ESCONDIDO — A controversial agreement that would have privatized top executives in Palomar Health’s administration was put on hold last month, partly due to the public healthcare district’s financial losses over the past year.
Nearly a year ago, the Palomar Health board of directors approved an agreement with Mesa Rock Healthcare Management that would have transitioned CEO Diane Hansen and her executive team to work directly for the newly established nonprofit corporation instead of the board.
Supporters of the agreement said it would help Palomar Health partner with private and regional healthcare providers, expanding access to primary medical care, surgical oncology, pediatrics, lab medicine and other services in North County.
Under the agreement, Mesa Rock would have received 1% of net revenue for its operations.
Additionally, since Mesa Rock is a private organization, it is not subject to the state’s public records law, allowing the executive team’s records to remain private and enabling the healthcare district to negotiate deals behind closed doors.
However, Palomar Health board members Laurie Edwards-Tate and John Clark criticized the agreement, arguing it diminished the board’s authority and contradicted its role of representing voters in the public healthcare district.
“I don’t believe it’s appropriate for us to give up our authority to another institution,” Edwards-Tate said. “It’s the people’s hospital, and it belongs to the people.”
On Jan. 27, a board majority agreed to suspend the Mesa Rock agreement for at least 12 months. According to board documents, the pause is due to “declines in Palomar Health’s financial performance caused by broad market trends that disproportionately impact safety-net hospitals” and as the district enters “a forbearance agreement and two-year financial turnaround plan with Assured Guaranty.”
The pause also allows Palomar Health to enter provider affiliations directly.
Palomar Health is California’s largest public healthcare district, operating independently from city and county governments to provide health services to residents.
Like many public healthcare districts, Palomar Health has struggled with financial challenges, exacerbated by the COVID-19 pandemic. Hospitals nationwide face staffing shortages, rising labor costs, inflation, supply chain disruptions and other economic hurdles. Larger private nonprofit entities, such as Kaiser Permanente and Sharp HealthCare, have proven more resilient to these challenges.
After approving the Mesa Rock agreement last February, Palomar Health suffered a $165 million operating loss in fiscal year 2024. The district has two years to turn its finances around. Given Palomar’s financial standing, Mesa Rock has not taken any of the 1% revenue it was entitled to under the agreement.
On Feb. 12, Moody’s downgraded Palomar Health’s rating to “Caa1” from “B2,” citing “further thinning of liquidity resulting in 15 to 20 days cash on hand and limited ability to meaningfully improve given ongoing significant cash flow losses.”
Although Palomar’s forbearance agreements reduce the risk of debt acceleration through January 2026, Moody’s said its weak liquidity threatens its short-term financial viability. The ratings agency had previously downgraded Palomar’s rating from “Baa3” to “B2” in October.
Moody’s said high expenses, large physician subsidies and an increasing government-payer mix will continue to challenge the hospital’s performance. However, consulting assistance has identified areas for potential cost savings, including labor force reductions, revenue cycle improvements, physician enterprise efficiencies, supply chain management and purchased services savings.
Despite these financial struggles, Palomar maintains a strong market position and community support, which has helped fund major projects. However, Moody’s maintains a negative outlook, citing liquidity concerns and the risk of default, bankruptcy or liquidation.
Board Chair Jeff Griffith and members Michael Pacheco, Terry Corrales and Linda Greer approved the one-year hiatus, while Edwards-Tate voted against it. Clark and Abbi Jahaaski abstained.
Edwards-Tate said she opposed the resolution because it included language that could revive the Mesa Rock agreement.
“I would never want that Feb. 24 agreement to be resurrected again because it is not in alignment with what our public healthcare district stands for,” she said.
Voters created public healthcare districts to address the needs of underserved communities. These districts provide essential health services and are governed by elected representatives.
Griffith said public healthcare districts are at a disadvantage in turning a profit. Of Palomar Health’s $750 million budget, only 3% comes from taxpayers, with the district left to compete in an open market in San Diego County’s highly competitive healthcare landscape.
“We spend $100 million a year on charity care,” Griffith said.
He also disagreed with claims that the board relinquished its power.
“We built a killswitch,” Griffith said, explaining that the agreement could be dissolved if deemed unnecessary.
Griffith said the Mesa Rock agreement helped foster a deal with Sharp HealthCare. In exchange, Palomar would sublease the top two floors of its Escondido hospital to Sharp, allowing Palomar patients access to Sharp’s specialized services, including transplants and advanced oncology procedures.
Progress on the partnership with Sharp has slowed since the pause, though Griffith noted Palomar employees are now covered by Sharp.
Griffith also pushed back against allegations that the Mesa Rock agreement was a move to privatize the district.
“Mesa Rock is not a private equity, it’s not an existing company — it’s a construct we put forth to allow our organization to negotiate a safe space with for-profit healthcare providers,” Griffith said. “We did this with the aim of creating a joint power authority.”
The resolution approved by the board also rejected claims that the agreement relinquished board control.
“Despite various statements and speculations by former board members, political figures and members of the community, the (agreement) did not actually entail any transfer of resources to Mesa Rock or loss of control by the Palomar Health Board,” the resolution states.
Griffith noted that no other healthcare providers are willing to build a hospital in North County except for Kaiser Permanente, which recently opened a new hospital in nearby San Marcos — another financial blow to Palomar Health. Palomar already has the facilities and capacity to expand services, he said, which is why the Mesa Rock agreement was created to foster partnerships like the one with Sharp.
Whether the board will revisit the Mesa Rock agreement within the following year remains unclear.
