Kaweah Health approves budget with unprecedented $11.2 million loss

Skyrocketing cost of labor, massive purchases of personal protective equipment and the loss of elective surgeries forces the hospital district to approve its first budget deficit in its 60-year history

VISALIA – Similar to the virus’s effect on the human body, COVID-19 has taken a toll on hospitals and weakened their financial health over the last two and a half years of the pandemic. 

That was evident on June 29, when the Kaweah Delta Health Care District (Kaweah Health) Board of Directors approved the public hospital’s 2023-24 budget projecting an operating loss for the first time in Kaweah’s 60-year history.

“Sometimes during unprecedented times, organizations have to take unprecedented action,” CEO Gary Herbst said during a news conference with reporters on June 30. “Last night was very exemplary of that statement.”

The new budget, which became effective July 1, projects an operating loss of $11.2 million for the fiscal year and it comes on the heels of a projected $17.9 million, COVID-driven operating loss for the fiscal year that ended June 30, 2022, even after factoring in nearly $18 million in federal relief funding through the CARES Act and American Rescue Plan Act.

Herbst said the health care district could have delivered a break-even budget but that would have required making cuts to employees. Instead, the district decided to match 100% of employee retirement plans, freeze health care premiums paid by employees and any other out-of-pocket employee expenses, worth an estimated $23 million, which would have turned the district’s finances from red to black.  

“We are a compassionate and grateful organization. We want to continue to be a great place to work and we want to continue to attract and retain the very best employees to care for our community,” Herbst said. “The South Valley is already underserved medically, and we decided against closing services and further reducing access to care, even if some of those services lose money.”

Kaweah Health’s forecasted loss assumes it may see an additional $3 million in federal COVID relief funds in 2023-24, although that is not a certainty as Congress has not yet authorized additional payments to hospitals. The state of California does not currently provide hospitals with financial support due to the pandemic, and has not increased reimbursement to hospitals for Medi-Cal patients since 2014. Approximately 40% of the patients treated by Kaweah Health have Medi-Cal coverage.

“While we have cash reserves to cover a bad year or two, it reduces our ability to invest in facilities and equipment, as well as our ability to borrow money. These losses are not sustainable in the long term,” Herbst said.

Kaweah Health is not alone as hospitals across the state prepare for budget deficits as more than 51% of California hospitals are losing money. According to a recent study conducted by national consulting firm Kaufman Hall, California hospitals lost more than $20 billion in 2020 and 2021 due to COVID. These losses were only partially offset by $8 billion in federal relief funds.

“The pandemic has taken a devastating financial toll on the majority of hospitals in California,” said Carmela Coyle, president and CEO of the California Hospital Association. “In communities throughout our state, many hospitals are struggling to provide services for all who need care. It is going to take years for hospitals to recover from these losses, and the truth is some hospitals may not survive.”

The losses are largely attributed to decisions made in California during the pandemic that forced hospitals, including Kaweah Health, to:

  • Shut down non-emergent surgeries and procedures (resulting in significant loss of revenue);
  • Bear the increased cost of caring for COVID patients with only a nominal increase in Medicare payment and no increase in State payments for patients covered by California’s health care program for low-income children and adults (Medi-Cal);  
  • Cover unprecedented increases in employment expenses related to contract labor – most notably travel nurses – wage increases to maintain competitive pay, overtime pay, extra-shift incentive bonuses and the State’s increase in minimum wage; and,
  • Purchase unprecedented quantities of personal protective equipment, supplies and medications at exorbitant prices.

Kaweah Health expects operating revenue to increase approximately 4% during the coming fiscal year, but the increase in revenue is more than offset by unprecedented increases in employment expenses. Last year, Kaweah Health’s employment expenses were an estimated $454.1 million which exceeded budget by nearly $64 million. Next year, employment costs are projected to increase an additional $2.7 million. These dramatic increases in labor costs have occurred in many respects due to a severe shortage of healthcare workers, requiring Kaweah Health to fill these vacancies with contract labor, overtime and asking its existing employees to work extra shifts. The cost of contract labor, most notably travel nurses, has skyrocketed in recent years. According to the American Hospital Association, travel nurse staffing agencies increased their hourly rates by 213% between January 2019 and January 2022.

“When faced with challenging financial conditions, most organizations look for ways to cut costs including laying off employees or reducing offered services,” Board President David Francis said.  “But we want to recognize our employees for continuing to come to work and caring for our community.”  

Kaweah Health has reduced its open positions from 800 to 550 in the last few months and the public hospital said it is hoping to fill more through aggressive recruitment both locally and across the nation. Here at home, Herbst said the hospital has entered into two significant partnerships to recruit and train nurses. College of the Sequoias has developed a new nursing course for those needing to work to pay for college. Thirteen slots were given to Kaweah Health to send those wanting to become licensed vocational nurses and medical assistants to school at night and on the weekends. The hospital is also partnering with Unitek College, a private university specializing in healthcare and nursing. The college has eight campuses, seven of which are in California, with the nearest campus located in Bakersfield. Under the program, Herbst said students would be able to do their classroom training from home and their clinical training at Kaweah Health, meaning they would not have to leave Visalia to earn their bachelor’s degree in nursing. Those graduates will then enter into a contract agreement to work at Kaweah Health for several years in exchange for covering the cost of much of their tuition, books and fees.

“It is really the labor component that is the biggest cost,” Herbst said. “Our single biggest asset is our workforce. We just have to stay competitive.”

In order to help close the budget gap this year, Herbst said Kaweah Health will look to efficiencies. He said the hospital is working on ways to improve patient flow by streamlining intake, conducting faster triage and discharging patients sooner once they are healthy enough to go home or to a skilled nursing or rehabilitation facility. Herbst said the hospital will also look at consolidating vendors to negotiate better prices on medications and supplies and become a destination for elective surgeries. Herbst pointed out Kaweah Health is already affiliated with the Cleveland Clinic, the nation’s top rated cardiovascular surgeons, and top doctors at the University of Southern California for urology and head and spine surgeries. 

“We want to grow back into prosperity rather than to cut ourselves into prosperity,” Herbst said.

Kaweah Health’s losses last year were absorbed by the organization’s cash reserves, similar to a savings account. The district has 120 days cash on hand, or enough money to operate the district for a quarter of the year without additional revenue. This same approach would be taken if the projected losses occur in the next fiscal year. 

“Kaweah Health has a long history of great financial strength,” Herbst said, offering suggestions to community members who want to help. “I would encourage people in Tulare County to support your three local hospitals: Kaweah Health, Sierra View Medical Center, and Adventist Health Tulare. There is excellent care available locally, meaning that you don’t always need to leave the community to seek care.  Concerned citizens can also reach out to their Federal and State representatives to let them know that your local hospitals need their support during these unprecedented times,” Herbst said.

The deficit budget will not affect Kaweah Health’s credit rating, a major factor in determining the interest rate on the hospital’s bonds. Moody’s, the nation’s largest risk management firm, reaffirmed the district’s AAA rating, one of the few hospitals in California to receive such a high rating. Herbst said the budget complies with all of the debt agreements with bondholders and investors but is operating right at the edge of those ratios. If the district were to underperform financially in the next year, it could affect the interest rate of any new bonds or debts the district might issue but would not affect interest rates for previously issued debt. Herbst said that scenario was highly unlikely given the worst days of the pandemic are likely behind the healthcare industry.

“We aren’t expecting that COVID is going to play a real significant factor in the coming year,” Herbst said.

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