Amid pandemic, hospitals face financial peril

California’s hospitals are experiencing unprecedented financial stress due to the COVID-19 pandemic, with net losses projected to hit $14.6 billion by the end of 2020.

The losses are “way above anything anyone could have anticipated… the costs have been nothing like we have ever seen before,” said Jan Emerson-Shea, a spokeswoman for the California Hospital Association, which represents about 400 hospitals, large and small.

“The dramatic slowdown of non-emergency services due to the COVID-19 pandemic, and the resulting dramatically reduced margins that damage hospitals’ financial strength, are expected to present unprecedented challenges to hospitals’ abilities to serve their communities and remain financially viable,” reports  a new study commissioned by the hospital association.

The number of COVID-19 patients that hospitals were instructed to prepare for was overestimated — and when the patients didn’t materialize at the level they expected, hospitals lost even more money.

Before the pandemic, about 40% of California hospitals operated in the red, while about 11% broke even. That 40% has jumped to nearly two thirds, according to Emerson-Shea. Virus preparation, fewer nonessential surgeries, and the economic downturn contribute to their ballooning expenses.

Nonessential surgeries are hospitals’ most profitable venture, and have been canceled at alarming rates.

“People have become afraid of necessary medical care… they are even ignoring signs of strokes and heart attacks,” Emerson-Shea said. Preparing for an influx of COVID-19 patients also incurs astronomical costs; providing adequate protective gear for healthcare workers, making room for additional ICU beds, and installing ventilation systems bears a hefty price tag. And right when they needed them the most, the stock market’s nosedive decimated hospitals’ investment portfolios.

Furthermore, the number of COVID-19 patients that hospitals were instructed to prepare for was overestimated — and when the patients didn’t materialize at the level they expected, hospitals lost even more money.

Gov. Gavin Newsom directed the CHA to prepare for an influx of 50% more patients in early spring, but patients did not turn up at that rate; stay-at-home orders were more successful than expected.

Though all hospitals faced significant financial blows, some argue that wealthy hospitals are better prepared than safety-net and red-zone hospitals. 

The preparation hospitals carried out was a risk — over-preparing would multiply financial losses. But the CHA executed Newsom’s requests anyway. “We did it for the state. We did it because it was the right thing to do,” said Emerson-Shea. “We were there, we listened to the governor – now, we need the state to stand up for hospitals,” said Emerson-Shea.

A draft state budget was passed Monday to meet the constitutional June 15 deadline, but the document will be rewritten as as lawmakers get a better handle on expenses and revenues, Because tax filing deadlines were extended from April 15 to July 15, the state’s revenue data will be updated in the summer. With this new data, the state may amend the budget throughout July and August.

It is uncertain how the hospitals will fare in the new budget, but the financial straits of some hospitals may be perilous: Studies indicate that several California hospitals will not survive the COVID-19 pandemic.

Though all hospitals faced significant financial blows, some argue that wealthy hospitals are better prepared than safety-net and red-zone hospitals. 

Wealthy hospitals have been building financial fortresses since 2008, piling up to two years’ worth or more of cash reserves. By investing their reserves, some hospitals’ investment portfolios have become enormous; 1 in 13 has an investment portfolio of over $100 million. 

Red-zone hospitals, which includes hospitals in low-income communities, are in an even tougher position than wealthy hospitals, however.

Their cash reserves tend to be enough to function for only 30 days, and their investment portfolios are not comparable to that of their wealthy competitors. Groups like America’s Essential Hospitals, which represents safety-net hospitals, encourage government officials to consider the volume of hospitals’ reserves before deciding where to distribute aid. 

If a hospital spent its reserves, it could lose its loans and its ability to treat uninsured or MediCal patients.

The CHA argues that wealthy hospitals’ reserves and investment portfolios should not discount their request for aid, however. Liquidating their investment portfolios would impose consequences on the medical economy; it would drive wealthy hospitals’ credit down enough to make it nearly impossible for red-zone hospitals to attain a private loan. If government aid is limited or lacking, red-zone hospitals may depend on private loans for survival. Because liquidation would be detrimental to the medical economy, hospitals may be attempting to avoid doing so.

Additionally, wealthy hospitals’ cash reserves are at least partially inaccessible due to bond covenants. Hospitals must be deemed credit-worthy in order to borrow money. To qualify, hospitals must show that they have sufficient reserves on hand. If they spend their reserves too quickly, bond covenants permit bondholders to retract their loans immediately. So, spending their reserves could risk the security of their loans.

Reserves also allow hospitals to treat uninsured and MediCal patients. Uninsured and MediCal patients create additional financial stress; hospitals lose 22 cents on their dollar for every MediCal patient treated, according to Emerson-Shea. Having reserves on hand may be necessary to prepare for treatment of MediCal patients. 

Wealthy hospitals may have astronomical investment portfolios and reserves, but their money may be untouchable. If a hospital spent its reserves, it could lose its loans and its ability to treat uninsured or MediCal patients. If it liquidated its investments, other hospitals could lose their opportunity to acquire loans. Emerson-Shea emphasizes that “no one has been spared in this… all hospitals incurred these expenses.”

The $14.6 billion net loss in California hospitals’ revenues through the end of 2020 will be compounded by another $2.1 billion by April of next year.

The gradual reopening of the economy encourages hospitals to prepare for another round of COVID-19. Cases are already starting to tick up in the capitol – and scientists estimate that a second wave will occur in the fall. Hospitals will have to prepare, again, rendering them even more financially vulnerable. 

Additionally, California has a state law on the books that requires hospitals to update their earthquake preparedness infrastructure by 2030 – a project that the RAND organization estimates will cost up to $100 billion in the next nine years. Hospitals must be able to borrow funds to pay for this, since neither the state nor the federal government has provided hospitals with aid to meet those new standards. And to borrow funds, hospitals must have reserves on hand (to comply with bond covenants) – but two-thirds are already in debt due to the pandemic. Following a second wave in the fall, that number may be even higher.

According to the CHA-commissioned Kaufman Hall Report, the $14.6 billion net loss in California hospitals’ revenues through the end of 2020 will be compounded by another $2.1 billion by April of next year. This debt will come in conjunction with a surge in uninsured and MediCal patients; it is estimated that over a third of California’s population will be enrolled in MediCal in 2020-2021. The high volume of Medi-Cal patients will present as an additional financial obstacle for hospitals.

A new proposal offers $10 billion as a safety net for hospitals nationwide — leaving $1.1 billion for California split between 53 of the state’s safety-net hospitals.

Obliterated revenue, COVID-19 preparation, new earthquake standards, a ravaged economy, and uninsured and MediCal patients combine to necessitate government aid for hospitals. They have no other option.

In March, the U.S. Department of Health and Human Services began to doll out $175 billion in bailouts to hospitals and health care workers. According to experts, it will not be nearly enough to keep near-bankrupt hospitals functioning.

The first $30 billion goes to health care facilities whose physicians have received the most money from Medicare. This aid does not consider Medi- Cal patients, thereby disadvantaging safety net hospitals. The remaining $145 billion is based on the number of uninsured patients and COVID-19 cases that each facility faces. 

A new proposal offers $10 billion as a safety net for hospitals nationwide — leaving $1.1 billion for California split between 53 of the state’s safety-net hospitals. Emerson-Shea argues that this aid is insufficient.

Since federal aid has proven to be lacking, hospitals depend on the California Budget Plan to come to the rescue. However, the May Budget Revise looks grim. Experts say it does not come close to the aid that would be needed to mitigate the losses that California hospitals have faced – even if they were to get federal and state aid, hospitals would face $11.2 billion in losses by the end of 2020.

If that was not enough of a threat to their financial stability, California is also considering drastic MediCal cuts, which makes supporting the uninsured increasingly difficult.

Closures may leave patients in hospital “deserts” of sorts.

Carmela Coyle of the CHA is asking for $1 billion in financial relief by June 30th as part of the 2019-2020 budget and $3.1 billion as part of the 2020-2021 budget. If the state provides this aid, the federal government will match it, adding up to $6.2 billion of the $14.6 billion hospitals have lost. Neither of these requests has been included in preliminary budget plans. 

Whether or not hospitals receive aid, experts say the medical world will change permanently. The Kaufman Hall Report analyzed the consequences of hospitals’ losses in California; the prospects are ominous. Three takeaways stand out.

First, hospitals will have to make risky financial decisions. Hospitals that do have reserves may dip into them, overriding their bond covenants. They will have to take out loans with high-interest rates and sell investments.

Second, hospital closures will occur. The hospitals that were operating in the red before the pandemic are scrambling. Closures may leave patients in hospital “deserts” of sorts, particularly in areas that provide care for lots of uninsured, Medicare, and MediCal patients. 

Third, hospitals’ workforces will be reduced. Staffing makes up 60% of hospitals’ expenses. Some health care workers will be laid off and furloughed, reducing the patient volume that hospitals can handle and the services that they can provide — ironically, in the middle of a public health crisis.

“The hospital down the street might not offer the service you need any more,” Emerson-Shea says. “We are part of the fabric of our society… whatever operation someone needs, whether that is a kidney transplant, a hip replacement, you name it – we want to be there to do that.” But they need the aid to do it.
—
Editor’s Note: Lana Schwartz is a Capitol Weekly intern from Vanderbilt University.