Holland & Knight's San Francisco Healthcare Team, led by Partners John Kern and David Holtzman, has advised longtime client Palomar Health on an innovative structural reorganization to partner with Mesa Rock Healthcare Management Inc., a newly created private nonprofit management services organization. The plan, which is the first of its kind in California, will empower Palomar Health to affiliate and align with other regional health systems while remaining an independent public health institution. The plan was approved by Palomar Health's board of directors at a public meeting on Feb. 29.
Palomar Health operates two medical centers in North San Diego County and is an essential healthcare provider for more than 850,000 residents in the community. Palomar Health is the largest public healthcare district in California.
The plan would allow the existing healthcare district board to retain oversight, including the implementation of policies and monitoring of the system's performance. Mesa Rock would manage the hospital operations, but not own any of the assets. Mesa Rock would also hire Palomar's current award-winning executive team to help manage the system. Mesa Rock would receive 1 percent of Palomar's net revenue for its operations, but it would be required to use those fees exclusively for the benefit of the healthcare district, including for expanding patient access and lowering the cost of care.
The plan will allow Palomar to operate more nimbly and compete with other for-profit regional hospitals and health systems, while preserving its mission to serve public health. It will also make Palomar a more attractive partner for collaborations with other regional health partners. Currently, Palomar is subject to numerous regulations, including the California Public Records Act and the Ralph M. Brown Act (California's "sunshine law"), laws that restrict how public hospitals in California can operate and compete.
Mr. Kern, whom Palomar engaged to lead the effort to create and broker the transaction, stated: "When the California legislature passed the laws 80 years ago creating public healthcare districts, no one envisioned healthcare economics being what it is today. It is simply not possible for a public institution like Palomar — with the current restrictions in place — to survive and compete with for-profit hospitals in its region without making some type of creative pivot."
In addition to Mr. Kern, Mr. Holtzman played a lead role in advising on the management agreement and in the negotiations and presentations of the proposal to the healthcare district board. Mr. Kern and Mr. Holtzman were assisted on the deal by more than a dozen Holland & Knight attorneys, notably Partners Shawn Turner, Jesse Neil, Dan Kappes and Jessica Brown and Associates Andrew Klair, Ana Dragojevic and Jacob Barrera.
"This deal simply does not happen without Holland & Knight's strategic and legal guidance," said Palomar Health CEO Diane Hansen. "We are doing something bold here — trying to save and strengthen a public institution. I have worked with John Kern and David Holtzman for five years, mostly as litigators. Though transactional in nature, this project needed John's force, leadership and powers of persuasion, as well as David's creativity and steady hand."
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