Sebastopol man invests heart, fortune in reviving hospital for western Sonoma County

All around Dan Smith, medical staff in scrubs and office workers in button shirts go about their urgent business, reviewing health care procedures, fine-tuning administrative processes, testing medical equipment - all in preparation for the rebirth of a small community hospital in Sebastopol.

The west county businessman and philanthropist, dressed in casual clothes and donning an even more casual smile, moves about the new Sonoma West Medical Center as if he owns the place. Staff are addressed warmly, like they are Smith’s own employees. When he needs a room for an impromptu conference, even hospital CEO Ray Hino’s empty office is open to him without asking.

Smith, who has done more than anyone to keep the former Palm Drive Hospital alive since it became a public facility 15 years ago, does not own the medical center. But there is much at stake for him as the hospital prepares to resume operations 16 months after it was closed.

A self-made software millionaire with humble beginnings, Smith and his wife, Joan Marler, have contributed nearly $9 million to the troubled hospital in donations and forgivable loans over the years. They also have donated countless hours of volunteer work.

Smith was there when it became a publicly run district hospital in 2000, rallying voter support for taxpayer subsidies to acquire and operate the facility. He helped raise money to prevent its closure in 2007, during the hospital’s first bankruptcy, and he has been instrumental in devising and financing the physician-led model he and many others hope will soon resurrect the facility and ultimately bring it out of its second bankruptcy.

Amid a chorus of skeptics who believe the next iteration of the hospital is sure to fail and fall victim to an evolving health care landscape that is unforgiving to small rural hospitals, Smith and Marler are defiant. At 69, Smith said he and his wife want to leave a legacy - a sustainable hospital for the west county that can both make money and save lives.

“We can’t take our money to our graves. Why not invest it in the future of our community?” he said.

The hospital, he said, can mean the difference between life and death for people in the west county. “I came to know a lot of people whose lives would not have been saved (without the hospital),” Smith said.

Far more than his previous efforts to bail out the hospital financially, Smith is behind every major decision surrounding Sonoma West Medical Center, a privilege afforded by both his money and his ability to devise a business strategy to reopen the shuttered facility, possibly by the end of the week.

“He fundamentally controls everything that’s going on over there,” said Sebastopol mechanical engineer Jim Horn, a vocal critic of Smith’s and a former hospital board director who strongly questions the viability of the new business model.

Other critics are more blunt, calling Smith an egoist and a bully, and questioning his motives. Some say he’s using Sonoma West as a platform to promote and market his tablet-based electronic health records system, which he is currently donating to the hospital at no cost.

Smith and Marler are familiar with the criticisms but alternately dismiss such claims as myth, cruel speculation and unfounded attacks that no longer affect them as they and other hospital supporters plow forward.

“This is all about perseverance,” Smith said one recent afternoon, sitting next to Marler in the outdoor patio of their Sebastopol home. “This is setting your mind to something and never giving up, even when things look really bad.”

Smith said he almost walked away from the hospital in its latest crisis, soured by his previous involvement that he said was plagued by “politics,” something he said he doesn’t do well.

When Marler learned the hospital was slated to be closed last spring, she called her husband in tears, telling him, “it’s not acceptable to let it die.” Smith told her he didn’t want to get involved, remembering previous attempts that went sideways.

But Marler insisted.

“So think of this - your wife is giving you the choice, you can be a schmuck or a hero,” said Smith. “There’s no middle ground ... I’m thinking to myself this conversation is not going well, so I put it to her: ‘You keep talking to me like this and it’s going to cost you millions and millions and millions of dollars of your money.’”

To which she replied, “I don’t care, you know, if it costs everything,” she said.

“We didn’t have anything before he sold his (software) company. We were both brought up as poor people. We don’t live like rich people,” Marler explained. It’s a point the couple makes often.

While Smith said his net worth is about $15 million, the couple has lived in a home on Furlong Road for more than 40 years - a home that Smith himself built several years before starting a construction business. For years they have driven old cars, although Marler said she recently bought a Prius, because her old car “died.”

Smith followed an unconventional road to making millions in software, a journey that would enable him to play a central role in the hospital’s future.

Smith and his family moved to Petaluma from Los Angeles when he was 3 years old. His father, a union organizer who worked as a painter on Hollywood movie sets, was blacklisted for being a communist.

His father sometimes had trouble finding work because of he was branded as a “Red” and the family was “very poor,” Smith said.

In Petaluma, they bought a piece of property with their small savings. His father went to work as a house painter, and he was an artist as well.

The family often “lived off the land,” he said, with goats that he milked before going off to school, sheep that the family raised and often ate, and a large garden for food.

Smith attended Cinnabar Elementary School and graduated from Petaluma High School in 1963, enrolling in Sonoma State University for a year. He left the university and moved north to Mendocino County, where he met his future wife, Joan.

Smith was a conscientious objector during the Vietnam War, working at a string of jobs in the mid 1960s and early 1970s. He went from working at the Aborigine Lumber Co. mill in Fort Bragg to Pacific State Hospital for the developmentally disabled in Pomona and back to Sonoma County at a group home for boys.

He did a couple more years at Sonoma State, majoring in math, before quitting school. He entered the construction business, starting a contracting firm with his partner in the mid-1970s. He had already built his own home outside Sebastopol and had reconnected with Marler, who had graduated from Mills College in Oakland and was studying ballet in San Francisco.

In the late 1970s, he asked a friend who was somewhat of a computer whiz to find a computer program that could help with administrative and accounting aspects of his construction business. The friend, who later became a partner in Smith’s software business, told him he couldn’t find any such program and suggested that he learn to write his own using an Apple II.

Smith did just that. Soon, he started selling his construction management software, Master Builder, to other contractors. By 1985, Smith realized that he could not run both a construction business and a software business simultaneously. It was too much work, and the businesses were too different.

He threw all his effort into the software business since it was making more money than construction, even at a time when building was booming on the North Coast.

Between about 1985 and 2001, Smith built his software company, Omware, to where it had about 5,000 construction companies as clients and was doing about $10 million a year in revenue. He sold the company in 2001 to Mountain View-based Intuit Inc. and was kept on board to run Omware.

Smith said the company was valued at $38 million at the time of the sale. He said he received only $18 million, however. The rest went to Omware investors or was part of an “earnout” that he was never paid because he said he was fired after one year because of conflicts with the new owners.

The financial windfall would enable Smith to become Palm Drive Hospital’s largest single benefactor. But he was already involved with the hospital by that point, having become active in discussions about its future after the hospital’s owner, Columbia/HCA, announced in 1999 that it would close the failing facility.

Smith was one of the original “35 for Palm Drive,” an limited liability corporation that was formed to buy the hospital. At that time, a group of local community leaders created the West County Health Care Foundation, which later became the Palm Drive Health Care Foundation.

The corporation purchased the hospital from Columbia/HCA and contracted with the foundation to operate the hospital. Smith helped to orchestrate a voter campaign that resulted in the creation of the Palm Drive Health Care District, a public agency tasked with operating the hospital. Voters in western Sonoma County also approved a $5.9 million general obligation bond, which was used to purchase the hospital from the corporation and upgrade the facility.

After that, the foundation turned over operations of the hospital to the newly created district.

Frank Mayhew, a former district board member and one of the founders of the West County Health Care Foundation, said the hospital has struggled from the beginning and is now a victim of a changing health care landscape that is straining small hospitals across the country.

Mayhew, who has sparred with Smith over the hospital, said he hopes Smith’s new plan for Sonoma West Medical Center works out. But he’s doubtful.

“I think the industry is against him. Medicare doesn’t like small hospitals,” he said. “Medicare is encouraging large hospitals and discouraging small hospitals.”

Mayhew said Palm Drive’s most recent financial downfall stems from a fundamental shift in the health care industry, spurred particularly by President Barack Obama’s Affordable Care Act, which reduced Medicare payments to the hospital by 20 percent. The number of patients admitted to Palm Drive tumbled as a result, he said.

“Doctors are being encouraged to keep patients out of the hospital,” he said. “In some cases the doctors are being paid more to do procedures in their office rather than in hospitals.”

The hospital piled up more than $10 million in debt, prompting it to file bankruptcy for the second time in seven years and close its doors in the spring of 2014.

As it prepares to reopen, Smith believes the hospital’s restructuring and new business model have made it viable.

If anyone can make the hospital succeed it will be Smith, said Gail Thomas, president of the Sonoma West Medical Foundation, the nonprofit that provides financial support to the hospital. While the community could have found the money to reopen the hospital, she said Smith possessed the “skill to envision a whole new approach.”

Thomas dismissed critics who say Smith is using the hospital to showcase his software business. She said she believes his only motivation is reopening the hospital for the sake of the local community.

“I hope that he may find a way to have some return,” she said. “But I truly believe that the only return he wants is for his community to have a hospital that is successful.”

However, Jim Horn, the former hospital board member and Sebastopol engineer, has serious concerns about the financial viability of Sonoma West Medical Center and the plan championed by Smith and the hospital’s foundation.

The plan low-balls expenses, overestimates revenues from key medical “institutes” that are expected to subsidize traditional hospital operations, and relies on unproven hospital strategies, such as the “No Wait ER,” Horn said.

For months, Horn has also questioned Smith’s close involvement with the hospital, alleging possible conflicts of interest.

The allegations are not new.

Smith is president of the board of directors of the Sonoma West Medical Center, the entity that has entered into a management services agreement with the hospital district to operate and manage the hospital. SWMC has contracted intensive care and other medical services to Sebastopol-based OffSiteCare, for which Smith serves as chairman of the board and is a minority investor.

Smith is also CEO and a minority investor in E-Health Records International, or EHRI, which produces a tablet-based electronic health records system that Smith is donating to the hospital free of charge.

In 2011, Smith resigned from the hospital board after the board voted to terminate its contract with OffSiteCare. At the time, Smith had loaned OffSiteCare $175,000 and was a voluntary business consultant. The board concluded that was a conflict of interest.

But today, Smith rejects any charge of financial conflicts. He argues that he is part of a 13-member SWMC board that is not a public entity and that he is not a public official.

“The board members of an entity that has been contracted with for management services are not defined as public officials so I am not a public official by this definition,” Smith wrote in an email detailing his involvement with the hospital.

Smith said that OffSiteCare’s services are being provided at cost, but his electronic health records system is being donated for free. He also rejects critics’ claims that he is using the hospital as a testing ground for the EHRI health records system.

The system is currently not being used at any other hospital in the United States. Horn, for his part, doubts it can make serious inroads into the American hospital industry because many such facilities have already made such investments.

He also disputes Smith’s contention that he is solely a private adviser to the hospital, citing a recent state appellate court ruling that found “corporate consultants” to public boards were also bound by state conflict of interest laws.

Horn nevertheless said he doesn’t believe Smith is motivated by profit in his bid to resurrect the Sebastopol hospital.

“I think he and his wife truly want the hospital to succeed,” Horn said. “He wants to prove that he knows how to make it succeed.”

But the numbers just don’t add up, he said.

With the hospital’s reopening so close, Marler said she’s put such criticism behind her. It is necessary, she said, for Smith to take a hands-on approach.

“Nobody is holding the whole thing like Dan is, every single thread,” she said.

She said the “demonization” she and Smith have endured is nothing compared to the joy of witnessing the “pall” hanging over the hospital slowly dissipate. She herself has spent many hours reviving the hospital’s patio gardens.

“And just to sense the whole thing coming to life, you know and the people coming in so excited ... the whole thing has been a stunning transformation,” she said, her voice cracking from emotion.

“It’s just been incredible, you know. And we’re poised right on the edge of it,” she said.

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