Physicians & Surgeons Deal on Hold
The tortuous task of trying to keep San Diego Physicians & Surgeons Hospital alive has taken another twist, as the potential buyer of the inner-city facility now says that a lack of financing has stalled the deal.
Physicians & Surgeons, the only acute-care hospital in impoverished inner-Southeast San Diego, has faced an uncertain future in the past year after its operator, National Medical Enterprises Inc., announced its intentions to sell the property.
But the No. 1 prospective purchaser has failed since July to convince either the city of San Diego or NME itself to help finance the sale, said Benjamin F. Davis Jr., president of the firm negotiating to buy the hospital.
Failed to Convince City
He said that NME notified his firm, a small, privately held medical care company called Nationwide Medical Systems, on Tuesday that it would not serve as Nationwide’s mortgage banker for the sale.
After failing to convince the city to help it sell $12 million in bonds for the purchase and related improvements, Nationwide offered NME $6 million for the hospital, Davis said. But it offered NME only $1 million up front, with the balance in a $5-million mortgage financed by NME.
In a terse statement issued late Thursday afternoon, NME spokesman Donald W. Thayer said the firm “is actively pursuing its options, including the sale” of the hospital. Company spokeswoman Mary C. Stancill said she could not elaborate, but she reiterated that Physicians & Surgeons will continue to operate as those options are pursued.
“We will be exploring further offers that Nationwide Medical Systems has informed us they will be presenting,” Thayer’s statement said. “In addition, we are pursuing our options with other offers we have received.”
In July, Thayer said, NME had three firm offers for the hospital, and Nationwide’s was the one eventually pursued.
The breakdown in negotiations makes the outlook even more uncertain for a hospital that has been floundering in a sea of red ink for years. A flood of government-funded patients whose bills are only partly paid, and of completely uninsured patients, has brought losses as high as $2 million a year, although they are now running about half that, Davis said.
De Facto Owner
NME took a lease to operate the hospital in 1982, after the facility had been closed by its former operators. Last spring, the firm also bought the hospital’s defaulted construction bonds, thus making itself not only the operator but the de facto owner.
One of the biggest obstacles to a sale, however, has been the city of San Diego’s interest in those original bonds. As issued in 1972, they stipulated that, in return for lending its name to the bonds, the city would take title to the hospital in the year 2002. NME has tried unsuccessfully since the spring to prod the city into relinquishing that claim to the property.
In pursuing the hospital purchase, Nationwide wanted the city not only to relinquish the original ownership right but also to help the firm issue $12 million in “certificates of participation” bonds.
Half that money would have gone to NME, and the remainder would have built a medical office building, bought new equipment and covered the bond payments for the first two years after the sale, Davis said.
The city rejected the offer because it felt the deal represented a potential liability and could have put the city into the hospital business, said Hal Valderhaug, deputy city attorney.
“Certificates of participation are secured by a lease, and the lease would be to the city, and then the city would sublease it to this operator,” Valderhaug said. “But, if the operator didn’t pay, the city could get stuck with the payments themselves.”
Too Big a Risk
Given the hospital’s history, that was a chance the city couldn’t afford to take, he said. He added that the the City Council has said clearly that it does not intend to get into the hospital business.
“It might work,” Valderhaug said of Nationwide’s proposal for reviving the hospital. “But, if it doesn’t, the way their deal was proposed, the city would be left holding the bag.”
There has also been concern in the medical community that Nationwide did not have enough experience in such situations to assure success, said Jennifer Adams-Brooks, chief aide to Councilman Wes Pratt, who represents Southeast San Diego.
Nationwide operates a small hospital in Perris, Calif., and six pharmacies, said Davis, a resident of Coronado. It is made up of a group of investors who have many years of experience in running nursing homes and other medical facilities, he said.
Davis said Nationwide’s plan was to turn the hospital into a nonprofit corporation that would break even with just five more paying patients per day. Additional programs would be added, including training for nurses and certified nurse’s aides, he said.
Meanwhile, Physicians & Surgeons faces another problem with a state-federal investigation that could cause its decertification to receive Medicare funds, one of the few areas in which it can count on revenues.
The inquiry began after it was revealed that an elderly woman died in March after a feeding tube was inserted into her lung instead of her stomach, according to reports filed here with the licensing and certification office of the California Department of Health Services. The inquiry is continuing, said Ernie Trujillo, chief of the office.
Loss of Medicare funds, which account for 30% of hospital patients, would be a blow, said Howard Carey, chairman of the hospital’s board of directors.
“I don’t think the outlook would be bright at all,” he said.
