This was supposed to be the year that hospitals throughout Los Angeles County were going to start steadying their finances after years of tumult and unexpected costs brought on by the Covid-19 pandemic.

Instead, many hospitals are in worse financial shape now than they were at the height of the pandemic three years ago. Soaring costs – chiefly for contract “travel nurses” and prescription drug procurement – have continued to plague hospitals, while government program reimbursement rates for most of the treatment hospitals provide have not kept pace.

The result has been a worsening squeeze on operating margins for hospitals in Los Angeles County and statewide. And, unlike three years ago, when the federal government stepped in through the CARES Act to offset much of the Covid treatment and personal protective equipment procurement costs incurred by hospitals, the government cavalry has not ridden to the rescue this time.

“This has turned out to be the most challenging year financially in recent memory for our hospital and hospitals throughout the region,” said Bernie Klein, chief executive of Providence Holy Cross Medical Center in Mission Hills, who has also emerged as the chief spokesman for 13 of Renton, Washington-based Providence Health and Services hospitals in Southern California, including six in Los Angeles County. 

Klein said the situation is exacerbated because hospitals locally and throughout the state already sustained record operating losses in 2021 and 2022, forcing many to tap reserves.

Indeed, a new report commissioned by the California Hospital Association, a Sacramento-based trade and advocacy organization, laid out a bleak picture, citing rapidly escalating costs and Medicare and Medi-Cal reimbursement rates that have failed to keep pace. Most hospitals in the state rely on these government programs for the majority of treatment payment revenue.

The report, prepared by consultant Kaufman Hall & Associates and released last month, showed that 52% of the state’s roughly 400 hospitals now have negative operating margins, nearly double the 28% seen in 2019. Another 18% have operating margins between 0% and 3%, considered dangerously low with no ability to set funds aside for reserves or future emergency situations.

What’s more, the report said, nearly 20% of the state’s hospitals are considered “at risk of closure.” The hospitals association said one hospital has already closed in the state – Madrera Hospital near Fresno – – and others could follow as soon as this year.

Locally, one hospital system, El Segundo-based Pipeline Health, went into bankruptcy last fall and re-emerged in January after restructuring its debts and selling off two of its seven hospitals.

And on April 19, Beverly Hospital in Montebello filed for Chapter 11 bankruptcy protection after failing to secure a buyer or affiliation partner. Officials with the 202-licensed bed hospital said they had lined up $13 million in financing to keep the hospital open as they continue to pursue a deal. 

The overall financial condition of hospitals statewide has gotten so dire that the hospital association is now calling for a $1.5 billion bailout from the state.

“The clock is ticking each and every day as more and more hospitals in this state are taking the next step toward the edge of survivability,” Carmela Coyle, the association’s chief executive, said in a press conference called last month to put pressure on lawmakers to step in.

LA hospitals worse off

The hospital association report did not break out figures for the roughly 95 hospitals in Los Angeles County. 

But according to the Business Journal’s list of the 75 largest hospitals in the county as ranked by net patient revenue, 47 – or 63% – of the hospitals had negative operating margins last year, meaning they lost money. That’s double the 23 number from 2019.

California Hospital Association spokesman David Simon said the higher percentage for Los Angeles County hospitals didn’t surprise him. He noted that hospitals in the county tend to have a higher proportion of patients relying on Medicare, Medi-Cal and other government programs than the statewide average.

The Business Journal’s list doesn’t include the 20 smallest hospitals in the county. California Hospital Association leaders noted that small hospitals with fewer financial reserves and resources have generally had a tougher time absorbing the cost increases.

On the cost side, one of the main drivers cited in the report was hospitals’ increasing reliance on so-called contract “travel nurses” – who command pay rates substantially higher than the average union-scale staff nurses – to fill vacancies left by staff nurses who have left due to burnout.

Collectively, the state’s hospitals paid out $3.8 billion more for contract labor than in 2019, according to the report. That represents an increase of 263%, with the bulk of that increase coming between 2021 and 2022.

“Our high volume has driven the need to use temporary nursing labor, which is very expensive,” said Elaine Batchlor, chief executive of Martin Luther King Community Hospital in Willowbrook. 

Given the low-income community it serves, almost all of the hospital’s patients are on government programs.

“Our public (government) payments are pennies on the dollar and haven’t been growing anywhere near as fast as these costs,” Batchlor added.

To try to make ends meet, Batchlor said her hospital has had to tap its reserves and has continued to borrow to cover costs.

“We can’t keep doing this indefinitely,” she said.

Over the longer term, Batchlor said her hospital may have to start cutting services, such as maternal labor and delivery care or a recently opened wound care center.

Pipeline bankruptcy

Of course, this imbalance between government medical program reimbursement rates and rising treatment costs is nothing new, particularly for hospitals such as Martin Luther King Jr. Community Hospital that are heavily or entirely reliant on government programs for treatment reimbursements. These hospitals have long been referred to as “safety net hospitals” and are known for their relatively precarious financial position.

“Safety-net hospitals are always on razor’s edge for profitability,” said Craig Beam, an independent hospital consultant in Cowan Heights in Orange County who has held several board positions at hospitals and managed-care organizations.

Fifteen years ago, the state attempted to come up with a fix: hospitals with a lower proportion of patients on these government programs – the “richer” hospitals – would pay into a fund to help subsidize the poorer safety net hospitals. That fund helped spur the growth of Pipeline Health. 

But the cost impacts of the pandemic and the labor and supply shortages that followed destroyed the safety net hospitals’ precarious balancing act.

Pipeline Health initially sought to close the gap by turning to a sale-leaseback of its four local hospital properties. The health system also tried to sell two Chicago-area hospitals it had recently acquired. But that sale process hit unexpected regulatory roadblocks and took much longer than expected. Without this extra cash, Pipeline Health was forced to file for bankruptcy in October.

Eventually, Pipeline Health completed the sale of the two Illinois hospitals; that, along with some other internal debt restructuring made possible by the bankruptcy filing, allowed for a quick exit from bankruptcy in January.

Meanwhile, at Beverly Hospital, more than 90% of patients are on government programs. 

In a statement issued in conjunction with the bankruptcy filing, hospital executives said, “Today’s filing was precipitated by the financial stresses that safety net hospitals across the United States now face: a meteoric rise in labor costs caused in part by the nationwide labor shortage post-Covid crisis coupled with egregious inflation in the price of medical supplies and medications — while Medicare and Medicaid base rates and payments have failed to adjust to absorb such increases.”

The statement also noted hospital executives tried unsuccessfully to affiliate or merge with three separate hospital systems in an attempt to obtain help shouldering the costs. 

Cost-cutting

With the Pipeline Health and Beverly Hospital bankruptcy filings fresh on their minds, other local hospital executives are taking whatever steps they can to avoid a similar fate.

At Ontario-based Prime Healthcare Inc., which operates five hospitals in Los Angeles County, Chief Financial Officer Steve Aleman said the hospital system started to address the nurse staffing situation late last year, creating a task force to try to better manage staffing needs.

“That’s not necessarily less staff, but making sure the staff you have is in the right places,” Aleman said. 

Aleman said he expects the results of this staff management initiative to start showing up in Prime’s financials later this year.

The chief executive of Antelope Valley Medical Center in Lancaster, Edward Mirzabegian, is considering more drastic steps.

“Things are getting much worse now,” Mirzabegian said. “Government payors and insurance companies are paying under the cost assumptions of five or 10 years ago and costs have soared since then. Everything costs three times as much or even five times as much now. Every hospital, including ours, is in a jam.”

Mirzabegian said he has been forced to tap hospital reserves, but that can only go on for another year or two.

“We’re now canceling our existing managed care contracts and renegotiating them for higher reimbursements,” he said. We have a 90-day window to reach new agreements or the payors lose their discounts.”

This renegotiation – or something similar – must be done on a larger scale to solve the financial crisis faced by state hospitals, according to hospital executives and the hospital association’s Coyle.

“The fundamental problem here is systemic,” Coyle said. “It is driven by the underfunding of government payor programs. The only sustainable fix is an increase in the reimbursements.”

But she said that will take time. And the situation is so acute now that an immediate infusion of $1.5 billion is necessary for the safety net hospitals facing the direst financial situations. 

However, getting that $1.5 billion in a fiscal year in which the state will face a projected budget shortfall of at least $20 billion will not be easy.

“That’s why we’re letting people know now that if that money doesn’t come, we will see more hospitals close and more communities go without the health care services they need,” Coyle said.