By: Kevin Zhang
Introduction
For the past few months, hospitals all across California, and especially in the LA area have struggled with financial hardships. From layouts to incurring greater and greater costs, it is estimated that 1 out of every 5 hospitals in CA are in threat of shutting down and half are making negative profits (Carbajal). This would have catastrophic effects for lower-income communities, whose people rely on the already struggling smaller hospitals that provide them service. This report aims to identify the causes of this problem and identify what steps have been taken to ameliorate this situation.
Causes
Hospitals all across America took on huge burdens during the Covid-19 pandemic, where emergency rooms, doctors, and nurses were forced to work to their breaking point in order to support a struggling America. The one relief they faced were the massive monetary donations given to hospitals to help them stay afloat. However, most of these donations ran out in around June of 2022, as COVID came to an end. As a result of the end of this cash flow, many hospitals were forced to operate on reserve money left for emergencies, a system that many struggling hospitals are still engaging in today. Obviously, this cannot be a long term plan, as more than 50% of hospitals are losing money (Roth). There are three major factors for these losses: burnout, Medi-Cal, and the financial system.
Burnout
Nurses were working long hours 24/7 throughout the pandemic. This job itself already has an extremely high burnout rate of 25% (Flynn), but this number almost doubled during the COVID pandemic, where that number lept to a whopping 41% (Rotenstein). As many of these nurses left the job, hospitals were forced to hire “travel nurses,” who demanded much more pay than their unionized counterparts. As a result, hospital costs leapt up after a price increase of 3 times the normal unionized wage, from $100 an hour to $200-$250 an hour for travel nurses (Galeno). To make matters worse, studies have shown that wages and benefits are the two most expensive costs for hospitals, totalling around 56% of their budget combined on average (Yera). At the end of the day, California hospitals paid an extra $10 billion more for labor and supplies in 2022 than what they paid in 2021. To make matters worse, their return on investments like travel nurses were also decreasing at an alarming rate, only $119 million in 2022 compared to $6 billion in the year before (Young, Hart). Despite trying to find alternatives, these “travel nurses” are crucial to keeping the hospitals up and running. Firing or letting go of these nurses would result in even more economic losses, as they are the backbone to any healthcare system. Much like how a team can only work as fast as its slowest member, a hospital can only function with a certain number of nurses on duty, thus tying many hospitals into a shut-or-incur-loss bind.
Medi-Cal
Medi-Cal is California’s version of Medicaid, a program first started in 1965 under the LBJ administration in order to provide healthcare to lower income individuals. However, the issue with Medi-Cal is that it doesn’t fully reimburse the very costs that hospitals incur to take on Medi-Cal patients. In fact, studies have found that the Medi-Cal program only pays hospitals 74 cents to the dollar on average (Young, Hart). As a result, hospitals lose substantial money every time a Medi-Cal patient walks through the door. For instance, the Emanate Health, a nonprofit organization located in West Covina with three hospitals, reported that the lack of reimbursement from the Medi-Cal program was killing their programs. In 2020 itself, Emanate Health lost a whopping $30 million, and incurred an extra $16.6 million cost in just the first two months of 2022. Another hospital in California’s Central Valley, Madera Hospital, faced the same financial hardships, losing a total of $15.6 million from Medi-Cal patients (Emerson-Shea). To make matters worse, people who rely on Medi-Cal also tend to live in lower-income areas. These areas lack the financial infrastructure to have multiple hospitals readily available, meaning that for many communities, there may be only 1 hospital within their vicinity. If that one hospital closes down, that would be catastrophic news for these people, as there would be no other option for them in times of emergency (Klein). With the Medi-Cal program expanding year by year, hospitals would be forced to take on an even greater financial burden for every Medi-Cal patient that walks through the door.
Financial System
The economic losses hospitals take on from Medi-Cal patients is not a new phenomenon. For decades, the Medi-Cal program has limited profits made by hospitals, paying hospitals only 74 cents to the dollar. As a result, larger hospitals like Cedars-Sinai Hospital System in Los Angeles secured grants back in 2009 that allowed them to funnel tax-payer’s money upwards themselves. These larger hospitals then promised to help finance the smaller hospitals that were located in lower-income communities. In return these larger hospitals would receive tax benefits from the government, a move that would prove to be extremely lucrative (Young, Hart). Smaller hospitals who catered towards a larger percentage of Medi-Cal patients, like Emanate Health (80% Medi-Cal patients) were therefore heavily reliant on these “bailouts” from larger, more lucrative hospitals, while still forced to pay a large amount of taxes. As a result, these smaller hospitals failed to attract wealthier customers with private insurance. This loose system of a healthcare “bank” allowed these smaller hospitals to remain operational despite losses on paper. But with the onset of the COVID pandemic, hospitals all across America were suddenly financially burdened, leading many of the larger hospitals to reel back on their “bailout” for smaller ones. Without this crucial lifeline, smaller hospitals have thus been forced to shut down in fear of incurring more financial losses from Medi-Cal patients.
The CARES Act
The CARES Act was the $3.4 trillion COVID relief bill passed by Trump in 2020. It was meant to be a comprehensive relief bill, and a large portion of it, $175 billion, was allocated to hospitals to help keep them afloat (Bailey). It greatly helped mitigate the struggles of California hospitals, but nevertheless, there were still some major concerns. As shown in table 1, Californian hospitals endured a net total of $14.3 billion dollars in 2020, but even with substantial CARES funding, the final result was still a substantial $8.4 billion in loss. In addition, the percentage of hospitals with negative operating margins jumped from 40% in 2019 (178 hospitals) to 58% (254 hospitals) in 2020.
Table 1
Source: Kaufman Hall
More recently, governor Newsom passed a $150 million loan program to struggling hospitals across California (Muoio). While it is a step in the right direction, it is far from the proposed $1.5 billion requested by the California Hospital Association (Coyle). With national debt problems and strict budget regulations from the California senate, Governor Newsom must find a way to allocate these scarce resources to hospitals that are actually in need. Large hospital systems like Cedar-Sinai have large backout financial resources they can fall back on--and they have been doing so. But smaller hospital systems are fighting to stay afloat and they need this loan more than anyone else. At the end of the day, Newson’s goal should be to keep as many hospitals alive as possible, not just simply throwing cash at everyone, especially at those that don’t necessarily need the money right away.
Beverly Hills Hospital Case Study
The case for Beverly Hospital in Montebello, California, is a very good example of the problems listed above. On April 19, 2023 Beverly Hospital declared bankruptcy after suffering continuous negative cash flow and also failing 3 times to merge with other hospital groups, including AHMC Health. One of their main struggles were the poor reimbursement rates from Medi-Cal. Beverly hospital serviced a majority of low-income individuals, 90% of which were on Medi-Cal (Reyes). As a result, they sustained heavy losses with the disproportionate payback (74 cents to the dollar) from the Medi-Cal system. When taking a look at their first quarter revenues, there was a clear drop in 2023 as shown in table 2, where they only received $1.2 million in Medi-Cal reimbursements compared to $4.5 million from the year before, a whopping 73% drop. To make matters worse, total operating expenses as well as total reduction on revenue had what hospital officials called a “meteoric rise” for the past 5 years, severely constricting cash income flow (Reyes). Operating expenses remained quite tame from 2019 to 2022, at around the $49 million mark, but hit a peak in 2023 at $59 million. Total reduction on revenue also hovered around the high $80 million mark from 2019-2022, but once again saw a huge increase in 2023, hitting a total of $112 million. According to hospital officials, much of these increased costs can be attributed to both increased wages and supply costs, a result of the heavy burnout rate of COVID nurses. In the past, they could sustain most of these losses from the large monetary donations they received. But as Covid ended, these donations dried up. In fact, Beverly hospital saw a 68% decrease in donation revenue from 2020 to 2021, from a healthy $13 million to just $4.1 million. And as the last straw, net patient revenue suffered another huge hit in 2023, only bringing in $35 million compared to mid $40 millions from the year before. Cumulatively, Beverly Hospital suffered a crushing blow of almost $4.4 million in economic loss in 2021 and another $3.8 million in 2022 (American Hospital Directory). For now, they have reported to have lined up $13 million in emergency financing to keep the hospital up and running as they continue to pursue finding a deal.
Table 2: Beverly Hospital Financial Information from 1st Quarter Data in millions.
Note: Positive cash flow is marked in green; negative cash flow is marked in red.
Source: CalHHS
Conclusion
The 2023 LA Hospital Crisis is one of the most severe financial constrictions hospitals have faced in recent years. A combination of nurse burnout, insufficient Medi-Cal reimbursements, and a faulty financial situation were the tipping point of a problem that should have been addressed much earlier. The failure to do so has resulted in huge implications, both hurting the medical industry from an economic standpoint, but also leaves communities stranded without the medical infrastructure they need. As of now, already one in five hospitals, like Beverly Hospital, have shut their doors, with a majority of the rest operating on negative margins, barely having space to breathe. Governor Newsom and California’s state legislature must take stronger action soon; otherwise, Californian hospitals and residents alike may be looking at an even more bumpy road ahead.
Citations
“American Hospital Directory.” Ahd.Com, www.ahd.com/free_profile/050350/Beverly_Hospital/Montebello/California/. Accessed 18 June 2023.
Bailey, Victoria. “COVID-19 Federal Relief Funds Helped Offset Hospital Financial Losses.” RevCycleIntelligence, 18 May 2022, revcycleintelligence.com/news/covid-19-federal-relief-funds-helped-offset-hospital-financial-losses#:~:text=Congress%20passed%20the%20Coronavirus%2C%20Aid,for%20hospitals%20and%20healthcare%20organizations.
Carbajal, Erica. “20% of California Hospitals at Risk of Closure: 4 Leaders React.” Becker’s Hospital Review, www.beckershospitalreview.com/finance/20-of-california-hospitals-at-risk-of-closure-4-leaders-react.html#:~:text=One%20in%205%20California%20hospitals,and%20outpaced%20increases%20in%20revenue. Accessed 14 June 2023.
Coyle, Carmela. “Now Is the Time to Make Your Voices Heard on Financial Relief .” California Hospital Association, 28 Feb. 2023, calhospital.org/now-is-the-time-to-make-your-voices-heard-on-financial-relief/.
Emerson-Shea, Jan. “New Report: California Hospitals Face Massive Financial Losses Due to Covid-19 Pandemic; 2021 Shortfall Triple Previous Projections.” California Hospital Association, 21 Apr. 2022, calhospital.org/new-report-california-hospitals-face-massive-financial-losses-due-to-covid-19-pandemic-2021-shortfall-triple-previous-projections/.
Flynn, Jack. “15+ Nursing Burnout Statistics [2023]: The Shocking Truth about Nursing.” Zippia, 12 May 2023, www.zippia.com/advice/nursing-burnout-statistics/#:~:text=At%20least%2025%25%20of%20nurses,of%20nurses%20experience%20career%20fatigue.
Galeno, Christian. “Hospitals Pay Hundreds per Hour for Travelling Nurses, but Still Not Enough to Staff Hospitals during Covid Surge.” KGET 17, 14 Sept. 2021, www.kget.com/health/coronavirus/hospitals-pay-hundreds-per-hour-for-travelling-nurses-but-still-not-enough-to-staff-hospitals-during-covid-surge/.
Klein, Kerry. “After a Rural California Hospital Closes, Farmworkers Pay the Price.” PBS, 11 Apr. 2023, www.pbs.org/newshour/health/after-a-rural-california-hospital-closes-farmworkers-pay-the-price.
Muoio, Dave. “California Lawmakers Greenlight $150M of Emergency Loans for Struggling Hospitals.” Fierce Healthcare, 5 May 2023, www.fiercehealthcare.com/providers/california-lawmakers-greenlight-emergency-loans-struggling-hospitals.
Reyes, Emily. “Beverly Hospital in Montebello Files for Bankruptcy in Effort to Avoid Closure.” Los Angeles Times, 20 Apr. 2023, www.latimes.com/california/story/2023-04-20/beverly-hospital-in-montebello-files-for-bankruptcy-in-effort-to-avoid-closure.
Rotenstein, Lisa. “Covid Burnout Hitting All Levels of Healthcare Workforce.” Harvard Gazette, 31 Mar. 2023, news.harvard.edu/gazette/story/2023/03/covid-burnout-hitting-all-levels-of-health-care-workforce/#:~:text=Intent%20to%20leave%20the%20job,clinical%20staff%20reporting%20the%20sentiment.
Roth, Drew. “New Report Confirms Depth of California’s Health Care Crisis.” California Hospital Association, 13 Apr. 2023, calhospital.org/new-report-confirms-depth-of-californias-health-care-crisis/.
Yera. “Breaking down the Top Costs in Hospitals.” PathstonePartners, 8 June 2023, www.pathstonepartners.com/blog/common-hospital-costs-expenses/#:~:text=and%20professional%20services.-,Wages%2C%20Benefits%2C%20and%20Labor%20Costs,total%20expense%20of%20a%20hospital.
Young, Samantha, and Angela Hart. “California Hospitals Seek a Broad Bailout, but They Don’t All Need It.” California Healthline, 25 May 2023, californiahealthline.org/news/article/california-hospital-funding-bailouts-hospital-quality-assurance-fee-program/.
Comments