Sonoma West Medical Center defaults on millions in loans

Sonoma West Medical Center confirmed Monday it has defaulted on millions of dollars in loans made to the struggling Sebastopol hospital by its two primary benefactors, raising further questions about its financial viability.

The treasurer for the hospital’s board of directors issued a letter last week warning that Sonoma West could be forced to close without an infusion of money. The warning, however, was questioned Monday night by the board of directors at the Palm Drive Health Care District, which provides financial support to the medical center.

Ray Hino, CEO of Sonoma West Medical Center, also dismissed that dire prediction and said the hospital was not in danger of closing.

In a May 31 letter to software entrepreneur Dan Smith and his wife, Joan Marler-Smith, the hospital board’s treasurer said the Sebastopol medical center has failed to perform as projected. Smith, who is president of the hospital’s board, has donated and loaned millions of dollars to revive the Sebastopol medical center, which reopened last fall from the ashes of Palm Drive Hospital.

“We regret to inform you that the loans that you have made to Sonoma West Medical Center Inc. cannot be repaid,” hospital board treasurer Stewart Goldberg wrote the couple, adding that without a new influx of money, the hospital “cannot possibly survive for more than a few months.”

Smith and his wife responded in a letter dated the same day that they would forgive the loan.

“While this creates a serious hardship for us since we borrowed much of this money, we understand that the hospital is at a critical point where its survival is at stake,” the couple wrote.

The couple is forgiving $5.8 million in debt owed by the hospital.

“It’s only money,” Smith said Monday night. “It is not as important as peoples’ lives.”

The hospital also has defaulted on a $400,000 loan made by the Palm Drive Health Care District, a taxpayer-funded agency that subsidizes Sonoma West.

In its letter to the Smiths, the medical center said it was negotiating with Valley Emergency Physicians to have them take over management of the hospital and to provide crucial capital, which would be lent to the medical center on commercial terms. However the doctor’s group said it would not cut such a deal with the debt to the Smiths on the books.

“Valley will not loan unless the balance sheet is cleared of your debt and they are in second place behind our line of credit,” the letter stated.

Last month, the medical center dramatically scaled back its monthly revenue forecasts as the Sebastopol hospital struggles to collect payments for medical services and become financially sustainable. The medical center has yet to turn a profit. Its operating losses for April are expected to surpass $600,000, up from an operating loss of $47,000 in March and $400,000 in February, Hino said. On Monday, Hino said he disagreed with his board treasurer’s assessment of the hospital’s finances.

“All I can say is he believes that to be true and I disagree,” Hino said.

Hino said the hospital is on stable financial ground between the medical center’s recently acquired ?$4 million line of credit from Pacific Premiere Bank and the $1.5 million in billing and collections it receives every month. Its monthly expenses are $2.5 million, he said.

“We need to collect more for sure, but I’m optimistic its going to come in,” Hino said.

The medical center reopened in October as a 25-bed acute-care hospital with inpatient services and a new emergency room. Formerly known as Palm Drive Hospital, the facility was shuttered in April 2014 after filing its second bankruptcy since 2007.

You can reach Staff Writer Martin Espinoza at 521-5213 or martin.espinoza@pressdemocrat.com. On Twitter @renofish.