UC Health to invest $200 million in JPA with Palomar, with option to buy all its assets

UC San Diego Health will invest $200 million in the joint powers authority it is forming with Palomar Health, and will receive the option to buy all of the public health care district’s assets at fair market value seven years after the complicated deal is done, according to information presented by executives at a town hall meeting Tuesday.

Though many supporting documents necessary to create what is to be called the Palomar/UCSD Health Authority remain unsigned and unavailable for public review, the chief executive officers of both organizations shared additional details of the coalescing collaboration in a first-floor conference room at Palomar Medical Center Escondido.

“We want to provide lots of opportunities for transparency as we work through this partnership,” said Patricia Maysent, CEO of UCSD Health, indicating that additional meetings will occur in the coming months, next time with more than 24 hours prior notice as occurred with Tuesday’s lightly attended gathering.

Some who asked questions Tuesday were interested in how quickly UCSD can upgrade Palomar’s electronic medical records system to match the one university workers use and how quickly two vacant floors at the Escondido hospital could be built out to allow an expansion of services, which executives in the past have said will include oncology and cardiology.

Such work, executives said, is still months away, though the university has already begun bringing in some additional workers.

“We have our neurosurgery team here (and) some of our perinatologists are here, and we have some others,” Maysent said. “Our first big push will be cancer, because it’s such a big priority for us … and we’re already doing some active recruitment for medical oncology (and) surgical oncology.”

UCSD hopes that its collaboration with Palomar will allow it to deflect some patient load from its busy medical campus in La Jolla, which includes Jacobs Medical Center. Palomar hopes that receiving more of these patients will quickly help shore up its battered bottom line, which has forced it to rein in some services, including psychiatric care and labor and delivery.

Palomar is the main medical provider in inland North County and is the largest public health care district in the state. Its Escondido hospital includes a busy trauma center that is a key part of the region’s overall trauma system, as is its emergency department, which draws patients from throughout the region.

Others had questions about the future of specific departments or of existing labor contracts. Diane Hansen, Palomar’s chief executive officer, assured attendees that efforts are underway to maintain the status quo while lawyers and other professionals work to shuffle the mountains of paperwork necessary to create the joint powers authority and transfer the legal authority, including hospital licenses, that would allow it to operate Palomar’s facilities.

Employees, Hansen noted, will still have the same employer.

“Employees are still going to remain Palomar Health employees; that won’t change,” Hansen said.

The plan, added Palomar’s attorney, is to lease those employees to the health authority, though exactly how that would work remains unclear. An employee leasing agreement referenced in the referendum that the board approved in October was not disclosed under a public records request filed by The San Diego Union-Tribune on the grounds that it has not yet been executed. The same reason was cited for a contribution agreement that specifies which assets each organization will transfer to the new authority and a use agreement between both parties.

Some agreements, said Veronica Marsich, chief legal counsel for UCSD Health, cannot be executed until certain legal underpinnings are in place. Creation of the joint powers authority, for example, requires approval from the state Office of Health Care Affordability, a state agency tasked with assessing whether a proposed health care “market consolidation” is likely to “significantly impact market competition.”

“The contribution agreements, as well as all of the other documents, will be executed at closing,” Marsich said. “We can’t execute contribution agreements to contribute assets to an entity that doesn’t have the authority from the Office of Health Care Affordability … so we have to wait until they bless it.”

Palomar did provide copies of the main Joint Powers Authority, the organization’s bylaws and an option agreement last week.

Those three documents show that Palomar would transfer 49% of its existing assets to the new health authority when the deal closes, with the remaining 51% transferred only after further approval. State law requires that a health care district transferring half or more of its total assets to such a legal entity must put the matter before voters or obtain legal approval.

The Joint Powers Agreement states that Palomar’s elected board would have to authorize a public referendum “held at a general election on or about November 2026,” unless the transfer receives special court or legislative “validation action.”

The option agreement provides an avenue for UCSD to purchase Palomar’s assets at fair market value as determined by Deloitte Transactions and Business Analytics, though no actual market value is listed in the document.

Maysent said that while an initial valuation has been made, it is only valid for three months. Meaning that the initial work would have to be updated.

“We are committed to providing fair market value,” Maysent said.

In its initial form, without voter approval, ownership of Palomar Medical Center Poway would be transferred into the joint powers authority, along with a “portion” of Palomar Medical Center Escondido, Maysent said.

In seven years, Maysent said, UCSD could exercise its option to buy Palomar’s assets, though the University of California Board of Regents would have to approve such an expenditure.

The arrangement appeared in discussion Tuesday to be more about both sides having financial skin in the game as they work together, providing UCSD with avenue to recoup its investments if plans do not work out. But if the partnership proves fruitful, the idea is to let the joint operating authority just keep running things. UCSD’s $200 million investment includes $40 million that it has already loaned to Palomar.

“There are certain mechanisms within the agreement that would allow, at a seven-year term, UCSD to essentially buy out the assets at fair market value within the authority,” Hansen said. “I think what you are hearing from both of us tonight is that’s not the intent … let’s make it as successful as we possibly can so that there is never any reason for us to do anything differently.”

“If things are working, well, there’s actually no reason to do that,” Maysent added, referring to the possibility of a year-seven buyout.

Because Palomar’s operations would be kept entirely separate from UCSD’s, all revenue earned would remain within the authority, though a “funds flow” section of the joint powers agreement does specify that income exceeding expenses be used to pay for maintenance and expenses, debt service, and to maintain at least 50 days cash on hand. Beyond those three priorities, cash could be saved or paid out to UCSD, though a specific revenue split is not included in the document.

Palomar’s elected governing board, which would continue to exist after the authority starts operating, will appoint three of the six members that make up the authority’s board. Those appointments, Hansen said, are expected to be announced next week.

No date was announced for Palomar’s next town hall meeting. But Maysent called for longer-range public notice beforehand.