Three years ago, as the region and nation were still in the grip of the Covid-19 pandemic, Los Angeles-area hospitals were in a world of hurt, with nearly two-thirds reporting they were losing money and two local hospital companies eventually sliding into bankruptcy.

Last year, the financial condition of local hospitals improved – but only slightly. Just under half – 37 – of the 75 hospitals on the Business Journal’s list of Los Angeles County hospitals ranked by net patient revenue also reported they were losing money. The list is based on data compiled by the state Department of Healthcare Access and Information.

However, local hospital executives and industry representatives say that may be about as good as the situation gets for local hospitals. A confluence of factors – including state-mandated increases in hourly wages for health care workers and the likelihood of massive cuts to the federal Medicaid program – are poised to once again tighten the financial squeeze at local hospitals.

“This modest improvement you’re seeing in the numbers – it’s only temporary,” said Roger Sharma, chief executive of Covina-based Emanate Health, which includes three hospitals in its East San Gabriel Valley network. “I fear the situation is going to deteriorate in the next year or two to the point that it will be even worse in this ‘normal time’ than it was during the pandemic.”

Pandemic perfect storm

The overall financial condition of local hospitals has always been precarious, especially for “safety-net” hospitals where most of the patients are on Medicaid and other government-funded health care programs – if they have any insurance at all. Safety net hospitals must provide care to all patients, regardless of their ability to pay.

In the mid-1990s, the administration of then-President Bill Clinton bailed out the L.A. County-run health system and its five hospitals to the tune of $364 million. And a decade later, the state legislature approved a permanent levy on more-profitable hospitals that rely more on commercial insurance payments to help fund safety-net hospitals.

But nothing prepared local hospitals for the impact of the pandemic. Hospitals were slammed with huge increases in sick patients, shortages and skyrocketing costs for personal protective equipment, and an acute nursing shortage led to increased reliance on “travel nurses” who commanded pay rates up to three times higher than union-scale nurses. All this while there was little or no revenue coming in from elective surgeries, the principal revenue generator for most hospitals.

The situation was so dire that the California Hospital Association requested $1.5 billion in emergency funding from the state legislature. In the end, the state authorized a $300 million loan for financially distressed hospitals, along with moderately higher reimbursement rates for treating patients covered by the Medi-Cal (the state’s Medicaid program) and the reinstatement of a tax on managed health care organizations.

Spotty recovery among local hospitals

The extra payments did help a bit for 2024, as did a recovery in elective surgeries once the pandemic fears receded.

“Our financial situation did improve,” said Ed Mirzabegian, chief executive of Antelope Valley Medical Center in Lancaster. “We were helped by a higher volume of patients as nearly all of the elective surgery procedures have come back. That has been generating considerable revenue.”

Emanate Health’s Sharma agreed that patients have been returning to the hospitals in his network. Sharma added that as the nurse staffing situation has stabilized, the hospitals are relying less on travel nurses and when they do hire these nurses, they are no longer commanding such exorbitant rates.

But at Willowbrook-based Martin Luther King Jr. Community Hospital, where nearly all patients rely on government-funded health insurance the situation never really improved.

According to Elaine Batchlor, the hospital’s chief executive, the vast majority of patients enter the hospital through the emergency room. “The payments we receive for those emergency department services doesn’t even begin to cover the cost of treating the patients,” Batchlor said.

Over the past year, the hospital has avoided making steep cuts because of a one-time infusion of nearly $50 million. About half of that came from state funds specifically tailored to the hospital, along with $14 million from that state loan program for distressed hospitals and $8 million in county funding.

“We were very fortunate to get these funds,” Batchlor said. “That helped to stabilize our finances and get through 2024.”

One more bankruptcy

Earlier this year, another local hospital chain entered into bankruptcy: Palms-based private hospital operator Prospect Medical Holdings Inc., which at the time operated 16 hospitals in four states, filed for Chapter 11 bankruptcy protection on Jan. 11.

Ostensibly, the filing was to facilitate the sale of its two hospitals in Rhode Island and one hospital in Pennsylvania. The aim was to complete the process of shedding all assets outside of California and focus going forward on its seven California hospitals, according to the company’s statement issued at the time of the filing.

In the filing, Prospect Medical blamed the Covid-19 pandemic for its current financial problems.

“Prospect’s financial distress started as a result of the decreased revenue and increased costs arising from the Covid-19 pandemic,” said Paul Rundell, Prospect’s chief restructuring officer, in a declaration filed.

The financial effects of the pandemic hit Prospect Medical’s nine hospitals outside of California harder than the seven hospitals within the state, Rundell said in the filing.

As a result of this and other factors, he said Prospect Medical decided to sell its hospitals and other operations outside of California, using the proceeds from those sales to strengthen the balance sheets of its hospitals inside the state.

Maternity ward closures and other service line cuts

Faced with ongoing financial pressures, many hospitals and hospital chains have cut some of their most unprofitable service lines. Topping the list is the closure of maternity wards, which are considered among the least profitable service offerings, thanks to a long-term decline in the number of births and expensive equipment and labor costs.

“We’ve definitely seen an uptick in service line cuts,” said Justin Ziombra, the California Hospital Association’s group vice president of data analytics. “This is especially concentrated in maternity and delivery services and delivery services and NICU’s (neonatal intensive care units).”

The association put out a report earlier this year showing that roughly 50 maternity wards have closed statewide over the last decade.

Locally, two hospitals shuttered their maternity wards last year: USC Verdugo Hills Hospital in Glendale and Adventist Health Simi Valley Hospital.

Both hospitals said in their maternity ward closure announcements that they intend to use the freed-up resources to boost their service offerings to seniors, which comprise the most rapidly growing segment of the population. But the downside of these closures, of course, is that maternity patients have to travel farther to get to a hospital.

David Simon, a spokesman for the California Hospital Association, added that some hospitals have cut their behavioral health service offerings, citing the high cost for these services.

Labor cost increases accelerating

Simon and other association executives say more such moves are likely over the next couple years as hospitals grapple with a confluence of negative trends that will likely push more hospitals into negative territory for operating margins.

“Costs have exploded and will continue to explode, while revenues are not keeping up,” Simon said.

The biggest cost increases are expected on the labor front, despite the lessening of the travel nurse crunch. Last year, the legislature passed a law boosting the minimum hourly wages for health care workers.

The amount and level of the increases vary by organization size. Large health care systems with more than 10,000 employees must pay their workers at least $24 an hour starting this month, while mid-sized facilities must pay at least $21 an hour. Both minimum wage levels increase to $25 an hour by 2028.

Rural hospitals and safety-net hospitals, where at least 90% of the patient base is on Medi-Cal or Medicare, saw their minimum wages increase to $18.63 an hour as of last week. Their minimum wage levels will reach $25 an hour by 2034.

After the wage hits $25 an hour for all hospital facilities, annual inflation adjustments will hit every July 1.

“This minimum wage expense is countering the gains we’ve made dealing with the travel nurse situation,” Emanate Health’s Sharma said.

Labor costs currently make up 54% of the overall budget on average for hospitals in the state, according to the California Hospital Association.

Other expenses also rising

Prescription drug prices have been rising at rates above inflation, with prices for new and specialty drugs rising far faster, according to a report last year from the American Hospital Association. Shortages of key drugs have also become more frequent, forcing hospitals in many instances to use costlier alternatives.

Another expense that has cropped up in recent years is IT security in the wake of several hacking and ransomware incidents. Back in December, Whittier-based PIH Health, which runs three local hospitals, was hit by a ransomware attack allegedly involving more than 17 million patient records. It took several weeks for PIH Health to recover from the attack.

Not only are these attacks costly, but hospitals have to spend millions of dollars on proactive measures to thwart potential hackers.

Batchlor of Martin Luther King Jr. Community Hospital said this is her hospital’s fastest growing expense.

“Hospitals need to invest on the front-end to protect their data,” Batchlor said. “And in so many cases, hospitals have considerable catch-up to do.”

Reimbursement rates lagging

As hospitals are facing this array of rising costs, reimbursement rates from payers – especially for Medicaid and Medicare – are not keeping pace, meaning the gap between revenue and expenses is increasing for most hospitals each year, according to comments from California Hospital Association representatives and hospital executives.

“Government payments have been pretty much stagnant,” said Ben Johnson, group vice president of financial policy for the California Hospital Association.

Johnson said that the average net operating margin for hospitals where the vast majority of patients are on these government programs is minus 6%. Martin Luther King Jr. Community Hospital fared slightly better than most of its peers last year with a negative operating margin of about 3%.

Another worrisome trend is the increasing rates of denial and delays in payments from insurers, both commercial and government.

“We are seeing a significant increase in denials and delays of claims payments,” said Batchlor of Martin Luther King Jr. Community Hospital.

She also noted that for the government programs, it’s not the government itself that is denying the claims, but the managed care companies that have obtained Medi-Cal contracts, thereby taking over the claims management.

“This is especially pernicious,” she said. “Once you treat a patient, those costs are on the books – you can’t go back and reduce those costs. To wait and wait for payments or not get paid at all is a direct hit to the bottom line.”

To counteract this, Batchlor said her hospital has had to hire more people to fight claims payment delays and denials – adding to the costs.

Cuts in Medicaid

All these negative trends have been occurring even before factoring in likely huge cuts in the federal Medicaid program. The House budget bill that passed in May would cut nearly $800 billion from the Medicaid program over the next 10 years. The Senate budget bill that passed last week would cut about $930 billion over the next decade. The final bill that Congress passed on July 3 appeared to adhere more closely to the bigger cuts in the Senate version, but full details were not available as of press time.

Both versions would achieve the funding cuts through a combination of stricter eligibility requirements and cost-shifting to states. The Congressional Budget Office has estimated that the more than 10 million people could lose their Medicaid coverage under the House version of the budget bill, while nearly 12 million people could lose coverage under the Senate version.

According to the California Hospital Association’s Simon, the Senate bill would result in a $120 billion hit to Medicaid reimbursements to the state’s hospitals over the next 10 years. That figure does not include the cost of caring for people who might lose Medicaid coverage and become uninsured because of the stricter eligibility requirements.

“These costs will mostly fall on health care providers, especially hospitals with high proportions of Medicaid patients,” the association’s Simon said. “It will decimate California hospitals and lead to more hospital service cuts and more hospital closures.”

Johnson, the association’s group vice president of financial policy, said that while the state has stepped in to try to provide some additional funds, the state’s own fiscal constraints could limit its options.

More pain for local hospitals

Even though the Medicaid cuts would be spread out across 10 years, some hospital executives are concerned.

“We stand to lose tens of millions of dollars in revenues,” Batchlor said. “We simply don’t have the capacity to absorb the levels of cuts.”

Batchlor said that if these cuts are implemented, she would work hard with both state and local governments to secure enough funds to keep the hospital’s doors open.

“This is an existential threat for us,” she said. “We don’t have many service lines that could be cut. Unless some other solution can be found, we could be forced to close.”

Emanate Health’s Sharma and Antelope Valley Medical Center’s Mirzabegian were somewhat more hopeful, mostly because their hospitals are not in as dire financial straits as Martin Luther King Jr. Community Hospital.

“Yes, the cuts in Medicaid would hurt every hospital, but it would happen over 10 years,” he said, adding there’s no guarantee these cuts will remain in place.