Health Services Reform in Peril, Audit Says

A systemwide reorganization designed to save the beleaguered Los Angeles County Health Services department hundreds of millions of dollars has become mired in legal challenges and drawn-out negotiations that threaten the department’s future, according to an audit by state officials.

The report, released Thursday by the Bureau of State Audits, offers a bracing counterpoint to an announcement by the health department last month that it had a year-end surplus $103 million higher than expected.

According to the audit, the department faces a projected budget deficit of $345 million by 2006-07, even if it is adopts the cost-saving reorganization.

Although the audit makes no specific recommendations about how to remedy the problem, county officials said it confirms their years-old contention that the county health system, which serves a largely uninsured and low-income population of about 800,000, is overburdened and unable to function indefinitely without changes.

“The significance of this report is that it isn’t the county saying it, it’s the state, who hasn’t particularly been in our corner,” Los Angeles County Supervisor Zev Yaroslavsky said.

But the report does more than buttress the county’s ongoing plea for federal assistance or another stable funding source. It also details the difficulty the county has had in paring a public health system that federal officials and others have criticized as bloated and inefficient.

In 2002, faced with more uninsured patients and escalating medical costs and with tighter budgets in Sacramento and Washington, the department drafted a strategic plan whose cornerstone was a centralization of services at County-USC Medical Center and a reduction of services at other hospitals.

The plan outlined three cost-cutting scenarios, the most drastic of which would have closed three of the six hospitals the county operated at the time, and 32 health centers and clinics.

That worst-case option was averted by the passage in November of Measure B, a voter-approved parcel tax expected to raise $146 million annually for the county’s emergency and trauma centers, and by agreements with the state and federal governments providing $250 million by June 2005.

Instead, the county adopted the least painful plan, known as Scenario III, which called for the closing of High Desert Hospital in Lancaster and Rancho Los Amigos National Rehabilitation Center in Downey and for a 100-bed reduction and other increased efficiencies at County-USC.

Scenario III also proposed that the department pursue reimbursement for about $20.2 million in services it provides to the Department of Mental Health annually and that it contract out some administrative functions at its Office of Managed Care.

Those changes, combined with other reductions in Scenario III, were projected to result in annual savings to the department of $358 million by 2005-06.

But as the state audit notes, the closing of Rancho Los Amigos and the bed reductions at County-USC have been postponed by lawsuits, and the pursuit of reimbursement from the Department of Mental Health and attempts to contract out administrative functions have become bogged down in protracted negotiations.

Because of these various roadblocks, the report says, “Health Services no longer anticipates” being able to achieve the projected savings.

The department’s fiscal outlook was already bleak, with a budget shortfall projected at $345 million in 2006-07, increasing to $767.8 million in 2007-08. Now, according to the report, the onset of the deficit is expected to begin a year earlier, beginning at $69.5 million in 2005-06 and growing to $840.5 million by 2007-08.

David Janssen, the county’s chief administrative officer, said the county had tried to follow a “soft-landing strategy of making as few cuts as possible, as early as possible to avoid a sudden slashing of services that could collapse the department.”

“The deficit is getting closer,” Janssen said after reviewing the audit. “That means the cliff we’ve been trying to avoid is getting closer.”