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The recent death of Palm Drive Hospital in Sebastopol has some wondering which of Sonoma County's three other district hospitals is next. Will it be Healdsburg to the north, Petaluma Valley to the south or Sonoma Valley to the southeast?

While the forces that caused Palm Drive's closure are affecting all hospitals, smaller district hospitals are particularly vulnerable and have fewer resources to offset today's financial pressures.

These forces include declining inpatient volumes, fewer reimbursement dollars from the government and health insurance companies, and Kaiser Permanente's dominance of the local commercial insurance market. What's more, federal health care reform has ushered in a new payment model that is changing how hospitals operate, essentially rewarding hospitals for keeping people out.

Local health care systems say the new paradigm is forcing them to change their business model in a way that de-emphasizes the role of hospitals in their health care networks.

That's easier to do if you're part of a larger health care system, such as St. Joseph Health, Kaiser Permanente or Sutter Health.

"It's not our intention that we be next," said Todd Salnas, president of St. Joseph Health in Sonoma County, which leases and operates Petaluma Valley Hospital for the Petaluma Valley Health Care District.

"We're very focused on making sure we'll be around and viable for the community," he said of the 80-bed Petaluma hospital.

Salnas said the health care landscape across Sonoma County is evolving from one where hospitals are paid handsomely for treating episodic care to one where they are part of larger systems that manage care.

At the 83-bed Sonoma Valley Hospital, president and CEO Kelly Mather is also shifting focus away from inpatient services and building on its specific geographic health care needs. One of its priorities is to expand its home health care program — an alternative to nursing home care — to communities beyond the district's boundaries.

"All hospitals are struggling right now," Mather said. "You have to be nimble. We're moving to provide services on a regional basis, looking beyond just the community."

Nancy Schmid, CEO of the 43-bed Healdsburg District Hospital, has reversed the financial relationship between inpatient and outpatient services. Traditionally, she said, hospital executives have viewed inpatient volumes as driving outpatient dollars, but today it's the other way around.

"I believe it's the reverse of that, you focus on outpatient services that feed your inpatient volume," said Schmid. "For every one dollar we earn on inpatient care, we can earn two dollars in outpatient services."

One example, she said, is Healdsburg's noted wound care program. The idea is to have patients use the outpatient service on a regular basis and develop a strong relationship with the hospital, so that if inpatient care is required, that patient will be admitted to the Healdsburg facility and not some other hospital.

The closure of Palm Drive was an undeniable wake-up call to district hospital officials, their nonprofit foundations and the local communities they serve. Many in the county quietly say Palm Drive's closure on April 28 was a long time coming, the product of declining inpatient volume, brutal competition from Kaiser insurance products and dwindling reimbursements from private insurers.

Its location in Sebastopol — which places it so close to the county's three largest hospitals in Santa Rosa — was reportedly one of the main reasons Palm Drive could not sustain itself financially. Though it serves many of the rural communities in the west county, it does not have a special "critical access" designation from the California Department of Health Services, a designation that would have meant higher government reimbursements.

Palm Drive is just 13 miles from Santa Rosa Memorial Hospital, a 15-minute drive with absolutely no traffic. When Sutter Medical Center relocates later this year to its new facility on Mark West Spring Road, it will be only 13 miles south of the Healdsburg hospital.

While certain industry forces affect all of the county's small hospitals, the differences between them and Palm Drive are also significant.

In Healdsburg, the hospital generates about $1 million in additional government reimbursements as a result of its critical access designation, Schmid said. That, combined with the $3 million the hospital receives from the district's $150 parcel tax, has kept the hospital from an even more dire financial situation.

The Healdsburg hospital lost $4 million in 2013 but is taking steps to improve its finances, said Schmid, who has been on the job for nine months. The hospital is on track to reduce losses to $1.3 million by the end of this year. For 2015, Schmid hopes to eliminate all losses.

The hospital is stanching its losses by expanding outpatient volume and correcting serious billing and accounting problems that resulted in no payment for many of its services, Schmid said. Last year, for example, the hospital brought in just $1.3 million a month, on average, in cash collections.

"In May, we're on target to hit $4 million in cash collections," Schmid said. "I need $3.2 million a month to break even."

The strategy, she said, includes expanding the hospital's contracts with local employers for wound care, as well as physical and occupational therapies. Other plans include adding orthopedic services that are supported by the recent addition of related technology and equipment.

Just last month, the Healdsburg facility received certification of its stroke program, which has been bolstered by the 64-slice CT scan that was part of a successful $13 million capital campaign carried out by the Healthcare Foundation Northern Sonoma County.

"The foundation is trying to address changes in the medical landscape by providing capital funds to support services," said Pat Callahan, the foundation's executive director.

Any hospital restructuring, let along a closure, affects employees, as demonstrated by recent layoffs at a number of local hospitals.

Deborah Burger, a registered nurse and co-president of the California Nurses Association, said hospitals have been squeezed by the federal Affordable Care Act because insurance companies like Aetna, Blue Shield and Kaiser were given too much power during the crafting of the legislation.

"Insurance companies are deciding how much care you get instead of how much care you need," she said.

Burger added that more money should be directed to a "public health system" that supports rural communities like Palm Drive.

"During this last recession, public health services were cut," she said. "What we really do need to look at is reprioritizing what we really want from our society, what we want from government."

Under the Affordable Care Act, hospitals with high rates of re-admitting patients within a 30-day period will be penalized. The penalty can be as high as 2 percent of a hospital's annual Medicare reimbursement in 2014 and 3 percent in 2015.

As a result, some hospitals are looking for ways to avoid the first hospital admission, instead keeping patients in "observation" for up to two days. The practice reduces re-admission rates down the road, but the hospital is reimbursed 65 percent less for patients in observation than for those who are admitted as inpatients.

In the past year, inpatient volume at Sonoma Valley has gone from 140 to 80 patients a month, a drop that is largely due to shifting more patients to observation stays.

This decline has led to cuts elsewhere. Mather said Sonoma Valley Hospital has cut expenses this year by<QA0>

10 percent. One way of reducing expenses has been reducing the number of FTE, or full-time equivalent, hours from 320 to 301 in the upcoming fiscal year. No layoffs are planned in the near future, she said.

Like other district hospitals, Sonoma Valley is trying to attract more local patients who are covered by commercial health insurance. Mather said Kaiser currently has about 20 percent of the commercial insurance market in the Sonoma Valley, a share that is far less than what Kaiser is believed to have in the Palm Drive Hospital district.

Like the hospitals in Sebastopol and Healdsburg, Sonoma Valley also is supported by a parcel tax, which brings in about $3 million, a sum that puts the hospital in the black. This year, the hospital's projected operating revenue is $51.1 million, while operating expenses are expected to be $54.2 million.

Both Sonoma Valley and Petaluma Valley are encouraging local patients and employers to utilize insurance products that can be used at the hospital. That means choosing plans like Western Health Advantage and Health Net over Kaiser.

Western Health Advantage is new to the market and just now making inroads in the local community, St. Joseph officials said. At Petaluma Valley Hospital, 28 percent of its patients are covered by commercial health plans, 27 percent are Medi-Cal and 45 percent are Medicare.

"There wasn't an option when many of them chose Kaiser," said Janie Boren, a regional vice president for St. Joseph.

Salnas said St. Joseph's "very, very tight affiliation" with Western Health Advantage "basically models other health systems that have their own insurance."

District hospital executives have long argued that Kaiser's "closed" triad of doctors, health plans and hospitals has over the years stripped their districts of patients.

Sutter, which for several years has been strengthening its affiliated physician base, is expected to launch its own health plan possibly next year. That has local district hospitals forming alliances among themselves and with local doctor's groups. Sonoma Valley Hospital and Palm Drive affiliated with Marin General Hospital. And Healdsburg has affiliated with Santa Rosa Memorial.

Petaluma Valley benefits from St. Joseph's affiliation with Annadel Medical Group, which has 20 of its 89 physicians working at nine sites in Petaluma. Other St. Joseph partners include North Bay Endoscopy, the North Bay Institute of Sleep Medicine and the Redwood Regional Medical Group, whose cancer center on Lynch Creek Way is now operated under a St. Joseph/Memorial Hospital license.

With nearly 17,000 annual emergency department visits, Petaluma Valley is the county's busiest district ER. It is a key component of St. Joseph's growing "footprint" in Petaluma, and part of an increasingly integrated system, Salnas said.

This system includes hospice, palliative care, a mobile dental clinic, a house calls program and various educational outreach services.

In effect, district hospitals have been forced to de-emphasize their traditional and singular role as providers of inpatient care. District hospitals are trying to build a Kaiser or Sutter-like integrative health care model where the hospital is component, necessary but no longer the only source of revenue.

"We have a conscious strategy to define ourselves as a premiere integrated delivery system, not just a premiere hospital," Salnas said.

(You can reach Staff Writer Martin Espinoza at 521-5213 or martin.espinoza@pressdemocrat.com.)