competitors to discover trade secrets through public records requests.

As a private company, Mesa Rock would not be subject to the state’s public records law. Even though most of Palomar’s records would remain public, those made by top managers would have at least some cover, and Palomar executives have said that this area of privacy will make collaborations happen quickly.

Director Terry Corrales said she believes that to be the case.

“We need to think out of the box; we need to look to the future,” Corrales said. “We cannot stand still.

“(These) health care districts were developed after World War II. I think we need to progress from that and look to the future.”

Some objected to the fact that little is known about how Mesa Rock will operate. The entity was created at the behest of Eric Friedlander, a resident of Sonoma County. A Palomar attorney called Friedlander “a successful health care executive who’s a lecturer at the UCLA school of business.”

Tom Kumura, a former Palomar board member, urged the board to slow down until more is known about Mesa Rock.

“Who are the members? You guys don’t even know, there’s no articles of incorporation,” Kumura said. “Why are you doing this during a special meeting?”

Last week, Friedlander, through his attorney, declined to say how he intends to run Mesa Rock. Generally not-for-profit corporations must have governing boards, but details on the makeup of such a structure have not been shared with the public.

It is clear that Mesa Rock, once it is fully formed, will have a budget of its own that comes directly from Palomar’s bottom line. The contract that the board approved Thursday gives the company 1 percent of net revenue for its operations, though any money left over each year is to be spent on Palomar’s health-care related activities.

Clark said he calculates the management fee to be about $8 million per year with Palomar net revenue expected to be about $800 million this year. Management did not respond to Clark’s request for more information on where operating cash would come from given that Palomar has been operating in the red.


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