State rescinds $50M grant awarded to Palomar Health for mental health hospital

A major project designed to add 120 beds for mental health care in north San Diego County has lost a $50 million state grant, making the project’s future uncertain.

The California Department of Healthcare Services, which is administering $6.4 billion in Proposition 1 behavioral health infrastructure bonds that voters approved in 2024, notified Palomar Health on Aug. 18 that its award, announced in May, has been rescinded. The state said it took the action because the public health care district, which applied through its charitable foundation, was unable to meet “match” requirements that would complete the funding plan for the stand-alone project, which has a total listed cost of $104 million.

“DHCS determined that Palomar did not meet the match documentation requirements, which Palomar identified would be cash,” the statement said. “As a result, DHCS informed Palomar that its conditional award was rescinded for the Palomar Health Behavioral Health Institute project.

“The decision is final and not subject to appeal.”

Asked for comment on what this development means for the mental health hospital, announced in 2022, a spokesperson representing the North County medical provider with hospitals in Escondido and Poway said in an email Tuesday that the organization “has no comment at this time.”

The project, which was to be undertaken with private partner Lifepoint Health, is important for North County. Palomar shut down its remaining dozen inpatient psychiatric beds mid-2024, saying in a statement that the move would “allow the health system to focus resources on building this new state-of-the-art facility,” and noting that an existing crisis-stabilization center on its Escondido medical campus would remain open.

Though Palomar’s budget has recently operated in the red, the organization appeared to continue its efforts to replace its closed inpatient psychiatric services, holding a groundbreaking event with local dignitaries last September at which the project seemed to be a done deal, with no mention of an additional need for public funding. However, since then, Palomar’s financial condition has worsened, with the organization entering a forbearance agreement with lenders after breaching financial covenants on more than $700 million in debt and embarking on a turnaround plan that attempts to control costs and bring in new revenue. Belts have recently been tightened to the point where Palomar has been forced to delay payment of retention bonuses earned by nurses.

It is clear that Palomar’s plan for a modern mental health hospital is still needed, though groundbreaking plans promoted last fall still have not come to pass. As recently as last Friday, construction still had not started in a parking lot on the southern end of the Palomar Medical Center Escondido campus.

The situation unfolds as Tri-City Medical Center in Oceanside, which closed its inpatient mental health care unit in 2018, works to open a 16-bed specialty mental health hospital built in partnership with the county. Construction on this project finished last October, though contract negotiations to operate the facility were slow to conclude, pushing the facility’s anticipated opening to late 2025.

Overall, the loss of the $50 million Prop. 1 grant is a blow to the larger plan that would significantly increase the availability of mental health care infrastructure in San Diego County. It is the largest award among seven received by organizations across the region in the program’s first round of funding for “shovel-ready” projects. San Diego-based organizations, including the county itself, won awards totaling nearly $156 million and collectively adding 375 treatment beds and 1,538 treatment slots serving those with behavioral health and/or substance use disorders.

The county’s behavioral health department said in a statement Tuesday that it hoped the overall Prop. 1 funding commitment to San Diego County would not change despite the rescission of Palomar’s grant.

“The County is hopeful that the $50 million of funding will stay in the region and be redirected to other projects locally if the money cannot be used for the new Palomar beds,” the county’s statement said. “It would be unfortunate if that did not happen, as the region certainly has infrastructure needs, and we are committed to working with local healthcare leaders and partners toward expanding local resources to support behavioral health needs.”

Most of Palomar Health’s elected board members did not respond Tuesday to a request for comment.

Members Abbi Jahaaski and John Clark, reached by telephone Saturday, said they were unaware of the grant cancellation.

“It’s disappointing because this is definitely a big need, especially in North County,” Jahaaski said.

The director is a registered nurse who works in the emergency department at Tri-City Medical Center and said she has personally experienced how difficult it is for many to find inpatient treatment.

“Working in the ER, I know how difficult it is to get patients with significant mental health conditions adequate treatment; the need, it’s ridiculous,” Jahaaski said. “And you know, patients with … Medicaid and MediCal funding, we face huge difficulties getting them placed, because most places will not take adults with government insurance because of the (low) reimbursement rates.”

A second round of Prop. 1 funding designated for “unmet needs” is in the offing, with application deadlines arriving in October.