Despite indications earlier this week that the long-developing partnership deal between UC San Diego Health and Tri-City Medical Center might be nearing completion, the university announced Friday afternoon that it is ending negotiations with the Oceanside hospital district.
When the two parties began negotiating in October 2023, both sides expressed excitement that the two medical providers could help one another, with Tri-City getting help shoring up operations that, until recently, have been operating in the red, and UCSD getting an opportunity to expand its footprint into coastal North County, diverting traffic from its overfilled facilities in La Jolla and San Diego.
The crux of the nine-month, behind-the-scenes due diligence period that led up to Friday’s announcement is a disagreement over the amount of financial risk that UCSD should assume in folding Tri-City into its network of care, which includes Jacobs Medical Center in La Jolla, UCSD Medical Center in Hillcrest and the recently purchased Alvarado Hospital, which was renamed East Campus Medical Center.
Originally, the idea was that UCSD would take over all Tri-City assets and liabilities, including long-term debt and a significant amount of unpaid bills to vendors.
But, after examining Tri-City’s finances and operational details in private, under a nondisclosure agreement, UCSD instead proposed a five-year transition period that would extend Tri-City $100 million right away, would increase employee salaries by 20 percent over three years, and would get a start on expanding or restarting programs as soon as possible.
But UCSD would not assume full financial risk for between three to five years after the deal was signed. A last-minute change, said Patricia Maysent, the university health system’s chief executive officer, removed a previous cap on a proposed line of credit that would “cover potential cash shortfalls.”
But Maysent said Friday that she lost confidence that Tri-City’s board of directors would approve the proposal.
“Based on the discussions we’ve had this week, we don’t believe that there’s a desire to get this deal done, and we’ve got lots of other things to get done,” Maysent said.
Asked what specifically led her to that conclusion, Maysent cited reports of internal meetings this week, one with employees and another with doctors, where Dr. Gene Ma, Tri-City’s chief executive officer, characterized the latest revision of the UCSD proposal as insufficient.
Ma said in an email Friday afternoon that “the revised proposal from UCSD Health leaves the District vulnerable to insolvency during a transition period with no meaningful pathway to resolve such a predicament.”
“We didn’t view it in terms of (a) good or bad deal, it’s simply our interpretation of the transactional risk,” Ma continued. “Our assessment under counsel from our transactional advisors is that it is not in the best interest of the community we serve, the hospital, and its valued employees to accept the proposal in its current form.”
Ma said that Tri-City is being advised by James Dutro, an attorney with the San Francisco firm Jones Day, whose work in structuring hospital mergers and acquisitions is widely cited, and Steve Hollis, a former investment banker with Goldman Sachs who formerly led mergers and acquisitions for the health care consulting firm Kauffman Hall.
Those advisers, he said, have counseled that Tri-City’s financial condition is far less dire today than it was nine months ago. The hospital, he said, has had positive earnings before interest, taxes and amortization for five consecutive months, and progress is being made in paying off debt owed to vendors.
“Our accounts payable had grown to $102 million as of September 2023,” Ma said. “Today, we are down to just over $79 million, and we continue to improve.”
While not a complete turnaround, Ma said advisers indicate that the urgency to do a partnership deal is no longer quite so fierce.
He added that there is zero thought that Tri-City should stick it out as a standalone medical provider surrounded on all sides by larger systems with multiple hospitals and deep connections to affiliated medical practices.
“We’re going to find the right deal that makes the most sense for this community,” Ma said.
Had the final UCSD proposal included a full and immediate assumption of all Tri-City assets and liabilities, he said, the deal would likely have been approved.
Ma said the Tri-City board, in giving its approval for the hospital’s executive team to consider other partnership possibilities, gave him discretion to handle the UCSD proposal.
But Tracy Younger, chair of the Tri-City board, said Wednesday that changes that UCSD made in its latest proposal were likely to be reviewed by directors. Younger did not reply Friday to a request for comment on whether it was still the plan for the full board to review UCSD’s latest proposal.
Ma seemed certain Friday that would not be the case.
“Our attorneys have advised that the terms have not changed and, in some ways, have worsened,” Ma said in an email. “I know that is not the interpretation of UCSD; I have a great deal of respect for Patty (Maysent) and her efforts, so I am not interested in putting our interpretation out there which would seem contrary to their view.”
Maysent said she believes the proposal was fair, especially with removal of the previous $30 million cap on the line of credit that the university would extend to Tri-City.
Why didn’t UCSD simply agree to absorb all of Tri-City’s assets and liabilities at the outset as was originally proposed? Why was a five-year transition period necessary?
Some of the details, she said, are covered by the nondisclosure agreement between the two parties and cannot be referenced in public.
“We needed to kind of stabilize their cash flow and then start adding on these services,” Maysent said.
In the end, she said, UCSD will be expanding services in North County whether or not it partners with Tri-City.
“They believe they can wait longer and look for other partners. God bless them; go for it,” Maysent said.