Hospital struggles to get ‘Back in the Black’

Kaweah Health asks residents to urge Governor Newsom for financial relief for the state’s largest district hospital as it attempts to recover financially from the pandemic

VISALIA – After three years of caring for local residents through a deadly pandemic, Kaweah Health is asking the community to put pressure on the state to help clot its financial wounds.

CEO Gary Herbst laid out a grim picture in a call-to-action letter to the community posted on the hospital district’s website last month.

“Through trying times and while dealing with difficult State requirements, district hospitals persevered to care for the communities when they were needed most,” Herbst said. “And while communities have started to bounce back, the district hospitals have been left on the brink of financial collapse, with the State not offering any support.”

The letter goes on to outline in detail the financial challenge facing Kaweah Health, the largest of the 33 district hospitals still operating in California:

  • Cumulative operating losses of $133 million from pandemic start to Oct. 31, offset in part by federal Provider Relief Funds of $61 million.
  • State mandates to cease all elective surgeries during COVID surges, forcing huge losses locally.
  • Soaring costs of contract labor due to the labor shortage caused by COVID-19 — $80 million in traveling nurses and $16 million in staff bonuses. 
  • 52,274 COVID-19 outpatient cases — 11% of Tulare County population.        
  • 5,591 COVID-19 positive inpatients    
  • •Increased average length of stay from 5.3 days before COVID-19 to 10.2 days from pandemic beginning to current time.

“We ask you to join us in voicing these concerns and email Governor Newsom today, urging him to consider a one-time allocation to help district hospitals recover their financial health and to reform Medi-Cal reimbursement for lasting change,” the letter concluded. 

Those wanting to email a letter to the governor can do so on Kaweah Health’s website at https://www.kaweahhealth.org/about-us/take-action/ .

Swelling Population

Reimbursement rates for Medi-Cal,  California’s program to cover medical costs of low income residents, have not been increased in 10 years for inpatient cases, and 30 years for outpatient cases while costs to provide care have continued to increase. That has left a shortfall of tens of millions of dollars per year for Kaweah. Herbst said close to half of Kaweah Health’s patients are on Medi-Cal and Governor Newsom continues to expand it to more populations, including all undocumented immigrants.

“Better Medi-Cal rates would help sustain district hospitals indefinitely,” Herbst wrote in his letter to the community.

Herbst says the hospital is on a financial path forward that could balance its deficit by March. But the hospital, still facing debt, would continue to lose money. They say they still need help from Sacramento and that the state has yet to answer their pleas.

“For the short term, it is also crucial to allocate one-time funding to carry the hospital through without further service closures and layoffs.”

Surgically Removing Jobs 

But the Visalia-based health care district can’t rest or simply wait for relief. At its Dec. 22 board meeting, Kaweah Health provided an update on its “Back in the Black” strategy to stem the red ink tide and right size their pandemic-impacted budget. The strategy plans to cut expenses by $85 million by this June and in successive years, unless the state can provide some type of relief. Kaweah Health has already closed their Neurosciences Center and a diabetes education clinic which, while important, do not make the hospital money.

According to an update on the plan last month, the hospital district has increased revenue by $10.9 million and should see another $1.5 million by June. Kaweah has also collected an additional $2.6 million in underpayments and appealed another $5.4 million through the rest of 2023. The district has also implemented changes to save another $1.1 million this year with new staffing models and compensation packets.

Now Kaweah Health says they will make cuts, particularly in staffing costs. The district has already reduced employee numbers by 106 and eliminated 90 open positions that had not been filled when staffing was short. Now through February, the hospital will cut an additional 94 positions bringing the job cuts to 200. In a report to the district finance committee this week administration said the cuts should have an annualized positive impact of $21 million.

Dramatic cuts are also underway in the hospital’s bulging contract labor numbers that had been necessary during the pandemic when so many staff were out sick.

The district had hired up to 229 full-time-equivalent positions but that has been gradually pared down to 110 with 70 more scheduled to be reduced. The goal will be to use no more than 40 contract labor staffers by the end of the year. Today the hospital is spending less than half the cost of its contract labor last May. Administration says that should mean $55 million in annual savings.

Other labor saving categories include a reduction in overtime that will save $5.2 million on an annual basis and cuts in shift-bonuses that should save $6.2 million in this fiscal year. The hospital has also stopped contributing to employees’ 401K plans – a $10 million savings.

All these cuts add up to around $98 million annually- a major step toward fiscal health although likely not popular of course with those who are laid off. But, you could argue – the hospital lives to provide care another day.

Herbst added that all staff levels have seen cuts. He said executives, or senior management staff, have taken a 20% pay cut, and directors, or middle management staff, have taken a 10% pay cut. 

Credit Rating Fading

On Dec. 7, Moody’s, an investor relations firm, downgraded Kaweah’s credit rating to a Ba1, because it is down to 75 days cash on hand. “Failure to reverse cash flow losses will result in further material cash declines and could cause the system to breach financial covenants and necessitate the funding of a debt service reserve fund,” the investment firm stated in its report.

Herbst recently told Valley Public Radio that the hospital had a plan in November to secure a line of credit with a bank. He sent out roughly 50 requests for proposals to lenders, but says the recent downgrade by Moody’s “spooked off” lenders. The hospital needs to borrow money to cushion against long wait times for reimbursement. Fixing that credit rating is job one.

“An upgrade is unlikely at this time given the severity of cash flow burn and other liquidity pressures,” Moody’s stated in December.

Besides the initiative, the district has closed their transitional care unit discharging patients under Kaweah’s obligation to others. A memo says the ramp down represents approximately $245,000 less in net patient revenue and $332,000 less in direct costs, a net positive in the bottom line of $87,000 for December and $180,000 for November and December. Apparently, the hospital was losing around $1 million a year on this service.

Then there is the length-of-stay issue for patients. In a nutshell, the pandemic forced those patients who were sicker for longer to stay an average of 10 days – about double the length of time they used to. Since the worst of the pandemic, the length of stay at the Visalia hospital has been dropping but is still around six days compared to the national average of five days. 

According to the American Hospital Association, delays in discharge result in hospitals and health systems undergoing additional pressure on an already overwhelmed workforce and reduce overall community access to care.

Extended stays also increase costs due to delays in discharge. The extra days to discharge patients are not reimbursed by the state. Having patients stay in the hospital longer than needed also increases the risk of complications, such as healthcare-related infections and falls, which can cost more in legal fees, insurance disputes and even fines from the state itself.

Additional costs for hospitals are also associated with delays in discharge, as they do not receive reimbursement for any costs associated with the extra days caring for patients in the hospital while patients wait to be discharged.

Because the hospital provides service in a large low income area with a significant population (about 14%) that suffers from chronic diseases like diabetes, Kaweah Health has additional challenges some hospitals don’t have.

“The Ba1 rating favorably incorporates the system’s distinctly leading market position as the major tertiary referral center for Tulare County, which has allowed for good revenue growth,” according to Moody’s.

Herbst told public radio they are also exploring getting money from medical claims in advance. It’s a model that worked during the pandemic with Medicare. Medicare pre-paid $90 million worth of claims to Kaweah, which the hospital was able to pay back, according to Herbst. He says, this may be something the hospital can arrange with private insurance companies, such as Aetna or Blue Cross, to give the hospital some breathing room.

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