California lawmakers OK emergency loans to failing hospitals

Alarmed by the closure of a rural hospital earlier this year, California lawmakers on Thursday voted to lend $150 million to struggling medical centers in the hope of preventing a cascade of similar failures across the state.

The only hospital in Madera County closed in December, leaving the community of nearly 160,000 people with no medical center within a 30-minute drive. The closure was a startling reminder of the plight of many community hospitals in mostly rural areas of the country that have struggled to stay open during the coronavirus pandemic.

Since then, hospitals in El Centro, Montebello, Hawkins and Visalia have been revealed to be teetering on the brink of collapse. One — Beverlly Hospital in Montebello — sought bankruptcy protection last month and another was taken over by a state university to prevent its closure. A report last month paid for by the California Hospital Assn., an industry trade group, warned that 20% of the state’s more than 400 hospitals were at risk of closing.

California lawmakers typically don’t approve new spending until June following months of debate and negotiations with the governor’s office. But the crisis is so severe that legislative leaders and Gov. Gavin Newsom agreed to go ahead and spend this money now, pledging to do more later in the year when the budget is finished.

“I don’t think people are appreciating what’s going on out there. I am very worried,” said Carmela Coyle, president and chief executive of the hospital association.

The pandemic upended hospitals across the country. While many were inundated with COVID-19 cases, patients seeking other care — like elective surgeries — dried up. Since then, rising inflation and labor costs have made it difficult for hospitals to recover.

In California, the problem has been compounded by an increase in the number of people whose health care costs are paid by the government. The number of people enrolled in the state’s Medicaid program, known as Medi-Cal, increased dramatically during the pandemic, a combination of emergency rules to make the program more accessible and a decision by Democrats to make all low-income adults eligible for the program regardless of their immigration status.

While more people are on Medi-Cal, how much Medi-Cal pays hospitals has stayed the same. On average, for every dollar a hospital spends to care for someone, Medi-Cal reimburses it 74 cents, Coyle said.

That’s a problem for hospitals like Kaweah Medical Center in Visalia, where most of its patients are on either Medicare or Medi-Cal. Nestled in the heart of the San Joaquin Valley, the hospital serves a mostly agricultural community made up of low-income farmworkers.

Before the pandemic, the hospital would turn a modest profit of 3% or so each year, according to CEO Gary Herbst. But since 2020, Herbst said, the hospital has lost $138 million. It has about $218 million in debt that a credit rating agency recently downgraded to “junk” status.

The hospital is supposed to have at least 90 days of operating cash on hand at any time. Before the pandemic, the lowest it ever got was 110 days. At the end of March, it dropped to just 62 days. Herbst said the hospital has lost $39 million through the first nine months of the fiscal year, or more than it lost in all of last year.

Herbst said he hopes the hospital will break even next year because of various cost-cutting measures, including laying off about 200 people and cutting back on services. That includes cutting the number of elective procedures for Medi-Cal patients by 35% because, he said, on “every one of those procedures we lose money.”

“If you were an outpatient surgeon who did 10 elective [Medi-Cal] surgeries a month, you can only do six now. And you have to put your other patients on a waiting list,” Herbst said.

The state will give out the $150 million in the form of interest-free loans to nonprofit or public hospitals that meet certain conditions. The state will prioritize loans for medical centers in rural areas and those that have a disproportionate number of patients on Medi-Cal, the joint state and federal government health insurance program for the poor and the disabled.

The $150 million likely won’t be enough to fix the problem. Herbst said his hospital needs $50 million — one-third of all the money being made available — to give it “some breathing room.”

During legislative hearings this week, lawmakers pledged to offer more money in June, when the state budget is finished.

“This is just a beginning. It’s antiseptic ointment on the cut. We haven’t even started with the Band-Aid,” said state Sen. Anna Caballero (D-Salinas), whose district includes the Madera Community Hospital that closed.

But it’s unclear how much more the state could pay. The California Hospital Assn. has asked for a one-time payment of $1.5 billion. But California is facing a projected $22.5-billion budget deficit, limiting the state’s ability to approve new spending.

One idea is to bring back a tax on managed care organizations, private companies that administer the Medi-Cal program. The tax triggers more Medi-Cal payments from the federal government. The last time it was in place, it saved the state $1.5 billion. The tax expired in 2020, but Newsom and some lawmakers want to bring it back.

The Newsom administration says it plans to use some of that new tax money to increase payments to hospitals for Medi-Cal patients. But those increases wouldn’t happen until next year at the earliest.

“Any business plan or business model that gets reimbursed 74 cents on every dollar that you spend is a pathway to bankruptcy,” said state Sen. Shannon Grove, (R-Bakersfield).