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Recent California hospital bankruptcies and closures, and the threat of more on the way, motivated lawmakers to approve a $150 million low-interest loan fund for not-for-profit and government hospitals last week.

One in five of California’s roughly 400 hospitals are at risk of closure, according to a Kaufman Hall report commissioned by the California Hospital Association.

Beverly Hospital in Montebello, on the east side of Los Angeles County, filed for Chapter 11 bankruptcy last month, and hospitals in El Centro, Hawkins and Visalia are struggling to remain open. In December, Madera Community Hospital, the only hospital serving the 160,000 residents of Madera County, closed, forcing patients to drive up to 30 miles to reach the nearest hospital in Fresno.

The measure, approved unanimously in both houses, was described by lawmakers as a stopgap to provide a lifeline to hospitals that might not make it until the next state budget takes effect July 1.

It would need to be signed by Gov. Gavin Newsom to take effect.

“I want to talk about a more permanent fix, because as one of my colleagues said, this isn’t even a Band-Aid, it’s the antiseptic ointment on the cut,” Sen. Brian Dahle, R-Bieber, said on the Senate floor. “This is just to get us through until we have an actual budget.”

Assembly Bill 112 would provide interest-free, six-year, cash flow loans to not-for-profit hospitals and public hospitals in significant financial distress or to governmental entities representing closed hospitals.

The Department of Health Care Access and Information would establish criteria hospitals would need to meet to quality for a loan. HCAI would administer the program in conjunction with the California Health Facilities Financing Authority.

The distressed hospital loan program would run through Jan. 1, 2032.

The criteria included in the bill exclude a system with more than two hospitals, investor-owned hospitals and freestanding inpatient psychiatric hospitals.

The California Hospital Association had asked the state to put $1.5 billion in the fund. But lawmakers chose to set it at the much lower $150 million pointing to the projected $22.5 billion budget deficit the state is facing.

No one questioned that something needs to be done.

“It’s having a detrimental effect on all of our communities,” Sen. Susan Rubio, D-Baldwin Park, testified ahead of the floor vote.

In Modoc County, in the state’s northeast corner, Dahle said, residents have to travel 140 miles to deliver a baby, because hospitals there have been reduced to emergency room only.

Though hospitals nationally have struggled to recover even as pandemic-related pressures ease, the set of challenges facing the entire sector is more pronounced in California, said Erik Swanson, senior vice president of data and analytics at Kaufman Hall.

His report showed that more than half of California hospitals were in the red in 2022. The list of specific hospitals has not been made public, because hospital operators provided Kaufman Hall with proprietary information so that the healthcare and higher education consulting firm to conduct the study, Swanson said. The report, which was released in April, didn’t look at conditions into 2023. Kaufman’s March hospital flash report showed that the sector overall has begun to recover.

Hospitals seen to be at risk, or in the red, were those with less than 113 days cash on hand, negative operating margins, and debt to capitalization that exceeded 55%, he said.

“Those criteria don’t mean that 50% of the hospitals are at imminent risk of bankruptcy, but 20% do fit that criteria and have that risk,” Swanson said. “It is entirely possible that even those that fall into the highest risk category could continue to sustain operations and turn it around.”

All states are facing challenges with labor shortages and increased labor costs from hiring traveling contract nurses to fill the gap. But in California, given its high cost of living and wage rates, the cost of labor tends to be higher than most states, Swanson said. Tack on to that California coverage ratios mandating the number of healthcare workers per bed are more stringent than other states, he said.

Then, there is the issue of the land costs and higher capital expenditure costs, plus a seismic retrofit deadline of 2030.

Like other states, California has also seen an increase in the number of patients whose coverage comes from government-sponsored Medi-Cal, the state’s Medicaid program for low-income patients, and Medicare for seniors. Bill testimony revealed that the reimbursement for those programs is typically 76 cents on the dollar.

The fiscal threats to smaller rural hospitals are longstanding. But that’s not necessarily the proper frame of understanding anymore.

“It’s not just a rural problem or an urban problem,” Swanson said “Though generally it doesn’t impact the largest hospitals or hospital systems, given the cash reserves those systems have generally built up.”

Fitch Ratings analysts don’t think the legislation will affect its rating clients, as 23 of the 26 hospitals it rates in the state are investment grade, said Michael Burger, a Fitch director.

Two that Fitch rates that fall below investment grade are rated BB-plus and one has a single B rating, but it’s median rating is an A-plus and the majority of the hospitals it rates are AA-minus or triple-B, said Kevin Holloran, a Fitch senior director.

“We have had two upgrades recently — one is Sutter Health and one is Loma Linda University Medical Center,” Holloran said. “While many hospitals are struggling, there are plenty doing fine and getting upgraded.”

Currently, downgrades are outpacing upgrades by two to one for Fitch-rated hospitals, with seven hospitals downgraded and four upgraded nationally this year, Holloran said. In California, there has been one downgrade.

“It is a bit of a make or break year,” Holloran said. “A lot of negative outlooks will be resolved one way or another.”

Three years after COVID-19 first hit, hospitals have had time to understand and respond to the issues they are facing.

“This should be the year that everything that was put into place should start bearing fruit,” Holloran said.

Just a start
Though the legislation received broad support, even backers say it’s a stopgap with more to be done.

“This rare measure is welcome news for those hospitals right on the edge of disaster while CHA continues to focus on the immediate assistance needed by dozens of more hospitals at risk of closure as well as those that have already reduced services just to stay in operation,” Carmen Coyle, president and CEO of the California Hospital Association, said in statement.

Coyle also asked that lawmakers support the Senate Budget Blueprint that asks for $400 million per year over the next four years to protect access to care.

Nancy Skinner, D-Berkeley, testified that while she supported the measure, she wants lawmakers to outline a more robust system of checks on the money being loaned out during upcoming budget hearings.

“If this keeps hospitals open, it’s a smart move,” Skinner testified during last week’s committee hearing. “However, I am somewhat uncomfortable with giving hospitals money without any criteria or intense fiscal analysis.”

Skinner said she fought for money in 2014 for a hospital in her area that was in financial trouble.

“The governor signed it,” Skinner said. “It was always iffy that it would stay open. Our funds only kept it open for four to five months longer. I don’t regret it, because it was in an area that was in a hospital desert.”

Doctors Medical Center in San Pablo closed in 2015. After bankruptcy proceedings, the hospital building was sold and demolished to expand a casino parking lot.

Skinner pointed to the Kaufman Hall report that said half of the state’s hospitals are in the red.

“That doesn’t mean they are at risk of closure, which is why we need to get data about the circumstances and where the need is highest,” Skinner said. “I don’t ever want to be in a situation where we are choosing which ones to save.”

Skinner said she, like Sen. Anna Caballero, D-Merced, whose district includes the shuttered Madera hospital, wants to see a system created for the state’s not-for-profit hospitals similar to what it has for school districts.

School districts fall under the oversight of the state’s Fiscal Crisis and Management Assistance Team. They are required to report regularly on their financial conditions. If FCMAT thinks school districts are at risk of failing financially, it will loan the school district money, but that often is tied to county oversight or even a caretaker being appointed to replace the superintendent.

“We can set up a process similar to what happens when schools are in distress… where FCMAT makes a decision on whether they need to provide a loan or take over the administration of the school,” Caballero said. “That would help prevent us throwing good money after bad.”

She described the legislation as “trying to fix the engine of a plane while you are still in the air.”

“Does it look pretty? No. Will every “I” be dotted? No. But, we have to move,” Caballero said.

Dahle proposed the state pass another MCO tax, a tax on managed care organizations that covers the cost of MediCal, California’s government-sponsored Medicaid insurance program for low income residents.

Sen. Bob Archuleta, D-Pico Rivera, who “rose in strong support” of the measure pre-vote, said the bankrupt 200-bed Beverly Hospital, located in his district, serves a payor mix that is 90% MediCal/Medicare.

“This money will keep them open long enough to regroup or possibly sell,” Archuleta said.

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