Kaweah Health pleads for help from Tulare County

CEO Gary Herbst explains Kaweah Health’s financial crisis, pleads Tulare County Board of Supervisors to consider options

VISALIA – Kaweah Health is close to running out of options as they do all they can to stay alive. Chief executive officer Gary Herbst is now making a plea to the board of supervisors to look for financial  options that might be able to help the hospital district.

Herbst gave the board of supervisors a thorough rundown of the state of Kaweah Healths outlook at their Feb. 28 meeting. Herbst explained some of the actions the hospital is taking in order to get “back in the black.” However, as the hospital continues to lose money on every patient on MediCare and MediCal, they are near the end of their rope.

Herbst is currently lobbying for financial help at the state level, but he came to the board of supervisors to ask them to consider other local options. He asked for a possible sales tax measure, a parcel tax, any extra funding from American Rescue Plan Act (ARPA funding) or CARES Act funding and general support for the hospital.

“We have developed a plan to help us recover from this financial condition, we obviously will not continue to exist if it continues going in that same direction,” Herbst said. “We will just become another one of those headlines.”

Herbst said in the meeting that the saying “too big to fail” is all but true. Yes, Kaweah Health is the largest district hospital in the state, but that does not keep them from feeling the financial effects every other hospital is feeling. One of the largest issues according to Herbst can be attributed to MediCare and MediCal/MediCaid reimbursement rates. According to the CEO, MediCal reimburses Kaweah 74 cents of every dollar and MediCare reimburses 75 cents on every dollar. That leaves the 25% and 26% remainder for the hospital to make up on each patient.

“So literally, we incur a 26% loss, where revenue is short of expenses for every single MediCal patient that we take care of. It’s not much better on the MediCare side,” Herbst said.

Herbst went on to explain that the combination of MediCare and MediCal makes up 73% of all patients taken care of in California hospitals. In addition to that, Tulare County and the Central Valley as a whole, have one of the highest poverty rates in the state, making it even more of a challenge for hospitals in the area. Over half of the patients seen at Kaweah Health are a part of either MediCare and MediCal.

“Unfortunately, Tulare County with its poverty and socio economic challenges, we actually have the highest MediCal enrollment of any county in the state of California,” Herbst said. “60% of our residents that live in Tulare County are covered by the MediCal program.”

With a loss as large as 25%, hospitals will in turn to “cost shifting” where they look to the remaining 15-20% of their commercially insured patients to carry all the weight. With the revenue from that small percentage, Kaweah is expected to generate a profit, reinvest in equipment, services and facilities and cover for the losses incurred from MediCal and MediCare.

“So unfortunately, Kaweah Health is not immune to these forces,” Herbst said. “In fact, I think we’re more severely impacted as is Sierra View, as is Tulare Hospital as is virtually every hospital in the San Joaquin Valley because of the socio economic challenges that we face.”

District three supervisor Amy Shuklian asked if the reimbursement amount was a set number across the board. Herbst’s answer was that for the most part all the rates are set with little room for negotiation. He said of the 250,000 MediCal beneficiaries who live in Tulare County, they are either enrolled in Blue Cross or Health Net.

Kaweah loses $8 million each year on the outpatient side of the MediCal population according to Herbst. If the hospital were reimbursed the total of what they pay for each patient, Herbst said revenue would increase by $30 million.

“There is that much disparity,” Herbst said.

The level of disparity is one of the reasons Herbst has been advocating at the state level. The reimbursement rates for MediCal have not been increased in 14 years. And on the MediCare side, the reimbursement rates have not been touched in 30 years.

Shuklian sits on the California State Association of Counties board and offered to advocate for an increase. However, this particular issue weighs heavier on Tulare County because of the dramatic numbers of those who are on MediCare or MediCal. Whereas other counties throughout the state may be feeling effects in other areas.

District two supervisor Pete Vander Poel said he is and will continue to support local hospitals by continuing to speak with legislators about upgrading the MediCal reimbursement rates. He also said he is open to exploring different tax options as well.

“I would be open to exploring further the possibility of a sales tax or a parcel tax, just so that we can make sure that we’re maintaining what is so critical to the people that live in Tulare County being able to obtain their care close to home well into the future,” Vander Poel said.

In addition to reimbursement rates, Kaweah is struggling in other areas. Herbst pointed out some of the cost issues hospitals are experiencing. From 2019 to 2021, labor expenses rose by 16%, pharmaceutical costs grew by 41% and medical supply expenses rose by 19%. The numbers for last year are not available yet, but an increase is projected in some of the areas.

“I can’t wait to see what happens in 2022, because I think it’s going to be even worse, particularly on the labor side,” Herbst told the board.

Now and Then

Herbst proceeded to explain the dramatic change Kaweah has gone through since before the pandemic as a community at risk. They have gone under a $136 million cumulative operating loss from March 2020 to December 2022. Kaweah’s loss, however, is not as extreme as some of the other hospitals in the state. In addition to the already mentioned primary reasons for the dramatic loss, revenue was also reduced due to state mandated closure of elective surgeries; heightened costs of contracted workers; and inflation.

However, one positive for Kaweah was the partial offset of the $136 million loss by receiving $61 million in federal Provider Relief Funds. Before the pandemic, Kaweah Health was a financially healthy hospital. They had over 140 days of what is known as “days cash on hand” in June 2019 and that number was lowered to 83 in December 2022. Days cash on hand, is how many days the hospital could cover daily operating costs before running out of cash according to Herbst. He told the board that as of Jan. 31, that number was only 73.

As a direct result of the drop, the hospital’s credit rating has also taken a dive. The hospital was downgraded from an A3 credit line to Ba1 which is a non-investment grade. As a result of the downgrade the hospital has been denied by over 50 banks for a line of credit that is necessary to meet bond covenants. Kaweah has however not defaulted on the $218 million in revenue bonds held by investors, and are still able to make premium payments for now.

Following the disarray, Herbst said Kaweah Health has had to come up with a plan to get themselves back in the black and all the layoffs and closures are a part of that plan. They have laid off over 130 employees with 90-100 more coming in March. They also closed a 22 bed skilled nursing unit that Herbst said was full most of the time. However, it was too poorly reimbursed by MediCare and MediCal that it would lose $2 million a year.

“I will tell you, one of the most gut wrenching, heartbreaking things I’ve ever had to do is stand in front of 50 nurses, LVNs, certified nursing assistants and tell them that we are closing this facility and you’re all being laid off,” Herbst said. “As you would imagine, they all started crying. But they weren’t crying because they were losing their jobs. They were crying for their patients.”

Kaweah also had to close an outpatient neurosurgery clinic and diabetes education clinic. Additionally Herbst explained that they are now forced to limit elective surgeries for MediCal patients to save money.

“Many hospitals, most hospitals restrict the number of elective surgeries they’ll provide to the MediCal patient population, but we’ve never done that until now,” Herbst said. “We can no longer afford to subsidize those losses because of the state of underfunding.”

The last thing the company has done is implement a 10-20% cut in pay for the hospital’s leaders, directors and executives. This is also the second year the hospital will not be able to match employee 401k plans.

Future Concerns

Another issue Kaweah is facing is California seismic requirements. Herbsts said half of the beds in Kaweah’s facility are in non-compliant space and will not be able to be used for acute inpatient care past Jan. 1 2030. As a result, before the pandemic hit, Kaweah had plans to begin the process of completely renovating the hospital’s downtown location. However now as a result of the financial hardships, Kaweah simply cannot afford to begin those plans.

He told the board the cost of a replacement tower is estimated at $730 million. Herbst also said that 40% of all California hospitals are not compliant and it will cost $150 billion for all California hospitals to become compliant. In a letter to the governor, Herbst mentioned the need for an extension for the completion date.

As a further result of our current financial crisis, our plans to achieve the state’s mandated seismic compliance by the year 2030 have evaporated,” Herbst said in the letter.

In addition to those costs looming over the heads of Kaweah Health executives, the potential increase in minimum wage is also present. There was a recent legislative proposal put forward by the state assembly to set a $25 minimum hourly wage for all healthcare workers. Even though the majority of nurses are making over $50 an hour, there are additional employees who are necessary to the ecosystem of a hospital that would also fall under that category.

“A housekeeper, a dietary worker, those that work in the laundry, are all incredibly valuable, important parts of our health system and we couldn’t provide patient care without them,” Herbs said. “But we cannot afford to raise their pay to $25.”

Herbst also said a big concern still hovering over the heads of most hospitals is that of the cost of contracted workers. He said since the pandemic, they have had to spend $95 million on contracted workers, and even though the cost per hour has gone down, they still are paying $125 an hour versus around $50 for a non contracted nurse.

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