Assembly Budget Subcommittee No. 1 on Health

Good afternoon. We will begin the Subcommitee 1 on Health hearing for today. Before we begin, I want to address an issue that has been brought to my attention. It has been mentioned that the panels that were invited here today only provide the perspective of the hospitals. Due to the fact that hospital financing impacts access and quality, health care and affordability for consumers, we have decided to split this issue into two hearings.

The alternative perspective on the issue of hospital financing will be addressed at a later time in a separate hearing and should be filed noticed very soon. So with that, I want to welcome everyone here today. This is Assembly budget Subcommitee Number One on Health, and today's oversight hearing is on hospital financing and hospital closures in California. As we are all aware, the financial sustainability and vitality of hospitals in California has become increasingly challenging over the past several years.

As you may know, financial instability in hospitals began before the pandemic, making the pandemic especially challenging for hospitals, a storm that, unfortunately, several hospitals could not weather. Furthermore, decreasing birth rates combined with increasing cost of maternal care is leading to an additional crisis in the form of hospitals closing labor and delivery units because they cannot continue to provide this care.

It is imperative that the state and Legislature closely track the impacts that hospitals and maternity ward closures are having on access to care, particularly those who already have the least access, such as our low income communities and rural Californians.

The goals of today's hearing include to, first, better understand the causes of financial distress in California's hospitals. Second, to better understand what opportunities and obligations the state has in supporting hospitals. And third, to better understand what opportunities and obligations other key stakeholders have, such as managed care plans, local governments and the hospitals themselves. With that, I will see if any of my colleagues on the dais have any opening remarks.

Just very quickly. Thank you, Chair. Thank you for doing this informational hearing.

As someone that represents the Central Valley Assembly District 27 and really the heart of where we saw the challenges of hospital closures with Madera Hospital closing, I want to thank you for really allowing us to shed light to the issues and also the opportunities that do exist to move forward to ensure that communities like mine that have the most vulnerable types of patients have true access to care in the State of California, where we've tried to increase access, but looking at really the closures as a big component and a gap that exists in the access piece.

So thank you so much, Chairwoman, for inviting me to be here today and look forward to hearing the different perspectives on this issue.

Thank you so much for joining us. So let us begin now with our first speaker Kristof Stremikis, director of market analysis and insights for the California Healthcare Foundation, who will be providing an overview of the financial health of California's hospital industry. Thank you so much.

Thank you very much for excellent pronunciation. You nailed it. And thank you for being here. Assemblymember Soria, it's nice to see you again. My name is Kristof Stremikis I'm the Director of the Market Analysis and Insight program. As Dr. Weber mentioned at the California Healthcare Foundation, CHCF is an independent, nonprofit philanthropy dedicated to meaningful, measurable improvement in the healthcare delivery system here in California.

We are particularly focused on improvements in the healthcare delivery system, serving low income Californians and others who are not well served by the status quo. On the second slide, which you'll see over here on your right, you'll see that I have a pretty hard job this afternoon. In no more than 15 minutes or so, I'm going to try to do three things. Number one, provide a very broad overview of the hospital sector within California.

Number two, using some of the data that's reported up to, audited and published by the State of California, give you a general sense of what that data shows about the financial health of the hospital sector broadly. And then number three, leave you with no answers, which may be a little bit disappointing. But really highlight what I think some of the key questions and considerations are for you.

Because while my job to do all of that in 15 minutes is very, very difficult, your job to make these public resource allocation decisions is even more complicated. And we'll get to some of the reasons why that's so complicated in just a minute. So on the next slide, and we'll skip over that one because I just talked about it. Let me provide some, just very basic information on the hospital sector here in the State of California.

I looked last night, and as of last week, I think it's March 2, there are about 411 general acute care hospitals operating in the State of California. They are in all 58 counties, save for Alpine and Sierra. Now, for our purposes this afternoon, I'm going to be largely focused on a smaller subset of those facilities that have been designated by the Department of Healthcare Access and Information, as comparable.

This excludes, and this is important, this excludes Kaiser hospitals, some of the state long-term care and long-term psychiatric and long-term care facilities. But for purposes here this afternoon, this is the start or the start of one clump of hospitals that have1 been designated comparable. Now, even though those are comparable, the very next point here is there is significant variation and we see this significant variation in organizational control among these hospitals.

Fortunately, we have several here with us today that can talk about these different ownership types, which have really important ramifications for the patients that they're seeing, the services that they're providing, and the financial streams that they rely upon and receive to provide those services. So you may have heard some of these examples, like city and county hospitals. Zuckerberg San Francisco general is one in my neighborhood. Riverside University Medical center is down in the Inland Empire. District hospitals are another important type.

We have someone here today from Kaweah Delta. They are a district hospital that has important ramifications for the financing streams that they rely upon. There are investor-owned and for-profit hospitals throughout this state. High Desert Medical Center, Pacifica Hospital of the Valley down south. Those are important. When we're talking about hospitals, we're talking about many different types, including nonprofit hospitals such as UCSD, which is also on a panel this afternoon.

So on the next slide, at a very high level, when we're looking across this industry, before we jump into the finances, I think there's really three things that jump out to me when I look at it. Number one, it is essential, I think California's hospitals have long been and continue to be an essential component of our delivery system. It is really impossible for me to overstate the heroic nature that this sector, the people that work in this sector, exhibited during the COVID-19 pandemic.

And there is clearly a role for hospital care within our delivery system going forward. It is an essential part of our system. Number two, it is a diverse part of our system. I just mentioned the tremendous variation in organizational control. There's also tremendous variation in geographies that are served. We have 59 rural hospitals in this state that has implications for how hospitals are paid, the type of care that's provided, what the health needs are in those communities. There is tremendous variation in population served.

There's 135, what are called disproportionate share of hospital in the state of California. Those have distinct funding streams and operational considerations. There are different missions in different hospitals throughout the state. We have teaching hospitals. We have hospitals that are focused on research. The real point here is there is variation in complexity across the industry.

I'm going to do the best I can to provide a high level, but one thing to always remember is within this industry, we really need to go hospital to hospital to understand financial health, what that facility needs to remain viable, and what the needs are of that community. The last high level takeaway when we're looking at the industry is that it's evolving. It's evolving, and it's interdependent with the other infrastructure in the community in which it operates.

What I mean by the evolution, part of that is the type of care that's provided in hospitals is changing. We are in the middle of a decades long shift from inpatient to outpatient care due partly to advances in medical technology, due to other things like patient preferences and economics. And so in some ways, care is moving outside the walls of a hospital, while at the same time, things that are happening outside those walls. Bigger forces are sometimes pushing care and patients back into the hospital.

There could be underinvestment in certain communities when it comes to primary care and ambulatory care resources. When that happens, people could show up in the emergency room and be receiving primary care there. There could be underinvestment, or there may be insufficient workforce in post acute discharge locations. I don't know, but I would suspect you're going to hear talk this afternoon around patients that are staying in hospitals because there's no place to discharge them.

That doesn't serve any of us, that doesn't serve hospitals, that doesn't serve patients, that doesn't serve the State of California. We need to make investments in that infrastructure as well. There may be underinvestment in social services. There may be places that, or there may be reasons or people coming to emergency rooms that are better treated elsewhere that are coming and have no place to go after they're ready to be discharged. And so the point here is, care is changing and it's interdependent.

And so as we're thinking about support to the infrastructure that we have now, we also need to be thinking about the system that we want to have and the other things that are happening outside of a hospital.

On the next slide, we start to get into what is sort of at a high level, what we're talking about when we're talking about hospital finance in the State of California, a good place to start, or a place that I always start, is just total revenue flowing into this sector. One of the reasons policymakers often focus on it is it's a lot of money we spent, according to the federal government, in 2020, about $405 billion on acute care services.

Roughly 40 percent of that, or $150 billion flew into the hospital sector. Those financial resources, it's important to note, just like any place in our economy don't just show up. It's just not money out of thin air. Ultimately, all those dollars that are flowing into this sector come from Californians in the form of taxes that they're paying, federal, state and local taxes, premiums and out-of-pocket expenses that they're paying directly for care, and the foregone wages of those that have employer-sponsored insurance.

And so this is a lot of money. It ultimately all comes from Californians. On the next slide, then, we start to do a little bit more of a breakdown. So within this broad sector, this broad amount of money, we can do some illustrative breakdowns or based on data that is submitted to the Department of Healthcare Access and Information, we have a pretty good sense of how much revenue is coming from different payers within the state of California.

And on this slide, you'll see roughly 60 percent of the net patient revenue now to hospital, are going to hospitals in California is attributable to Medicare and Medical. The red slice of that pie chart, I will say when you go back, particularly over the last 10 years, is growing. And so the take-home message there is Medi-Cal is an increasingly important payer when it comes to the financial revenue that is flowing into our hospitals.

On the next slide, we're going to lift up one more sort of slice of the onion here, and then for purposes of time, we're going to have to call it or we're going to have to move on. But within these lines of business, if I leave you with nothing else, let me leave you with the sense that there is tremendous complexity. There is tremendous complexity, and it's very complicated and difficult to untangle.

But those things that we do untangle leave us with a few sort of conclusions. This is an illustration of how financing flows to hospitals or the sources of revenue to hospitals within the medical program. What you'll see when you look there is, there are base payments from managed care plans for inpatient and outpatient care. There is payments directly from the state for inpatient and outpatient care through the fee for service program. And then there are supplemental payments.

The chart that you see here shows that at a national level, and this comes from the Medicaid Payment Advisory Commission, about 25 percent of the hospital's revenue or participation in the medical program comes from these supplemental payment streams. We have these things here in California. The number is actually higher. The proportion is actually higher in California. And you'll hear from DHCS and the public hospitals later. There are some hospitals where their supplemental payment streams account for more than 50 percent of their Medi-Cal revenue now.

And so what I take all that to mean is it's very important when we're talking about Medi-Cal payments and Medi-Cal rates, which is an important discussion that I know you're going to hear a lot about today. It can be more meaningful to talk about Medi-Cal revenue. What is the total amount of money that's flowing into a sector or a system, and how does that compare to the costs? Rates is just one part or one pixel of a bigger picture portrait here.

On the next slide, then, I'm going to conclude with sort of a very basic insufficient, but the best I could do overview of hospital finance and sources of finance, and importantly, the complexity in finance, and move to what we know, what we all can know, using data that's collected, audited and reported by the state of California.

When we look at that data, when we add up all the revenue that's coming in from all the different payers and look at all the expenses that are paid out, we see some really interesting and important things. I'll direct your attention to the bottom row here. It's labeled net income, and it says pretax. And then 2019 is the first year. Again, this is looking across all hospitals.

When we do that, what we see is roughly $10 billion in profit if it's a for profit system, and net income if it's a nonprofit system. This is the year before COVID, $10 billion. In 2020, the first year of the COVID pandemic, obviously, you'll see that number fall. It's still positive. It's still positive, $5.3 billion. You move to 2021. Again, this is all the revenue and all the expenses throughout the whole system. You see a significant rebound back to about $9 billion.

And then in 2022, its precipitous drop down to around $800 million. And then 2023 is where we'll leave sort of this slide, a very important caveat here. This publicly available state data only runs right now through the third quarter of 2023. If we assume, though, that the last quarter looks like the first three quarters of 2023, we're roughly projecting about $5 billion in net profit, or net revenue for the sector as a whole.

I want to say two really more important things before we conclude with some of the important policy questions and considerations on the next slide and the next slide after that. Because in the interest of time, we'll go to this very important point here. Number one, wide variability. What I just showed you were expenses and revenues for the sector as a whole.

It is extremely important to note that within the sector in any given quarter, there are facilities that are experiencing a positive margin, sometimes a very positive margin, and facilities that are experiencing a negative margin and sometimes a very negative margin. And so you'll see that in this chart. You'll see the bottom quartile, the worst performing hospitals on a financial margin in any given quarter, and you'll see the top quartile. A note on this variability, though, it goes even deeper than that.

When we look within these lines, what these lines represent are a certain number of hospitals, about 70 or 80. These quartiles of performance are not stable. And so a hospital from one quarter to the next is moving in and out of a quartile of this one measure of financial performance. That has important implications and just makes your job a little bit harder when you're trying to think about how you target revenue.

The other really important thing to note here is we have done all sorts of statistical analysis and found things that I, quite frankly, surprise me personally quite a bit, and we keep finding them. One of them is the organizational characteristics that would lead a facility to have particularly high or particularly low performance on this measure. And there I will tell you, we can't find statistical correlations between things like urban and rural status.

We don't find statistical correlations between the number of medical discharges and financial performance. That really surprised me. That surprises folks when I talk to them today. And I will tell you, it's real. It's something we found. It's something that other folks have found. On the next slide, the last sort of takeaway from this overall sort of financial discussion is I have just shown you one thing, which is financial margins.

Financial margins, again, are one part of a broader picture that you need to look at when you're evaluating financial performance. And we'll hear from HCAI later. I know that team looked at some of these other measures when they were making decisions about the distressed hospital loan program. I think some of these things are intuitive. If you look at income and expenses in any given quarter, just like you would for a family or an individual, that's really important information. But equally important is how much financial revenue.

What are their reserves? What are their savings? What can they draw from when they go to the capital markets? How much money can they raise? These are all important things. And just add to the complexity here, which is like, we can look at margins. Margins are important, but again, it's just a small piece of an overall picture.

Let me conclude then, in the interest of time, I'm kind of brushing up against my 15 minutes, but I want to leave you with maybe two or maybe three questions, and those are on sort of the next slide. I would say there's maybe two really key things here, to reiterate. Number one, one of the levers available to you is around Medi-Cal payments and Medi-Cal payment rates. And there is a question about whether Medi-Cal payment rates are too low or too high. That is very complicated.

I'm very glad the cepartment is here to talk about it. I'm sure you will hear perspectives from all the hospitals here about where those rates are. Again, I would remind you the discussion about rates is helpful. What's even more helpful is the discussion about revenue. I think it's even more helpful to understand, and I wish we all had more information about underlying costs. Increasing revenue into the sector will undoubtedly improve a balance sheet if costs are held equal.

That is a huge assumption that we know from the literature and the research that's been done here. The amount of money that's flowing in or those payments impact the underlying costs. We can talk more about that in Q&A if it would be helpful. But that is an important thing to consider. If we're purely chasing a more favorable payment-to-cost ratio, we may never catch up. We may never get there, because again, the numerator, the payments, impact the costs.

On the next slide, sort of the last slide, there's one final sort of question. The last bullet is perhaps the core of what you're wrestling with here, which I think is providing additional funding or public subsidies. A good use of public resources. My goodness gracious, that is a difficult question, and I don't have the answer for you. What I do have are some of the important considerations that I know you're wrestling with. Again, this is a very important part of our healthcare delivery system.

It's not the only part of our healthcare delivery system. It is interdependent with the other parts. If you have public resources, you have choices about how you invest those. For some communities, it may make sense to direct those to hospitals. For other communities, it may make more sense to direct those to primary care providers or investments in behavioral health. Those are really difficult decisions. If I leave you with nothing else, you have a really hard job. There's a lot of variability.

It's really hard to make sort of blanket policy. You have to go community by community, hospital by hospital. I'll end there. I just about made it in 15 minutes. I'm sorry, that was more. I'm happy to answer any questions.

Thank you so much. That was a lot of information to digest, but thank you so much. Before I turn it over and see if any of my colleagues have any questions, one of the things I do want to state, and I should have stated it from the beginning, is that we will have public comment at the end of this hearing, after all of the panels, is when we will actually have public comment. So with that, I will see if any of my colleagues have any questions.

I just have one question. In one of your slides that denoted the income margin analysis between 2019 and today, so there was a major drop in 2022. What is your conclusion in terms of why we saw such significant drop in the net income?

Yeah, 2022. If we go back there, there's a couple of reasons. So, number one, the amount of revenue that was flowing into hospitals decreased in 2022. Net patient revenue, or the amount of money that was flowing in for patient care increased. But the amount of money, what's called non-operating revenue, which is all hospitals in the state of California have at least some of this. This is money that flows into the facility, sometimes returns on, like, an endowment rent from leasing, like a doctor's office.

These non-operating revenue sources fell dramatically in 2022. And so there was an overall decrease in those revenues. While patient care revenues increased, non-operating revenue decreased. And the other thing that happened was expenses, which I know you'll hear about expenses around staffing and supplies. Those were up. Those began to moderate. They're higher, but they've moderated in 2022. But it's no more complicated than decreased revenue and increased expenses.

And when you add all those things up again across all these hospitals, you see roughly $800 million in profit or net revenue.

Thank you very much. You were talking about the graphs. I want to call to your attention this particular graph, and you made a comment that you were surprised in terms of a comparison and contrast, and the comparison was the same. Can you elaborate on that, please?

I think when I look at that graph, there were two things that were maybe one thing that's really important and one thing that really surprised me. The thing that's really important is there's instability in the composition of the performance. And so, more directly, if you have a poor margin in any given quarter, that doesn't predict whether you'll have a poor margin in a subsequent quarter or had a poor margin in a previous quarter, that's sort of an important part.

Those low performers depicted on that graph are bouncing around. And then the very surprising thing to me, personally, was looking for correlations, statistical correlations between Medi-Cal discharges and this total revenue margin performance. We couldn't find any statistical correlations, and we looked everywhere and talked to an awful lot of folks that was surprising to me. What I take from that, though, is it is possible. There are hospitals, absolutely, that are losing money on Medi-Cal. It is also possible to make money on Medi-Cal.

There are decisions that can be made about cost structures, and not everyone has perfect control over everything. And it is possible the data bear it out. There are hospitals that are seeing a high proportion of Medi-Cal patients and are profitable.

What hospitals can you talk about, if you would, please? Because the reason why I asked, because I represent Martin Luther King Community Hospital and I can't remember the exact percentage, but most of all of the care that comes in are people who can't pay as Medi-Cal. And that's what we all know, that the reimbursement is extremely low. And so I need to understand and compare and contrast what hospitals receive a great deal and still are profitable.

Yeah. So, fortunately, we live in California, and so we all have access to public data on revenue and expenses that, again, is reported to the Department of Healthcare access and Information audited and then published. And so we can look at individual hospitals and see what their revenue margin is in any given quarter and overall, throughout the year, this gets very complicated, very quick, but we can do breakdowns by revenue attributed to Medi-Cal and expenses attributed to Medi-Cal. And we can all do that.

And I'm happy to follow up with a list for your office afterwards.

If you would, please. That would just help frame some questions that I have.

And to be clear, there is variation within this finding, too. And so when we look, there are also hospitals that are not receiving Medi-Cal revenue that is commensurate with their costs. What the sort of the overall conclusion here is, there's variation wherever we look.

Okay. I would just say that I would love to get that data, because if you're a hospital and you're surrounded in a low income community, it's going to be extremely hard. You're going to rely on Medi-Cal patients coming in and those individuals receiving the services and then trying to find a profit in that. I just find that hard. But I would love to see the data.

Absolutely.

Thank you.

I do want to echo the concerns of my colleague Gipson. I would have appreciated if you would have come here prepared to enumerate those hospitals that you have concluded have medical reimbursements, cost controls, apparently, that create the opportunity then to have more revenue than their expenses. So I would like to have that information as well, particularly along with my colleague Soria. We have in common a big concern for the Madera Hospital.

And so when they come up, we're going to have some conversations about that as well, because I do think that the court in that particular case is moving forward in a good way. I've seen the American Advanced Management proposals. They have a history of intervening with hospitals similar to Madera and have, I think, the resources necessary to get that done.

But at the same time, if you're going to make references to some hospitals that have the similar kinds of problems with reimbursement that Madera had, and yet predominantly Medi-Cal patients, it would be very helpful to know what those hospitals are. I'd like to review them, particularly in the context of the Madera hospital, to try to figure out, is there a pathway with respect to revenue, the AAM proposal, what the bankruptcy court is going to do.

There is some hope that Madera can open in a few months, and the court is moving forward to do that. We look forward to that. But at the same time, I really want to know what those hospitals look like that you just enumerated and get into the finer print, because if there are hospitals with high medical patients, but have found a way to manage cost, that would be a very helpful set of data for what we're going through in Madera.

We do not want to open that hospital again, only to find that it closes again. So, we really do need to understand that cost and revenue matrix and compare and contrast hospitals that make it work and hospitals that have failed. Thank you.

Appreciate the points and appreciate having representatives from Madeira here, because, again, I think you need to go to hospital by hospital. There are stories there, there is reporting that's been done, voluminous reporting on the situation within Madera, and there are different opinions. And so I'm really glad, about why that hospital was struggling, and so I'm really glad they're here to provide their perspective.

Well, I want to thank my colleagues for their questions and thank you so much for being here. Like I said, you put a lot into a short amount of time. Hospital financing is extremely complicated, and I think one of the reasons why you've seen so many questions over this one variability graph is because a lot of times the conversation around hospitals in distress have to do with the payer mix.

And so the fact that when you all ran the data, you saw no statistical significance when you put in these different variables, is, I think, shocking for all of us up here, because it goes against the things that we have been told and some of the things that people may have potentially seen in their communities. However, to your point, there is differences in how different hospitals manage their money, what they choose to invest in, and some of their revenues and things like that.

And so it would be very helpful, not only when you're looking at Madera, but really every hospital in all of our districts, because they're all facing some significant challenges. And from a Legislature point of view, we're trying to figure out what we can do, how we can improve it. I know, and I say, like, one size doesn't fit all, but we have to figure something out that can be used up and down the state.

One of the other things I found surprising was in the hospital income margin analysis. And so in your graph, it shows a $5 to $6 billion profit. Is this correct overall? Yeah, in 2023.

The last quarter of 2023 is consistent or looks generally the same as the first three quarters of 2023. It looks like the industry as a whole, again, is on track for around $5 billion in net revenue or profit.

So how do we reconcile this ongoing profitability of hospitals as a whole when we're hearing that hospitals are in such financial distress?

This is so challenging. And again, it points, I think, to the variability. And so you mentioned, you're talking about public policy for the state as a whole, which is what you need to do. And when it comes down to it, I think it really takes hospital by hospital, community by community analysis. There are hospitals that are in communities that don't have the resources they need in order to meet the needs of that community. That is absolutely true.

And in order to, you have to look and find it. And it's just, again, I see variability is sort of the number one thing that jumps out to me. I wish there was one characteristic or one option that would kind of fix it or put everyone on sound financial footing and just don't see that. I really see tailored solutions in local communities.

So I know you are here at the California Healthcare Foundation. Do you have these kind of conversations with similar individuals in other states? Are they having the same challenges? Do they have the same variability that you're seeing here in California.

With folks nationally, folks that are involved at a national level, and folks that are involved in other states? Yes, I would say this is a topic of conversation that is happening across the country. There are other elements of this conversation. We didn't touch on labor and delivery units and sort of rural maternity. I think we have some panelists later today that probably will touch on that. That is another issue that absolutely nationally has some traction and folks are wrestling with right now.

Well, thank you so much. We're going to go ahead and move on to our second panel, which will be sharing experiences and perspectives of private hospitals. We will hear from the following speakers. Karen Paolinelli, CEO of Madera Community Hospital. Dr. Elaine Batchlor, CEO of Martin Luther King Community Healthcare. Todd Hofheins, I'm sorry if I'm pronouncing your name incorrectly, COO of Adventist Health. Jim Suver, CEO of Ridgecrest Regional and Scott Evans, CEO of Sharp Regional Hospital.

And we will begin with Madeira Community Hospital.

Can you hear me okay? How about there? Is that better? Okay. Hi. Good afternoon. My name is Karen Paolinelli, and I am the CEO at Madeira Community Hospital. I've worked at the hospital for almost 35 years, but has been the CEO for about five years, maybe a year and a half before the pandemic hit. But anyways, I want to thank you all for allowing me the opportunity to address this Committee here today.

And I am here to speak about what led to the closure of Madeira Community Hospital back in 2022. To just give you some background on our hospital. Madeira Community Hospital is 106 bed acute care hospital located in the Central Valley, and we have been serving our community prior to our closing for 51 years.

Although we were able to survive the past 51 years, it was not without challenges. Some historical challenges we faced were not having really enough money to really invest back into our infrastructure.

But in 2018 and 2019. I'm talking about this because it did really affect us as a pandemic hit. But we moved forward with three projects for our hospital. It was greatly needed, and they were expensive projects. And the first one was a relocation of our pharmacy.

And we were doing that because there was regulatory changes that were, in effect, that we needed to do to meet the new standards. And the second project was to replace one of our air handlers. This air handler.

Well, all of our air handlers were 51 years old, as old as the hospital, if you can imagine that we had replaced one already. We were on our second one. They were very costly. And the third project was a radiology remodel to replace a very aging CT scanner.

And it was almost 14-15 years old and a 25 year old fluoroscopy X ray unit. And so, as you can see, these are really important projects for a hospital. But we went forward.

We had enough money and reserves in our bank to do these projects. And so I'm giving you that history, because who would have known that just the next year, the pandemic would hit?

Prior to the onset of COVID-19 pandemic, we managed to maintain a semblance of financial stability with good reserves for a hospital of our size. When we used to do our cost reports, they'd always say hi. Compared to other hospitals, Madeira is doing very well.

Our payer mix was made up of primarily governmental payers, and being a small, independent facility, we were able to survive it. But it was always really tough financially. Prior to the pandemic, our debt was $5.6 million.

And the reason we had that debt because we built a new facility plant some years back, and we were still paying for that. And then 2020 came around, and with it, the pandemic that changed everything for Madeira.

We were amongst the first in the valley to receive a patient with COVID and our small hospital was hit very hard, and the financial storm of COVID followed. Really, there was nothing that could have prepared our small little hospital for the three year devastation, that financial devastation that COVID left us with. I really speak about COVID today because at where I sit today, the COVID impact, to me, how I sit today, has been long forgotten.

Are there some sort of a disconnect with how it really affected hospitals? Before I get into how our hospital got into financial ruin, I want to talk about how important our hospital was to our community during the pandemic.

I believed all of us who worked the front lines of COVID will forever be changed because of that experience. And I have nothing but praise for our frontline workers, nurses, doctors who supported our hospital and our community during this difficult time.

Our hospital stepped up during the pandemic and served our community in any capacity that we could. And although we recognized the financial strain early on, we continued to do what was needed, and that was to save lives.

As we finished the first year of the pandemic, there did not seem to be an in sight in the volume of patients coming into our hospital with COVID And in the beginning of 2021, our board of trustees proactively made a decision to look for a partner.

We knew we were not going to survive this. We began working with St. Agnes on an affiliation that would span for a long 13 to 14 month process. Part of the agreement with St. Agnes was to maintain all of our services, because surely we would have changed something if we could have.

But part of that agreement was to maintain those services as we worked through that affiliation process and St. Agnes worked on its due diligence.

St. Agnes, at the beginning of the affiliation loan, Madeira Community Hospital, $15 million while the process played out, 5 million was to pay off the debt that we had, the $5.6 million debt. We were no longer meeting the covenants of the loan, and we needed to get that paid off.

The other 5 million was to finish the projects, those three projects that I talked about, so that we could get those completed, because they were important for any hospital and they would be important for St. Agnes in the future. And the other 5 million was there just in case. Just in case Madeira needed it for operations.

But the affiliation process took a very long time, and as our financials continued to drain, the deal fell apart and St Agnes backed out, which left Madeira with no ability to continue to operate. And we had to close our doors.

So I just want to get into some of the other challenges, because we all know that story. It's been all over the news. But what really were the challenges faced by Madeira during the pandemic, which really led to our financial troubles?

As the pandemic raged on, we found ourselves increasingly reliant on travel nurses, a costly but necessary measure to meet the demands of the overwhelmed hospital with all the COVID patients that were there.

California hospitals are required to maintain nurse patient ratios, and this was not waived during the pandemic. Honestly, the patients were so sick, we had to have higher ratios. We needed more nurses just to take care of the patients.

As the year 2020 ended and we started year 2021 with a new variant of this horrible virus, our staffing crisis continued on. And I specifically remember how difficult it was to hire staff in almost impossible. The second year of COVID all the hospitals were competing with one another.

We were all raising and having to offer higher salaries to our nurses and hospitals. We were even competing on hiring travel nurses, and again, the state still was mandating these ratios, which we needed.

We understand that, but they did also understand the challenges we were facing. We were really struggling to find nurses, to even hire even travel nurses, and paying high dollars for those. The state did come in to help by contracting with some travel agencies, but when the nurses got sold back to the hospitals, they were at $200-250 an hour, and when this happened, it seemed like lots of our nurses started leaving to go work to be a travel nurse.

They got comfortable with it after the second year in COVID, and they left, and we were relying pretty much all, especially in our very high acuity areas, state contracted travel nurses. I do believe the travel nurses salaries, by far affected our hospital's financial health the most.

We had more than doubled our inpatient and tripled our ICU patient load. And at times, we had 30 ICU patients, but only a 10 bed ICU.

We had closed surgery numerous times, and we used the PACU for an ICU, and our ICU patients took up the majority of our ER patient beds. Many of these patients were on ventilators, and they were there for a long period of time. We needed more of everything to care for these patients, and our biggest increase in volume was in the ICU and the ER, and these are the costliest patients to care for.

And hospitals were full everywhere, and there was no option for transferring a patient and there was no option to say, we're full. We don't have nurses to care for these patients. You took everybody that came through your door.

In fact, the state had a requirement that if hospitals had an empty know, we had to report every day any empty beds, IC or med surge beds. We had to take patients from other hospitals. And Madeira did get transfers in from as far as way as San Diego.

There was a shortage of supplies, which caused the increase of the cost. It was three times or more in excess. I mean, it was hard to find anything. Healthcare supplies at the time. Medications that needed to treat COVID were very expensive and labor intensive. So more nurses to care for those patients.

Because of the surge of patients, we needed more equipment, more beds, more gurneys, more respirators, HEPA filters, tents, just to name a few of the types of equipment we had to go out and buy that we weren't expecting.

Surgeries were canceled to protect patients and staff from COVID Surgery areas were converted into surge spaces to take care of imploding number of COVID patients. On top of all this, we had issues with our sterilizers. In the midst of the pandemic, our sterilizers failed.

We had to replace our sterilizers. It was very costly. It shut our surgery down once again, and all of our non urgent patient outpatient care was postponed. We were all doing that to actually use the nurses inside the hospital and also to keep patients safe and our employees safe. So our hospital outpatient income dwindled. The increased cost imploded. But reimbursements really didn't remain the same.

We did not get an increase in our reimbursement during this time, Madeira have been told, is one of the lowest paid hospitals in California. In regards to reimbursement, we talk about a lot about equity and healthcare, but in order to continue to serve the people hospitals need, equity and reimbursement. The cost of providing services to the underserved communities like Madeira, really does cost more.

So when you ask, how did we get here today in a Chapter 11 bankruptcy and a closed hospital, I want you to understand that if it wasn't for the pandemic, Madeira would not be closed today. It comes down to this.

Reimbursements during the pandemic no longer covered the cost of providing the care. We began the pandemic with a 5.6 million debt, and after closure in Chapter 11 bankruptcy, we have over $30 million of debt.

Hospitals, by far, were the most impacted by the pandemic, and it will take years for hospitals to financially recover. And we're still filling it. I mean, if we were open, we would still be filling it, but we definitely felt it in 2022. We need fundamental changes in reimbursement so that we do not end up here again. I agree with Mr. Patterson.

And today there is a renew hope with American advanced management and Dr. Singh and his team, who stepped up when we really lost hope to ever have our hospital opened again. We are now on a pathway to reopen our hospital. I do want to say that this would not have been possible without the state's Hospital Distress Loan Program.

I can't say enough about and how grateful Madeira Community Hospital is for this program. And I really personally want to thank Esmeralda Dasoria for all that you've done.

And Senator Caballero, I mean, we are so very grateful. We do feel like this program is going to allow us to reopen our hospital, and it has aided, I know, in preventing other hospitals from closure. So I thank you. I really want to thank you now and again for allowing me to share our story.

I was told to talk for only five minutes, and I'm probably over that. But I really appreciate you allowing me to be here today.

Thank you. We will now go to MLK community healthcare.

Good afternoon, Committee Members. I'm Dr. Elaine Batchlor, CEO of MLK Community Hospital and Health System. Thank you for the opportunity to speak to the Committee today and to share my hospital's experience and perspectives.

And I guess I could know just ditto to the COVID experience that you so eloquently described that was similar at our hospital as well. MLK Community Hospital is a private hospital serving a public mission.

We were created to care for the historically underserved community of South Los Angeles, a community whose lack of access to health care was among the reasons for the 1965 Watts riots. A unique public private partnership with the County of Los Angeles and the State of California created our hospital.

In the original partnership agreement, the county and the state committed to keep the hospital financially sustainable. The private partner, MLK Community Hospital, committed to provide quality care and training for new clinicians.

Our patient population is approximately 60% Latino and 40% African American. 96% of our patients are either publicly insured or uninsured. Only 4% have commercial insurance.

This gives MLK Community hospital the worst pair mix of any private, independent, freestanding general acute care hospital in California. Some of the causes of financial distress for MLK Hospital are shared by other hospitals. California's low Medicaid provider payments, high labor costs that we just heard about, and inflation.

With the failure of revenues to rise in concert with few commercial patients to subsidize publicly insured patients and inadequate payments for high volume emergency care, MLK Hospital is simply no longer financially sustainable.

By the close of last year, we were providing over 120,000 emergency department visits a year, over three times the volume originally envisioned by our public partners. The high volume of emergency department visits is a consequence of a lack of access to outpatient services in our community.

Adding to our challenge is the fact that our state funding methodology, developed in 2010, excludes MLK from the disproportionate share program that subsidizes other safety net hospitals in the state.

Instead, MLKCH relies on county and state Medicaid supplements established through AB 2599 and I'll note that over 50% of our revenues come from supplements. More than a decade later, we know this the funding model that created our hospital has not kept pace with changes in our environment.

Despite our challenges, we continue to operate to the quality standards we promised. Evidence includes consecutive five star CMS quality ratings, an A rating for patient safety from the Leapfrog group, and specialty certification in diabetes care from the Joint Commission.

The loan Institute ranks MLKCH number three in California and number 12 in the nation for charity care and Community investment. I'm particularly proud of our nurse midwife obstetrician collaborative labor and delivery model that has earned MLKCH seven consecutive years on the California maternal quality care honor role.

Our commitment to our mothers of color is needed now more than ever. The closing of maternity units at nearby for profit hospitals has resulted in 40 fewer beds for labor and delivery, impacting approximately 1800 women in south Los Angeles.

In a community already lacking obstetricians, the services MLKCH continues to provide are critical. MLKCH has incurred large losses for the past two years, and we are surviving by drawing down financial reserves from earlier years.

A state distressed hospital loan allowed us to remain open through this past winter. A commitment from Los Angeles County is providing us with limited additional time, while the MCO tax has the potential to add future revenue through increased payment for hospital services.

The timetable and allocation of these funds have yet to be announced. By today's calculations, we anticipate running out of cash by 2025. The Committee has asked whether there's a correlation between the number of medical patients and financial distress in private hospitals.

And perhaps what we should be talking about instead of the number is the payer mix, because you could have a high number of medical discharges. But if you have a high number of commercial discharges they offset the losses. This is certainly true in our case, where we have very few commercial patients to subsidize the losses for medical.

Without increases in medical payments, particularly for outpatient and emergency services, my hospital will deplete its reserves and become insolvent within 12 to 18 months, potentially leaving South Los Angeles again deprived of quality health care. Thank you.

Thank you. We will now go to Adventist Health, followed by Ridgecast Regional, and we'll end with sharp regional hospitals.

Thank you for the opportunity to speak with you today and represent peach and my hospital safety net colleagues a little bit about Adventist Health. We are an integrated health system with 22 hospitals in California, 300 affiliated clinics, community clinics, hospital based clinics, and rural health clinics.

We have a commitment to provide the full continuum of services to the communities that we serve. We're driven to serve the most vulnerable communities in the state. 60% of our system is rural.

We are often the sole provider in the communities that we serve due to our commitment to serve the underserved population. Over 75% of our patients receive governmental funding, either through medical or Medicare, and we have less than 20% that have commercial insurance. We are part of the safety net hospital system.

My safety net colleagues and I have dedicated our are dedicated to serving the state's expanding medical population. The hospital safety net includes disproportionate share hospitals.

More than 50% of the patients that they serve are medical patients. These are the poorest 35% of the hospitals in the state, 152 out of 434 hospitals. These hospitals include community dish hospitals, children's hospitals, public hospitals, and nondesignated public hospitals.

Adventist Health has eight disproportionate share hospitals in California, serving from Los Angeles to Willett's.

The hospital safety net also includes those remote and rural hospitals that are often the only healthcare provider for miles and without whom there would be large areas of our state that did not have healthcare coverage.

Community safety net hospitals must serve the most vulnerable communities, and safety net hospitals are the most vulnerable hospitals in our state. In 2022, the safety net hospitals lost $864 million from operations, and nearly two thirds are operating at a loss today.

This is particularly driven by a few realities that have recently hit number one, rising cost and inflation. Expenses since the pandemic have increased by an estimated $2.8 billion during 2022. This is due to an increase in supply cost, pharmaceutical cost, and labor cost, particularly driven by the contract labor.

As you've heard from a number of my colleagues today, these losses incurred by safety net hospitals are in the billions and there is no relief in sight.

In the report that was provided by Christophe in the California Healthcare Foundation, they identified that there has been an improvement for a group of hospitals across California. That may be true when you look at a broad group, but when you cut that up and really look down into the detail, it will show that the disproportionate hospitals have a nearly $900 million loss.

In bold contrast to the group of nondish hospitals, those with larger commercial books of business have a gain of $3.2 billion. As a group, our safety net hospitals have not recovered and continue to struggle. Insufficient reimbursement 86% of the care provided by the community safety net hospital is to patients insured by governmental sources.

As you have heard from us today, these rates have been frozen and failed to keep pace with the growing cost of providing care. Medical enrollees have increased by more than 70% in the last decade, yet there has been no adjustment for inflation or for the complexities.

Finally, I want to touch on the complex care or the complexity of the patients that we are seeing. Safety net hospitals care for our state's most vulnerable and are frequently their only source of care.

State data shows that over half of the homeless patient discharge are seen in California's safety net hospitals. When these patients enter our safety net hospital, they require considerably more social, emotional, behavioral and other care support, and the reimbursement does not cover this support.

There were a couple of questions that were asked for us, and I want to touch on a couple of those. We were asked whether there is consistent correlation between the amount of medical business and the financial distress in private hospitals.

The answer is yes, and data will show that in 2021 and 2022, those hospitals that filed bankruptcy were all safety net hospitals with a much higher proportion of medical. This include Watsonville, Beverly Hospital, Madeira, Pipeline and Hazel Hawkins.

We were also asked if there is a difference between the financial distress seen with for profits and not for profits. What I would suggest to you, it is not based on the tax status of the hospital for profit or not for profit. It is based on the constituency or the mix of the patients that they are seeing. The hospitals struggling the most tend to serve the highest level of medical and Medicare beneficiaries with very low levels of commercial.

The hospitals not experiencing significant levels of distress are those with high levels of commercial coverage. Defining safety net hospitals should be by those that they serve. It's a critical step to our public policy. We've heard a couple of things today and a couple of references as it relates to labor and delivery. As we explore why labor and delivery services may close, we want to highlight that this is a serious problem for rural safety net providers.

If the delivery volume is not adequate, is not high enough, it is unsafe for the hospitals to maintain that care and they cannot maintain the providers with the skill set level to do so. We simply cannot continue the programs that are falling below that from a volume perspective.

Policy that seeks to address labor and delivery must keep this unique rural issue in mind as it seeks to solve that the continued structural funding of medical has greatly impacted our financial safety net and every true safety net hospital in the state.

It impacts our ability to do more in the community, to provide more stability in our workforce, to address those outstanding seismic requirements, and to keep and grow our much needed services. Key rates have been frozen as expenses have spiked.

Labor and supply costs have continued to grow. Just in the past two years, we at Adventist Health have reported $390 million of losses due to these conditions. This isn't sustainable for us and it isn't sustainable for the safety net. Every Californian deserves access to equitable care.

The communities that suffer from unequal access to care and health status share a common obstacle toward achieving an equal chance at a healthy life. That common factor is a lack of resources caused by underinvestment and systematic underfunding of health care.

Our safety net hospitals are dedicated to serving these communities. We are part of the communities. As you continue to do your work and bring equity to every community in our state, we hope that you will look at the safety net as your partners to serve these communities. Thank you.

Good afternoon, and thank you for inviting me to speak before your Committee. I'm Jim Suver. I'm the CEO at Ridgecrest Hospital. I've been there 16 years. I can vouch for all the other stories I've heard about what these hospitals went through during Covid. Ashley Artemis started with two earthquakes in 2019, and although our building was fine, the loss in revenue from being shut down when we made repairs dipped into about four million dollars, our reserves.

Prior to the earthquake, we had around 100 days cash on hand. Today, as I'm talking to you, we have around 15 days on cash on hand, with almost 15 days of cash lost because of the recent cyber breach at UnitedHealthcare. And we are certainly doing whatever we can to get through this. And like the other hospitals, I've been very proud with what we accomplished through Covid. The nearest hospital is two and a half hours away.

And even if we had wanted to transfer, there was no one that had any beds. And if I can share with you one brief story about how even a small hospital had a role in this, As we had a 35-year-old father with three children come to our hospital with severe Covid, we were unable to transfer this gentleman, so we kept him for two weeks. Fortunately, we had arranged an intensivist service through telemedicine.

That was not a reimbursable, but the right thing to do for our community. After two weeks, we were able to get him to a Los Angeles hospital. He had a lung transplant. Every month, this father of three sends the hospital a picture of him with his family because he's doing fine. And this little teeny hospital in the middle of the desert was able to do that. So the earthquakes did take our reserves down, but we were still doing okay.

And as most of the other speakers have mentioned about Covid, we were using a lot of traveling nurses. And, in fact, last year, I am proud to say we went from 55 traveling nurses to five. But that came at the expense of increasing wages. And, in fact, looking at my wages over the last three years, they've gone up roughly 30 percent. And much of the phenomena that was mentioned to you, I lost some of my long-term staff because traveling became very appealing financially.

We've gotten them back. But one of the things that's happened to us is what I call the post-Covid world of economics. Wages never go down, and I am still paying essentially the wages that I had to do to get through with Covid. I'm paying premium for supplies like I was doing through Covid, but like the other hospitals have spoken to you, my revenue has actually reverted back to 2019 levels.

Yes, we are cost-reimbursed for Medicare, but with sequestration adjustments and other cost report anomalies, we don't even get our costs for Medicare. Medi-Cal has already been discussed, and we suffer from that on actually two fronts, both the acute care side, but my hospital actually provides the bulk of ambulatory through our rural health clinics. So the majority of primary care in town, pediatrics, obstetrics, and many other specialties are housed in my hospital because any medical group that has tried to come in into our remote community has not made it.

In the past, we were able to have a margin on some business that would offset the losses on Medi-Cal, but with the expenses so high, I finally realized I don't have a margin on anything anymore. Not even my skilled nursing facility is contributing anymore because we actually wait two years for our rates to be adjusted back to costs with no retroactivity.

The nursing home alone has now gone from a two million dollar contribution to overhead to over a three million dollar negative hit against overhead. Many of our insurance contracts have caps, some as low as one percent with the average being around three percent. Even if I attempted to raise rates to get myself out of this, no one would pay. Medicare will not pay me more. Medi-Cal will not pay me anymore, and I'm capped in what I can get from commercial insurancers.

Being a small, remote hospital, we don't necessarily have the larger power that maybe a health system would have. We are actively in negotiations now, but I made one of the most horrible decisions in my career last year, and eight days ago, we delivered our last baby at Ridgecrest Hospital.

I could no longer afford the labor and delivery unit because it was actually interfering with my ability to keep the emergency room open and I had to weigh impacting a few very well-deserving mothers, of which half are Medi-Cal, or having an emergency room open for our community. We have an additional mission that we support China Lake Naval Base, the largest research institution for the Department of Defense in the country. Our closed room labor delivery has even impacted their ability to recruit and retrain scientists.

I am not sure how we're going to end up and at one time I thought I could make it through 2025 and we were a recipient of the Distressed Loan Program and I appreciate everyone that was involved in that. We were not able to get the full amount we asked for and so our projections are off about how long we can do it, but there is no one behind us once our cash is exhausted, and we have talked to our mortgager and let them know that we actually probably may default on our mortgage to do that.

We've suspended all of our work on the seismic items that we need to do. Half of our hospital is not ready for 2032, and that project is another 45 million dollars. Prior to the earthquake, I actually could have written a check for that. Now I'm very grateful when we make payroll.

I think the challenges that we have in a rural community is our population is growing at a very slow rate, around two percent at best. We've also done some very innovative things, such as an accountable care organization that has actually spent a lot more on prevention, such as calling our frequent flyers and making sure that they're taking their medication, et cetera, to actually keep them out of the hospital. But our volume is also going down as well, and it's not a market share problem.

It's much like our challenges that Todd mentioned with labor and delivery. When I started at Ridgecrest, we were doing 60 deliveries a month. Now we're doing between 25 and 30 and we have the same 99 percent market share. People are having fewer children. However, my reimbursement on many things at my hospital are on a per-patient basis. The nature of a hospital is to be there 24 by seven by 365, having that standby capability. Standby capability, with the exception of Medicare, is not paid for.

And if anything, we realized during the Covid endemic that having hospital beds that were ready to take patients was very, very important, even if they weren't being used at the time. But really, if I had to explain to a business professor what the problem with my hospital is, I am staffed to be providing care all of the time at a constant level, but when I'm paid on a per-patient basis, I have a huge gap, and that has destroyed our bottom line and destroyed our cash flow. Thank you very much.

Good afternoon. Thank you for allowing me the opportunity to discuss patient access with you, and thank you to my colleagues who were sharing their stories today, all of which are too familiar to all of us in health care. My name is Scott Evans, and I'm sorry to have my back to you. I am the Market CEO for Sharp Regional Hospitals. Sharp HealthCare--when people think of Sharp HealthCare, I think they think of our metropolitan campus, more often than not.

I represent sort of the other side to--the other story to Sharp HealthCare, which are regional hospitals where we serve about two-thirds of our Sharp HealthCare patients. Sharp is the largest provider of care in San Diego. We have about 30 percent of the inpatient market share. But when you look at the Medi-Cal market share, we have closer to 38 percent of the Medi-Cal market share. So we are certainly picking up our fair share of the underserved patients in the Medi-Cal market.

We have four campuses and seven hospitals on those four campuses. My region does include two safety-net hospitals, one in Dr. Weber's district in the East County and one in the South County with very high volume of Medi-Cal patients. We are proud certainly of our role as a safety-net provider, but there are really some very strong headwinds in maintaining access to care, as Medi-Cal reimbursement certainly does not cover the cost to provide care.

As a health system, we've been able to offset that over the 70 years that we've been in business. It certainly is becoming increasingly harder as each of our hospitals are not faring as well as they had. When we look at Sharp Grossmont, it is really the only hospital provider in East County. It is a public-private partnership with Grossmont Healthcare District for more than 30 years.

Of course, safety-net hospitals deal with the most complex of patients when it comes to discharging, and I think that we forget about that sometime. When you look at Sharp Grossmont Hospital, it discharged more than 1,000 unhoused patients last year. That's 46 percent of all of Sharp's unhoused discharges across the organization. It is a 542 bed hospital with 46 behavioral health beds in it as well with the full range of services.

So this is a safety-net hospital that literally provides every specialty that can be provided, which certainly comes at a cost to us. It is the busiest emergency department, single-site emergency department in San Diego and one of the top busiest in California with an emergency room payor mix of 51 percent Medi-Cal patients.

And we know that patients are not just accessing the emergency room care or accessing the ED for emergency room or emergency situations, but it's also because that's where they go to receive care that they can get nowhere else, that access to specialty care that they can only get by coming into the emergency department. And we see that time and time again.

We spend actually millions of dollars to providers to provide that specialty care coverage and to make sure that our Medi-Cal patients receive specialty care in the emergency department. At Sharp Chula Vista, of course, we're a border city hospital with about 63 and a half percent Hispanic patient mix, underserved population as well as smaller hospital, 349 acute care beds there, and like Sharp Grossmont Hospital, about 50 percent of the emergency department does have Medi-Cal coverage. Specialty care access is even more challenging in the South Bay.

And as a result, patients have higher complexity of needs, which becomes especially challenging at discharge. And what you'll see there is even a higher length of stay in those patients that do seek out Sharp Chula Vista as we work to connect them to specialists that can also follow their needs post-discharge, which is very difficult and challenging to do.

In the very near future, Sharp Chula Vista will be the only provider of labor and delivery services within the South Bay with pending consolidation of one health system and closure within the labor and delivery service of another. This is again particularly challenging. We think from a capacity standpoint, we are there to manage those patients. And so, as folks had said, volume has decreased over time.

We're about 60 percent full on the labor and delivery floor and so we definitely have some capacity to absorb, but this will lead to other specialty services that need to be provided to families, et cetera, and so we remain committed to providing that full gamut of experiences, but it certainly is becoming increasingly more difficult. I just want to touch on one point as well.

I want to talk about what we do with operating income because even from the first session, when I hear the operating incomes of hospitals--and it sounds quite large sometimes, not to us, but it does sound quite large--we just want to be mindful that it is with that operating income that we have to supply all of our capital needs, including seismic work that needs to be done, replacements like CTs or MRIs and sterilizers and all of those things.

And so when we talk about an operating margin of a health system as large as Sharp HealthCare being like one percent, we have huge capital needs that are required just to maintain services and replacement in facilities that are more than 60 years old, including that seismic work at Grossmont Hospital and at Chula Vista Hospital. Both will require significant seismic work that needs to be done.

When we talk about, Dr. Weber, Sharp Grossmont, which is in your district, that work, with the addition of the fact that we run at about 95 percent occupancy there, is more than a 700 million dollar plan. So when we talk about a hospital that's making a few million dollars on the bottom line, we still need to pay for that capitalization. And so I think that's just another important point to note.

For the last four years, as I'm sure with all of my hospital colleagues, Sharp's expenses has far outpaced our system's revenue. And while Sharp revenues have increased between 2019 and 2023, an average of about six percent annually, the expenses increased about seven percent, with labor costs being the primary driver of expensive increases with seven percent annually.

And so it certainly is a challenge, but we are committed to providing service as part of a system which other stand-alone hospitals that serve the same population that we serve are not always able to have the backing of a health system. But it's at this point where we can see the future when we look to other hospitals providing care that are safety-net hospitals as well, there is a limit to the resources. That's all.

Thank you. Thank you to all of my panelists, and I know everyone has questions, so I will start with Assembly Member Gipson and then Assembly Member Patterson and then Assembly Member Soria.

Thank you very much. I got real depressed, and if I had hair, the follicles would have already fallen out. But with each one of your reports, I've tried to listen attentively and take a lot of notes up here and want to ask some questions because I wanted to find out is there a correlation? Is there a correlation between those communities or those hospitals that receive Medi-Cal and communities of color?

Yes.

That, I'm very concerned with because it seems like--that's why I was getting up and asking questions--to find out, is there a correlation here where you have a hospital like Martin King Community Hospital that serves Black and brown, and let me go on record. You know, I remember Martin King Hospital, number one, and saw it closed, service my family and community in which I grew up in, saw it close. It was heartbreaking. Now it's opened up. It's like the phoenix rising from the ashes, and I'll be damned if I'm going to let it close again. I did say damn, didn't I?

I think so.

Yeah. And so it's concerning to me because I saw people die as a result of Martin King Hospital and have people having to travel to the next closest hospital for emergency services and care, right? And this question is going to be to Dr. Batchelor after I finish my statement. You know, Dr. Batchelor articulated, you know, the awards that the hospital have received and why do we find ourselves--I heard Modesto Hospital said, 'if it wasn't for the pandemic, then we wouldn't'--what was it--Madera, excuse me, Madera--'we wouldn't be in the situation.'

Well, my question is--let me ask her first--what happened to the PPE money to come in when we were faced with a pandemic? Because you said that the pandemic, if it wasn't for that, then we wouldn't be in the situation we're in right now, and a lot of money was given both on federal level and the state. So my question is, how did that not help prevent the hospital from closing? That's my first question to you.

And then while you're thinking about the response, Dr. Batchelor, in terms of with the money that Karen Bass, when she was Speaker Bass, when she was a Member of the Legislature, set aside for Martin King Hospital for these very reasons, why is that not helping today? And then if Martin King Hospital closes, who's going to help those mothers in labor and delivery and deliver those children and those babies? So, Madam, if you don't--Madam Chair, I hope you don't mind me asking. Okay.

So I'm going to try to answer each of your questions, and I'm sure my colleague will have some answers, too. A lot of hospitals were in distress during the Covid pandemic because of all of the unexpected expenses associated with Covid. For a couple of years, the federal government provided support, but then the government support stopped, and I think that's when the hospitals started down the path that they've gone down.

So it was after the CARES Act money stopped that hospitals began to have really serious financial challenges. One other thing I'll say about the CARES Act money is that the money did not go proportionately to the most disadvantaged hospitals. So you'll recall that it was started under Trump, and it was allocated based on hospitals net patient revenues. So that means that more affluent hospitals got more money and less affluent hospitals got less money, which doesn't really make sense, but that is part of the story there.

You're asking about Assembly Bill 2599, which is the bill that Karen carried that established the state Medicaid supplement for MLK Community Hospital, and I think the most simple way to answer that question is that the volume of patients that we are taking care of today was not anticipated at the time that the financial model for the hospital was created. So when that bill was carried, they projected 35,000 emergency visits a year, and there was no supplement built into the bill for those emergency visits.

The supplements were all allocated to inpatient care. Fast forward. We are now taking care of 120,000 visits a year, losing money on each visit, and the Medicaid state supplement that was established through 2599 does not supplement emergency department visits. So we only get paid the very, very low rates that come through the managed care plans and the Medicaid fee-for-service program. So there's a huge gap there, and it amounts to tens of millions of dollars a year in losses for our hospital.

So it's not a dollar for dollar kind of system, and are you getting paid on time because you're putting out the services and you billing and waiting for--am I understanding that is an issue as well?

That is absolutely an issue, too. So that has to do with Medicaid Managed Care, and all of the struggles that we have in getting paid in a timely manner, it's both a timeliness issue and a denial issue and a lack of timely authorization for services as well. So all of those struggles with managed care plans are negatively impacting hospitals and their revenue.

Thank you.

She pretty much said it all. I think we all can agree with what you just mentioned, but for Madera, the CARES Act money, we did get money, and we were very grateful at the time when we got it, but it fell short for what we were spending during the pandemic, so it just wasn't enough. Again, I think it was the way it was disproportionate, shared with different hospitals based on different factors, as she mentioned. So we did get some.

I do remember, too, just waiting for more money to come in so that we could save our hospital, and I remember waiting for the ARPA funds to come in, and no money was allocated to hospitals with those ARPA funds. I remember at that time calling up anybody I can talk to to find out why were hospitals forgotten when that money was allocated out? And never really got an answer for that, but it just fell short to be honest. There just wasn't enough to cover the losses.

Okay. One question, if I may. Dr. Batchelor, tell me, why isn't Martin King Hospital like a DSH hospital? Can you explain?

Yes. So this hospital opened in 2015, and at that time, all of the DSH funds had been allocated to other hospitals. And the leaders, the public leaders at the time who were involved in getting the hospital opened and developing the financial model did not want to get bogged down in a fight with all of these other hospitals in trying to take some of their DSH money away to give to a new hospital that was just opening. So instead, they came up with this idea of creating a separate program that was put into AB 2599 to provide supplemental funding for the hospital.

Thank you very much. Did you have a--

I was just going to add--and you raised a great point--things weren't healthy and stable before. It was a delicate system before, and I think that's kind of what you heard a number of us talk through. And there were sequestration, there was trimming around the reimbursement before the pandemic. The pandemic hit. CARES Act and a couple of those things came through to help through in that period of time.

But also things like the Medicare accelerated payments came through as an add, but then got taken away at some of our most vulnerable times. So just when inflation hit in 21-22 then the takeback of the accelerated payments happened. So you saw hospitals go through this increase of expenses when they needed the cash and feeling like they were falling off of a cliff. And so what was a delicate system got exacerbated post-pandemic with the inflation. And that's what's caused a lot of this. But to your point, this started before. It was a fragile system before, and the pandemic and the inflation has just exacerbated the issue.

I joined my colleague in hearing the difficulty here. And all through this period of time, I have thought over the years about people in my area. I was mayor of Fresno for eight years, 11 years up here, my final year. And to think about those people who are not well, we say we care about the most vulnerable, and yet it sounds like we're kind of stingy when it comes to them.

I know we have a serious budgetary issue here, but I want to turn a page with respect to Madera Hospital because I think there is a real possibility here and the reason I do is several points, and I want to lay them out. One, I think that the judge made the right decision with respect to American Advanced Management. I really do.

Notwithstanding some of the concerns over that decision, I spent about 3 hours with the executives of AAM in my office in Fresno, pressing them hard on their proposal. And their proposal had a lot of information in it, and I asked very tough questions. They do have a history in our area and in California of rescuing and reopening distressed hospitals. And I was very clear on that.

And so I think that there is, because of the judge's decision, a real possibility that we have somebody that will have the resources to do it, the history to be able to do it and get it open. And why am I optimistic if we can get it open? The mix of patience. Because I had a radio station in Fresno for 30 years, I was the mayor; this area, the city of Fresno, is one of the fastest-growing cities in the state of California.

We will hit 600,000 population. Our airport, after COVID, we flew 2 million passengers. If you look at the area that is bisected by the San Joaquin River, on the south side of that river, which is Fresno county, is some of the most populated areas and some of the middle to upper middle class, and even some higher than that. And the interesting thing is that they're just a short drive away from Madera, and we also have the Valley Children's Hospital, which draws, and if they were here, they'd say the same thing, that they have a high volume of children that they care for on public assistance. But also, if you look at what is happening in southern Madera County, you have to recognize that it's becoming a bedroom community of Fresno. Significantly large numbers of some of the best home builders in our region, and they are selling out fast.

They are communities where my guess is a lot of them will be employed in Fresno, but they're right across the river. I mean, your hospital is 20 minutes from my front door. So I think if we can get it open.

And if the hospital would look at the private insurance market and how it is growing, and it would seem to me that some of the most significant developers and home builders are right next door to you, I think that there would be an interest in getting that hospital open and then marketing it to the thousands, perhaps tens of thousands. I don't know what the housing population is going to look like there, but it's going to be really substantial.

But it's not just there close by in other Madera County areas and in Fresno County. And so I think if we can first get it open. Secondly, if we can just get reimbursements up to where, if you're not making money at it, at least you're paying your bills, at least you're breaking even. And I really think that needs to be something that we carry not just in our notes and not just in our budgets, but we got to carry it in our heart.

And then I think if we can get it open and if, in fact, we have a natural accumulation of people with government insurance, there's also a large and growing private sector within 10,15,20 minutes that I don't know. If you want to talk to Mr. McCaffrey, if you want to talk to the other builders, there they are talking about this wonderful place with 14 miles of trails and all of that.

So I guess I'm basically saying, if, in fact, you need additional private insurers, there's a big market of that growing in Fresno and in southern Madera County. Let's do our part over here to help, but why don't we market to the growing number of people that are moving into brand new homes? And if we can get it open, I think it can be competitive in drawing private insurance. So I'm optimistic. I want to encourage.

I also spent a good deal of time, as I said, with American Advanced Management, and one of the things that, after I spent time with them, that I committed to do was to send their specific proposal to each member of the board of supervisors and advocate for AAM, because I really felt like they had the desire, the history, and the ability for this to happen.

So instead of sort of being ungrateful for AAM's participation, and I know we had a number of elected representatives say: well, wait a minute. But I think that the judge had something to say about that in the case of the bankruptcy, and he repeatedly asked UCSF where they had been in the past years in the hospitals closing, and also pointed to Adventists previous interest and their withdrawal there. You've got somebody that wants to be there; they've got a good history.

They've convinced me that they are really good people and that they're not just there to process and collect and spend money. They really care about their people there. I think if you combine the hospital with a growing marketplace around it and a willingness, I think of Northern City of Fresno and southern Madera County to talk about the possibilities when it opens up.

And you could be talking about the Madera, you could be talking about come across the river to bring your kids right to the valley children's. And I know community is opening as part of - is it an emergency or I'm not sure. It's a full-service hospital, but there will be a third highly regarded hospital. I think there's going to be growing demand. I think that demand will be of people with significant numbers who have private insurance along with those that don't.

And the rising tide is coming in. Fresno, our SMSA is 1,000,003. We're one of the fastest cities, one of the fastest growing regions. So now's the time to open and offer, and I think there's an opportunity to open and an opportunity to offer a competitive place, a good place. And I think that AAM will meet the challenge. So I want to encourage, let's keep going forward.

It's a matter of months, I think, if we can open under the court's expectation, and I appreciate the fact that AAM was given a fair opportunity to make their case. And I think that they have been rightfully recognized for their ability and their history and their resources. So let's get it done. Let's open it up.

We certainly are working on it. We hope within four to six months. And one of the interesting things I wanted to mention is that before we closed our hospital and before the pandemic hit, we were looking at that market, and we had actual plans, and we're working with Mr. Jones on putting urgent care out there. So it's funny that you mentioned that. So, of now, we'll talk to AAM about that and see if there's an ability to do something there. So, thank you.

Yeah. Tim or Tom? Yeah, I've known him for a lot of years. He's got a very good heart there. So I think you talked to the right folks there, and he is a mover, and he's a decision maker, and he gets things done. So when we finish here and I go back to Fresno, I'm going to call him up and say, I heard some good things about you. Just go do that.

Go do it.

Thank you. Before you call them, can I ask one question about solutions? I'm sorry, Madam Chair. What do you think that we need to be doing? I don't want to dominate at the time, but in the back of your mind, before we conclude, what do you think we should be doing or asking for as a way of trying to resolve these growing issues? So whenever.

Mr. Gipson, we need to find-

Right now, I'm going to turn it over to Assembly Member Soria.

Thank you, Madam Chair. I think my questions have been asked by my colleague here, Mr. Gipson. But I did want to just say thank you for being very honest. I do, too, share kind of the sentiment that it is a little bit of a depressing state of affairs for our, really safety net hospitals, as someone that represents a very rural district, and these safety net hospitals are the lifeline for families. And so I am very concerned.

Obviously, we've done with the Distress Hospital Loan Program what we've can to kind of give that lifeline and provide that support for the next couple of years. I think that we do have to figure out maybe flexibility in our system and figure out different solutions. And again, back to what the Chairwoman mentioned, that a one-size-fits-all is not always the answer, especially seeing what the State of affairs is, especially with these safety net hospitals. And so thank you for sharing that.

The last thing that I just want to share, and I don't know if you guys made any comments to this, but I'd like to see maybe if any of you guys could share your reaction to the first panelist who shared in terms of the lack of correlation, because that really kind of stuck with me. And so I'm just trying to figure out. Okay, so where are we at? If there is no correlation, then what is?

I thought the statement was very puzzling, and I was wondering whether he was referring just to the number of discharges or to the payer mix, because the payer mix is really important in terms of figuring out the finances of a hospital. But to say that it's not correlated with MediCaid just didn't make sense to me.

Yeah, I would agree. And it's not an urban or a rural issue. It is that disproportionate amount of Medi-Cal and Medicare. We have White Memorial in Boyle Heights. We picked up Montebello. We've got a ride-out hospital in the Yuba Sutter area just outside of Sacramento. But then we have Mendocino coast. We have Tulare Hospital in Tulare County.

We have Dameron in Stockton, every single one of those hospitals that I mentioned is significantly distressed because of the governmental payer mix that they've got, the disproportionate amount of Medi-Cal and Medicare. And so it isn't an urban versus rural setting. It is a disproportionate amount of those governmental payers and a very vulnerable population in each one of those areas, whether it be urban or rural, in those settings. So, that did not make sense to me at all. And I appreciated Mr. Gipson's questions of him.

And I don't know if you also mentioned, which is very tragic, is that labor and delivery will be closing in June in Tulare, which... I was born and raised in Tulare County. Seeing Lindsay Hospital close, where two of my youngest siblings were born, and then now 20 minutes away from where my family lives, seeing Tulare close, I'm like, what is left standing? Visalia Kaweah Delta? And I'm like, I don't even know how they're doing given the fact that they've also just received the Distress Hospital Loan.

So very concerning. I think we have a lot to do. Chairwoman, thank you so much.

Well, once again, I want to thank all of our panelists.

Hospital closures, labor and delivery unit closures are extremely concerning because as we try to improve the health care and health care outcomes of all Californians, as we recognize the fact that we need to really start focusing on eliminating many of the disparities that we see along racial lines, along socioeconomic lines, the closure of these hospitals, these closure of the maternity wards, are going to do nothing but the opposite of what we are actively trying to do.

And so as we try to improve things within our education system, our transportation, our environmental justice, to improve the conditions in which everyone lives, to ultimately impact better health outcomes, we also recognize that if people do not have access to hospitals, to a place where they can safely deliver their babies with qualified individuals, we are truly, truly taking a step back. So I really appreciate all of you being here. I do have a few questions that I'll start, and I'll start with Madera Community Hospital.

Thank you so much for being here. I know this has been a very challenging few years for you all, but you stated something that talked about equity and reimbursement. Can you please elaborate on that a little bit more?

Well, as you know, maybe you don't know, but all hospitals are reimbursed different. I mean, we may serve the same patients, like, let's just say, Madera and Fresno, and patients that we may take care of in Madera, and if they go get services at Fresno, they may. I don't know how much their reimbursement is, but we do know that it's higher than Madera's, and it could be upwards of 30% more for that same patient for that same service.

So, it really depends on how much leverage you have to negotiate a good contract with a payer. And to me, that doesn't quite seem fair for the small rural hospitals, independent hospitals. We have no leverage. We have no other bigger hospital to help us get good contracts. We really don't even have the ability to hire some sophisticated people to come and help us as consultants to get better contracts because they cost a lot of money, too, which we don't have.

And so it just doesn't seem fair. And it really opened my eyes when we were going through the affiliation process and the attorney general staff was looking at our rates and our reimbursement, and he said, or his staff said, we're one of the lowest in California. And so that matters. That mattered a lot for us when we went through this pandemic. And, like I said, prior to that, we had very small margins. It was very hard to reinvest into our infrastructure, but we made it.

Somehow, we made it, and it was because we were always very tight and conservative with how we spent money because we had to be. And it really isn't the way to run a hospital, to be honest. You do need to have some margins. You need to be able to reinvest. You need to be able to pay your people fairly. The people that we serve. We do serve a huge Hispanic population. We are not considered a rural community, but our patients there deserve to get the care.

We're there because we want to care for our community. And we have a huge Hispanic population, a lot of medical, and we embrace that, and we love serving our community. We had a lot of rural health clinics, and we were the safety net of that community. We had over 23 different specialties in our rural health clinics. Patients didn't have to go far.

In fact, we had patients coming as far as Bakersfield to Madera to get their specialty care because they could not get it in other places because they had Medi-Cal. So, access to care is really an issue. And so I think that we understand how important equity is, but we also need to understand to serve this population that we serve, and many of them are farm workers with no health care insurance, we also need to have equitable reimbursement.

And I think that we need to talk about that more and more because I do hear that a place like somebody told me a story about Cerdar-Sinai, and their reimbursement for Medi-Cal was so much greater than anybody else's in California. I don't know if it's true, but just for instance, if it was, any differences in the reimbursement rates from county to county really matters, especially for the people that you, us, you know, lots of times we need interpreters that cost more money, lots of time.

We need extra supplies because patients come and they don't have any resources. They don't even have a house to live in. And so we're providing them with extra things that are not reimbursable. It just costs a lot more money, a lot more education. We have to see them back more often because they don't understand how to change, maybe their dressing or how to take their medicine or give their insulin shot. So there is just so many more needs.

And we just are asking that if you can really change, has to be, there's got to be change with reimbursement and the models and how it's set for hospitals to get paid because it's just not working. It hasn't worked for a long, long time.

Thank you. And along those lines of Medi-Cal, and know we recently just expanded access to Medi-Cal, yet we have an increased reimbursement rates across the system. So how are you all envisioning this expansion potentially impacting your individual health care systems?

I think you hit on the primary issue that we're all concerned about and that is continuing to add more patients to the system and not expanding participation by providers or reimbursement by providers. I think I heard someone call California's provider payments in the, you know, the Mississippi of payment. So we are out in front in terms of expanding coverage and expanding the scope of services that are covered with things like Doulas, Housing Navigation, and other important social services.

But we aren't providing adequate reimbursement for medical care for the providers. And I think that the program is really an illusory benefit if you have an insurance card, but you can't get access to the services that are supposed to come with that card. So I think we really do need to reform the structure of the program to provide equitable. She used that word, equitable, equitable payments.

It really isn't justifiable to pay providers less for taking care of a Medicaid patient than taking care of a Medicare patient or a commercially insured patient. And as Assemblyman Gipson pointed out, a disproportionate percentage of our communities of color are dependent on Medi-Cal and are getting separate and unequal health care. And I think, as a state, we can do better than that.

We expanded coverage without expanding access. And I think that's really what we're seeing, is the access is either not being met at all or it's coming through the emergency rooms at a much more acute incident or episode. And so it's stressing the system, even though it was after the right thing of getting that coverage. But it's not working as intended because of the access issues.

What is it that we can do from a legislative standpoint to keep patients out of the hospital?

Well, I think one thing that can be done is to raise the rates that Medicaid pays for outpatient. You know, now I'm going to take off my hospital CEO hat and put on a physician medical group hat hospitals receive supplemental payments for Medicaid services. We heard about that. Outpatient providers, physicians, and practice don't.

So they live off of the inadequate rates that Medicaid pays for outpatient care, for prevention, for disease management, for all of those services that are needed to keep patients out of the emergency department and out of the hospital. And I think in our system, we've leaned into the patients in the hospital and the hospital services, but we've left that outpatient and community-based component of the healthcare continuum severely underfunded in Medicaid.

So, in my community of South LA, we are missing 1500 providers, 800 specialists, and 700 primary care doctors compared to your average community. And it is driven by those low Medicaid rates with no supplements, which make it financially unfeasible for providers to practice there.

If I might also add as well, and I wholeheartedly agree that we must look at the ambulatory side as well. As I mentioned, we provide the majority of the physician services in my community through our rural health clinics. Yet a decade ago, rural health clinics were taken off cost reimbursement and put on a prospective payment system that's not kept up with cost. For example, we're down almost two-thirds, and I don't have quite the numbers you do.

We're down about six primary care doctors out of a necessary for any statistical of 10 doctors. But the reality is no one is going to move to town and be able to exist on Medi-Cal rates. The rural health clinics helped us a lot, but our PPS rate is not going up. And in fact, looking at some of the costs that I would need to pay or compensation to family practice doctors last two years, they've gone up 9% per year.

To give you an example, and I know this is an important topic for you, Dr. Weber is right now, we were two years ago able to recruit an OBGYN for around 425,000 a year. I'm being told by recruiters to get someone to even interview. I'm looking at $585,000 for an OBGYN, but with no increase in my physician or payments through our rural health clinic, that's not going to be possible.

The other thing I want to add is even though rural health clinics do are able to allocate some hospital costs to the reimbursement, we still get the medical rates for our specialty services, which in many cases, such as orthopedics, are about $0.08 for every dollar we bill for a surgery.

The phenomena that has really caused me to rethink if I can offer specialty services in town, is we do have out of town specialists that will have a clinic in town a couple of days a month and then take them back to a surgery center they may happen to own, which is neither here nor there. The reality is the out of town specialists do not take medical because of the reimbursement.

And even though my community's medical population should be about 30% of what I would see in my clinics, and many of my specialist is 80% to 90% medical because we are the only providers from the physician side that would accept these patients. And same thing with my OB program: my medical patients are hardworking. A lot of them have jobs, they just don't have health insurance.

And also, as bad as closing labor and delivery is, I'm looking at having to close specialty clinics as well due to the same phenomena. It's just a disproportionate amount of Medi-Cal on a very small hospital that is losing money on, as I said, every service I do.

Thank you. How far away is the next labor and delivery from your hospital? How far are these patients going to have to travel now? I'm sorry, say it again.

2 hours.

That's terrible.

And just out of curiosity, since I just found out about Tulare labor and delivery, where is the next one that those patients are going to have to travel?

Delano would be the closest, I think. Or Kaweah. Yeah.

Visalia. Well, and that's part of many of the mothers are leaving. We've tried to, remember, we opened Tulare. It was closed, and so we opened Tulare and tried to reinstitute the OB. And we have not been able to get mothers to stay in town. More of them have been leaving and going to Visalia, and so we haven't been able to maintain a safe program. So Visalia is where they've been going. We will still be able to.

We have a large primary care and OB rural health clinic there, so we can do prenatal care and those types of things. We just won't be able to maintain a delivery service. So they'd go to Visilia for that.

I do want to mention, as well, Madera, although we had labor and delivery services prior to closing, we were losing, like, $4.5 million annually. And AAM is not going to be able to initially open that service as well. So we're missing that service as well. I know how much they really want to, but again, the reimbursement just does not make sense.

And so it's happening all over the United States, not just in California, but it is something to note that I didn't know about Tulare, but it's very concerning. Right now, women have to drive at 20, 30 miles to Fresno to deliver. And in Madera, we used to deliver, like I said, about 75 babies a month. So that's a significant number that people are without.

Last year, Tulare lost $22 million, and $6 million of that was the OB service line. Faced with, how do we keep the hospital open is part of what we're trying to figure out how to maintain. And so it was a very tough decision that we've had to come to, and we're still trying to figure out how to get the rest of the hospital into a place that it is financially sustainable.

Our hope is that we can get to a point and reopen at OB at one point but right now, we can't see a path with it at where it stands today.

We lose money on labor and delivery, also, and it's been a difficult decision to keep it open, but we have that commitment to our community. So even though we're losing money, we are still maintaining that service.

And I wanted to just thank MLK community healthcare for that commitment. Even from the time I was a resident, labor and delivery oftentimes does not make money, unfortunately, and I did not do my residency here in California. I actually did it at Cook County in Chicago, so they definitely were losing money. However, it is a vital component of health care, and it is extremely disheartening to hear when decisions have been made to close our labor and delivery units.

And on that note, I want to thank Sharp Regional Hospital for having no option but to step in in the South Bay Area with the imminent closure of Scripps' labor and delivery union. My last question is actually for you, Mr. Evans.

So when you're dealing with a hospital like that has a regional hospital like Sharp that has facilities in multiple locations, multiple different payer mixes, different payer mix from Grossmont than what you have in La Jolla, are you able to use those funds across your system, or is it just, the one in La Jolla is for La Jolla. The one in Grossmont is for Grossmont. The one in Chula. South Bay is for South Bay.

Sure. Well, let me start by saying we don't have a hospital in La Jolla, so probably our good payer mix would be Kearny Mesa, is about as good as it gets. The answer is, yeah, that is how the system has existed for many years. And so you get a hospital like Grossmont. Grossmont has a positive operating income despite all of these challenges, but certainly not enough to capitalize its needs.

But Chula Vista has had a negative margin for years, to the tune of more than $30 to $40 million a year that it loses. That is certainly offset by some of the hospitals that do have a positive operating income so that we can replace capital and pay our employees, invest in their needs, et cetera. So we are able to leverage that somewhat. The problem really is that even the hospitals that we're doing quite well are just not doing as well as they were doing before.

And so it makes it extremely challenging for us to continue to shift those dollars to the ones that are underperforming from a financial standpoint, which always causes us to look at examining services that we provide. We are committed to providing those services.

But I think what you're hearing with regards to labor and delivery is that the hospitals that are the sickest financially within those hospitals, when you look at the departments, labor and delivery is one that you often have to make a very difficult decision on for the health of the entire hospital.

So we see that even at Sharp Chula Vista, where it is not doing well financially. In labor and delivery, we deliver about 250 babies a month, but each one of those come at a significant cost as well.

Well, thank you. Thank you all. And yes, you're correct. You're not in La Jolla, and I should know because I deliver it at your facility in Kearny Mesa. But thank you all so much. We really appreciate all of the information that you have shared, the time that you have spent answering all of our questions. We are now going to move to the next panel, which will cover experiences and perspectives of public and district hospitals.

We will be hearing from Erica Murray, President and CEO of the California Association of Public Hospitals and Health Systems. Gary Herbst, CEO of Kaweah Health, and Patty Maysent, CEO of UC San Diego Health. And we'll start with Erica Murray.

I'm Erica Murray. I'm the President and CEO of the California Association of Public Hospitals and Health Systems. Really pleased to be here today. Next slide. I thought I'd start with a little bit of history. Back in 1964, California had 66 county hospitals, and over time, many have closed or were purchased. 21 still remain. Most are county owned and operated, and two have separate health authorities. Of the five University of California health systems, three used to be the county hospital.

The other two are considered designated public hospitals because their medical and uninsured services are financed similar to county hospitals. And so they are incurring the same types of losses that have been discussed here. Next slide. The value of public health care systems can really be categorized in three ways, I think. The first is to their communities. County designated public hospitals have the mission and mandate to provide indigent care, which means our systems predominantly serve medical, uninsured, and trauma.

Colloquially, we don't refer to ourselves as designated public hospitals. We call ourselves public healthcare systems because we are more than just hospitals. We provide the full continuum of services, primary specialty. We are constantly working, as you noted, chair Weber, to keep people out of the hospital. Next slide. We also provide a tremendous value to the healthcare workforce. Each public healthcare system has a tie to a training program, and statewide, we train half of all physicians and hospitals.

And because of our mission, and because importantly, 60 percent of our patients identify as persons of color, we are constantly working to attract and recruit and retain a diverse workforce that can advance health equity. Next slide. Importantly, public health care systems are also of enormous value to the state. We were at the forefront of the COVID-19 pandemic, partnering with local public health departments on responses.

We were also the innovators of whole person care, what's now called CalAIM, leveraging our expertise to connect patients, especially those unhoused to behavioral health and social services such as housing supports. Simply put, we step in when others have to step back, whether through absorbing service lines or patients because of reduced service lines recently, especially acquiring or partnering with struggling hospitals and building capacity to meet the needs of communities.

I'd especially note that recently, several systems are currently in the process of significantly expanding their inpatient and outpatient psychiatric services. And we do this because we mostly see medical and uninsured patients cobbling together funding for which we ourselves put up the nonfederal share or state match. And so we're incurring losses even as we do this work. Next slide. This is an overly busy slide.

What you need to understand from this slide is the bottom two blocks are base payments and the top stripes are considered, quote unquote, supplemental payments. But you can see, because base payments are so low, the concept of a supplemental payment, it's become a misnomer that we have so many supplemental payments they shouldn't even be considered supplemental. And for each of those supplemental payments, again, we're putting up the match. So if we put up a dollar, it gets matched to $2, we receive $2.

We've still put out that first dollar. So it creates a structural deficit that I'll explain. Next slide. Four things are coming together for public healthcare systems that result in a looming crisis. The first, as has been noted by so many panelists, base payments have remained low even as Medi-Cal managed care has grown. Public healthcare systems are often not able to negotiate higher base payments. As others have noted, we simply don't have the leverage. We're not going to leave networks.

And managed care plans have limited resources and often put those elsewhere. Second, although we do serve trauma and burn patients, unlike private hospitals, we cannot recoup losses with commercial payments by and large. Third, as I noted, we've created a variety of supplemental payments, all those many stripes you saw in the slide before, but they have not kept pace with overall Medi-Cal expansion.

And finally, as has also been noted, costs just like everywhere and with everyone, have increased but have not been reflected in increased revenue. So that has resulted, as you'll see in this slide, a $3 to $4 billion structural deficit for public healthcare systems. That's the green. Here's what we've been doing to try to fill that deficit. First, you can see that some public healthcare systems have negotiated some increased base rates with their plans.

Second, there's $150 million of MCO tax revenue targeting designated public health care systems, which is enormously appreciated. But you can see from the amount, that plus what we expect to benefit from other MCO tax buckets contribute, but is certainly not the only needed pieces of the puzzle. Fourth, we've been working with the department to increase existing supplementals, which we both agree could by a minimum increase by about $1 billion.

But as you can see, even with all of that, we are still looking at a $1 to $2 billion deficit. And if a future Republican administration refuses to renew one of our existing programs, we could go back to square one. So I really appreciate the work that we're doing with the department and the administration and with you to think of creative solutions to avoid the public healthcare systems being the next group of distressed hospitals. Thank you. I appreciate it and I'll look forward to answering your questions.

All right. Thank you, Madam Chair. And I too want to thank you and the committee members for giving me the opportunity to share our story. I want to commend you for your stamina and your attention because I'd love to tell you I'm going to tell a completely different story and let you turn the chapter in this book. And unfortunately, you're going to hear a lot of the same things you've heard earlier, but from a different perspective. My name is Gary Herbst.

It's German for autumn or fall and I am the chief executive officer at Kaweah Health, which is a standalone public district hospital formed in 1961 and located in the rural agricultural basin of Tulare County. We are the largest of California's 33 district hospitals. We have 613 licensed beds in which we provide acute medical, surgical, acute rehabilitation, acute psychiatric, skilled nursing and subacute care. We operate numerous outpatient clinics and outpatient services with 5000 employees and 700 physicians and advanced practice providers.

We are the largest employer in Tulare County. We are a level three trauma center. We are a teaching hospital with six residencies and 130 different residents. We were named by health grades as one of the top 250 hospitals in the nation for four years in a row, and last January we were named in the top 100 out of 4500 hospitals across the United States.

Like many of my colleagues that have spoken before me, we have a payer mix of approximately 80 percent of our patients are covered by either Medicare or Medi-Cal. Uniquely, though, 62 percent of our Tulare county residents are enrolled in Medi-Cal. We have the highest medical enrollment of any of the 58 counties in the state of California. As such, we are a dish hospital for both Medicare and Medi-Cal.

We have an annual operating budget of almost $900 million and a recent economic development or impact study indicated that Quia Health provides more than $1 billion a year in economic vitality to Tulare County. And clearly, we are a regional safety net hospital operating in a very impoverished county with some of the worst health factors in the state. So prior to the pandemic, we were a modestly profitable hospital.

And I would definitely be one that argues that there is a direct correlation between your payer mix, your Medi-Cal penetration, and your profitability, or lack thereof. But even with that 2 to 3 percent operating margin, it was sufficient to cover our annual debt service. As one of the presenters had indicated earlier, don't just stop at that net income.

That bottom line that Kristof indicated, because it's from that bottom line that you then dund all of your capital equipment that needs to be replaced, or your investment in new technology or your investment in your facilities. It's also what you use to repay the principal amount that you borrowed from creditors over the years to finance a lot of your expansion. So we were profitable. We actually were an A3-rated hospital.

Our credit rating by Moody's Investor Services, we had a credit outlook of stable. But, that all changed in March of 2020 with the arrival of COVID-19. From March 2020 to June 30. 2023 our most immediate fiscal year that ended, we incurred a cumulative operating loss of $157 million. That's the amount by which our operating expenses, labor, benefits, supplies, drugs, energy, food. Everything that goes into operating in a hospital, exceeded all of our revenues from all sources by $157 million.

That required that we start burning through our cash reserves. Fortunately, we were in pretty good financial condition before the arrival of COVID-19. We had about 160 days cash on hand, which is a pretty high level. But in a short period of time, we saw that dwindle all the way down to 62 at March 31, 2023. That essentially put us in default of our debt covenants, and we remain to this day out of compliance.

That required that we had to take $18 million of our cash reserves and move it into a trustee held account that was only available to pay interest and principal on our bonds in the event that we defaulted on our debt. Our credit rating was downgraded from an A3 stable to a Ba1 with a negative outlook. So an A3 credit is called investment-grade bonds. There's a big market for them. People want to buy your bonds that you use to help fund your growth.

But a Ba1 bond is considered junk debt, and people started selling off their Kaweah bonds as fast as they could, and there's no way that today that we could go to the bond market or to any bank and convince it to loan us money. So, like others, for the time being, we have suspended all activity on coming into compliance with Senate Bill 1953. 206 of our 435 acute beds at our main downtown campus are in non-seismically compliant space.

To replace those beds, it would cost $750 million and it would need to be funded entirely by us. So these losses that we incurred over that period of the pandemic were largely driven by lower revenues. I still will never forget April of 2020 when Governor Newsom ordered all California hospitals to shut down elective surgery. We lost $12 million in one month, the single largest loss we had experienced in our 60-year history.

You compound that with double digit inflation, a poor payer mix, and, probably most significantly, a crippled workforce. All of those contributed to those significant losses. We spent more than $110 million in contract labor over the course of the pandemic. From that March 2020 to June of 2023, we spent tens of millions of dollars in overtime and extra shift bonuses to our employed staff. At one time, we had more than 240 traveler nurses that we were paying more than $250 an hour.

Today we have 90, and we're paying at about $105 an hour. So that definitely has helped contribute to a bit of a financial turnaround. But in pre-COVID-19 times, we might have 10 or 15 traveler nurses, but to still have 90 is a strong indication that we're still in the aftermath of COVID-19. We ended this last fiscal year with the highest operating loss in our history at $59 million. That was just eight months ago.

Since that time, we have been executing on a painful and sometimes heart wrenching financial recovery plan that's included more than 200 employee layoffs. We've frozen wages to our employees. We've cut wages to all of our leaders. We've gone years without matching our 401K plan. We've closed services like skilled nursing, outpatient neurosurgery, and diabetes education. But as difficult as these decisions were, they are working. For the seven months ended January 31, 2024 we have a cumulative operating loss of only $5.7 million.

But we're celebrating a $5.7 million loss because that is far better than the $34 million loss we had incurred for the exact same time period the year before. We also recently had our credit rating outlook upgraded from negative to stable, and our cash reserves have grown back to 81 days. But we are far from out of the woods. We are definitely not on solid financial footing.

We are incredibly grateful to the Legislature and the administration for creating the distressed hospital loan program and for awarding Kaweah Health $20.8 million under that program. But we have to remember, it is a loan, a loan that has to start being repaid in just 18 months from now. Many hospitals are afraid to spend that money not knowing for certain that they're going to have the ability to pay it back.

So while it does provide us a bit of a short term lifeline, so to speak, this industry really needs fundamental, sustainable, long term revolution of the financing system for the healthcare industry. We truly need fundamental change for hospitals like us. Today Medi-Cal literally reimburses us pennies on the dollar. Last fiscal year, we lost $16.2 million providing outpatient services to the Medi-Cal program.

So I am very hopeful that the MCO tax, which will allocate a significant amount of funding to hospital services, is largely being targeted to the area that hospitals are losing the most, and that is in their emergency department and in their outpatient services. Dr. Weber, you talked about, how do we keep patients out of the emergency department? We provide timely preventative care. We provide timely colonoscopies and breast cancer screenings.

We allow patients to go get that image, to receive physical therapy before their condition exacerbates to the point where they have to go to the emergency department. I was talking to my CEO colleague at Sierra View Hospital in Porterville the other day, another district hospital. She told me that they get paid $14 per physical therapy visit for a medical patient this last year. Again, that's $16.2 million. We receive 74 cents on the dollar, 74 percent of the direct cost of providing that outpatient care.

When I say direct costs, that's the staff salary, the nurse, the drugs, the supplies. It does not include a hospital's overhead for housekeeping and dietary and finance ISS and all of those services that are necessary to operate a hospital. We aren't even covering 0 percent of those dollars. We aren't even covering at current reimbursement rates, our direct dollars. And over the past 10 years, seven district hospitals have either closed or filed bankruptcy. Some have since reopened, but none of them as a district hospital.

Other district hospitals would have met the same fate, but ended up being acquired by another hospital or a health system before they closed or filed bankruptcy in 2021, 18 district hospitals operated labor and delivery programs. Since then, four have closed. And like you, I received a letter last week from the Tulare local hospital district board informing me that the Tulari L and D program was going to be closing indefinitely. I am pleased and proud to say that the Kaweah Health maternal child health program is going strong.

We deliver almost 5000 babies a year. We have full prenatal care, actually maternal-fetal medicine or perinatal care. Maternal-fetal medicine phhysicians on staff. Through a partnership with Valley Children's Hospital, we operate a 23-bed neonatal intensive care unit, a level three. And the reason that we can continue to operate is having that kind of critical mass, having that broad continuum of care, and having sufficient volume to be able to operate it profitably.

So you can rest assured we will be there for those Tulare residents that will be delivering babies. So lastly, Madam Chair and committee members, again, thank you for giving me this opportunity. I really am excited about the MCO tax. I look forward to hearing how you intend to allocate that.

I also thank you for considering to support Assembly Bill 2098 that will give district hospitals a little bit more breathing room in having to pay back the bridge loans that you supported through CHFFA to help us transition from the prime program to QIP. I know there's consideration being given to schedule the maturity date of that bridge loan to coincide with the repayment of the distressed hospital loan program. So I'd really appreciate your consideration of that. And I want to thank you again for this time today.

Great. Good afternoon, Dr. Weber and committee members. Thanks so much for having me here. I'm Patty Maysent. I'm the CEO of UC San Diego Health System. We are a proud, high DSH provider in San Diego County. We're an academic medical center that also supports the teaching of the next generation of physicians as well as research. I want to thank all of you too for your deep commitment to the care for the vulnerable.

And you're asking these hard questions right now is really appreciated by all of us in the field who are working so hard to make sure that we can stabilize healthcare across our regions. I won't rehash the stories. I think you've got a pretty good idea of what's happening with respect to reimbursement and costs. I do want to say that the hospital is serving high Medi-Cal and Medicare, don't let Medicare off the hook here, patient populations are facing particular struggle.

So if you're at 80 to 85 percent of government payers between Medicare and Medi-Cal, both of which don't even cover your costs for UC San Diego Health on an annual basis, we subsidize Medicare and Medi-Cal by $550 million. So you were talking about the margins earlier. There's a lot of support for the government programs and the government payers. So it's a really hard calculation to work. I wanted to express that UC San Diego Health is doing all we can in our region to help support and sustain.

Just east of San Diego is Imperial County, the poorest county in the state, experienced a major health crisis, actually was before the pandemic, but coming out of the pandemic really struggling. Over 80 percent of the patients cared for in those hospitals, the two hospitals out in Imperial Valley, over 80 percent, are Medicare or Medicaid. And it's just not enough to sustain the health care system out there.

So low reimbursement rates from Medicare and Medi-Cal, coupled with the financial losses both before and during COVID-19, and the need to take out debt. El Centro is different than a lot of hospitals in the state because they actually had 2020 seismic requirements because of an earthquake, they actually had to get seismically compliant 10 years earlier than everyone else. That resulted in them needing to take down debt quite a bit earlier.

And so as a result of that, meeting all the requirements, they were really at the end of 2022 at the brink of closure. They decided at that point, leadership decided at that point to close the OB services and move it to the other hospital in the region and really to prepare for closure. Fast forward to the beginning of 2023.

And to prevent that closure, UC San Diego Health agreed to assume day-to-day operational, clinical and financial management of the hospital since then and with great support. It wasn't just us, great support from the state secretary Ghaley himself, Department of Healthcare Services, City of El Centro and a really strong management team that we were able to put in place. El Centro is now on a track to achieve a positive cash flow by the end of the fiscal year.

The El Centro Regional Medical Center team could not have accomplished this turnaround without the $28 million distressed hospital loan dollars that came to it. These funds were used to leverage the completion of the construction required to achieve the 2020 seismic requirements to pay down debt, principal and interest as they had been in default. They still remain in technical default of that debt today based on their days, cash on hand, and to help fund necessary investments in the electronic medical record.

There was no electronic medical record in Imperial Valley and other capital equipment and payroll. We believe by the end of this year, El Central will have a fully seismically compliant hospital and will be on the path to financial sustainability.

That said, the future of the hospital and healthcare in general in Imperial county depends on needed additional investments going forward in clinical program development, physician and workforce recruitment, and development and other investments so patients don't have to leave Imperial County to receive care such as cancer treatments, which is a daily treatment regimen.

Critical care, cardiac interventions, loan forgiveness or turning the loan into a grant will help El Centro maintain financial sustainability and begin to make the needed investments in the community that will allow it to start growing programs in partnership with UC San Diego Health. So we're committed to build those programs in the valley, with the whole region, but particularly with El Centro.

And they will hopefully be in a position where they can support and sustain and gain scale so that they can provide those programs. At the same time, in San Diego proper, Tri-City Medical Center in Oceanside has been struggling financially for years. Post-pandemic, made some drastic decisions to close programs such as labor and delivery in order to keep their hospital doors open.

But they knew they were running out of money, and they went through a process this health district had the foresight to see that if they could partner, they could keep their doors open potentially, and so went through a process that subsequently resulted in choosing UC San Diego Health as the partner.

And we are in the middle of both diligence and the creation of a joint powers agreement that would move all the assets and all the liabilities over to UC San Diego Health as we take over and try to bolster that hospital. That will also not be enough. Tri-City did receive a sizable distressed hospital loan that helped them to pay down vendors and to keep their doors open, but it will become a real source of strain on the system as we move forward.

So we're working on creating that shared vision of stabilizing core services, reopening labor and delivery. I'm saying that particularly to you, Dr. Weber, and complying with seismic requirements. They have 2030 seismic requirements and we hope to sign and enter into the joint powers agreement soon.

We keep them up to market rates, but it's a strain on our system. It's a strain on all of the public hospital systems. And each year we are facing, as Erica pointed out, three or four billion dollars of projected deficits across the state due to the volume of Medi-Cal we provide, the UCs in total present 1.5 billion of that $3-4 billion deficit. And we need your help to keep hospitals open and to maintain our sustainability.

First, and as you've heard, we need the MCO tax to provide the minimum of the $150 million of public hospital support proposed in the governor's January budget and ensure that the public health systems benefit from other proposed MCO tax buckets, the other little sections of Erica's slide that reflect our broad footprint across the delivery system. Second, we really need those loans to those distressed hospitals, not just in San Diego and Imperial Valley, but I'm sure across the state, forgiven turned into a grant.

Third, we need more time to comply with the seismic requirements. We've solved that problem in Imperial Valley at El Central Regional Medical center. We have not solved that problem for our own mothership hospital, the county hospital that we took over in the late 60s, Hillcrest Hospital, as well as Tri-City. And finally, we need to continue to work to increase medical reimbursement rates, as you've heard this afternoon.

So with that, I would just say with a lot of gratitude towards all of our local, state and federal officials and providers. I think the answer is this is a team effort, and it has to be all of us working together to put together the package that's going to try to relieve this distress situation.

Thank you so much to everyone on the panel. I'm going to see if Assemblymember Soria has any questions. Perfect. Thank you. Well, I do have a question for Ms. Murray. So, you know, public hospitals are not the hospitals that are closing these days. They were maybe in the past, but not now. So what are you all doing different? What lessons can we all learn from your model.

I wish there was a positive answer to that question. Unfortunately, it's not that we're doing something particularly innovative or creative in terms of financing. In fact, because of our payer mix, we're in more hurt than many others. The reality is, because of our financing structure, we have delays in payments. So we are just now collecting 21-22 payments for all of those supplementals. And we did receive a fair amount of COVID relief funds, PRF funds, which helped keep us afloat starting in the pandemic.

So, we're just now-- The chickens are just now starting to come home to roost. But it's not a function of any particularly innovative financing structure. In fact, it's probably the opposite, that we're very underwater and it just hasn't resulted in service reductions or closures yet.

But if we don't solve that $1-2 billion deficit with additional revenues, and that very well might have to be federal dollars that we find, and we've done this before with 1115 waivers or other supplemental payments, we find ways to put up a state match and draw down federal funds. We're going to need to do that again to the tune of $1-2 billion more if we're going to avoid those service closures.

And that will probably start happening in the next year or two if we don't.

Well, whatever you all have been doing, please keep it up, because-

--And working, especially in partnership, who is the one that actually makes those requests to the Federal Government? So it's a very important partnership for us.

Well, as we've discussed, public hospitals really are the lifeline to the community. They really are the places where patients can go when they are not able to go to some of the private hospitals. And so we really need to make sure that we can help you in whatever ways to keep your doors open. I really want to commend UCSD, and it's not because you're in San Diego.

It's not because I used to work there in your OBGYN Department, but I was on faculty when the situation at El Centro started happening, and some of our periodologists and our cancer specialists, our gynecologists started going out there and really helping that system and then the situation with Tri-City and you all stepping up and helping them keep their doors open and hopefully reestablishing their labor and delivery department there.

My question for you is, what drove you all to do that, to step up like that?

I think our culture is such that we say, yes. I think I got the first call from, as the first planes were coming from Wuhan, China, February 5. And I thought, do I want to be the first hospital to take COVID patients? And I'm in an environment where I can say yes. I got the call for how do you get shots at arms? How do you get wastewater testing? And we're just in an environment where we can say yes.

It's part of our culture and our mission, big part of who we are. And so we just have tried to say yes.

Well, thank you for that, and thank you to everyone on our panel. I am going to move, it is getting a little late, so we're going to move on to our next panel on the Distressed Hospital Loan Program and the Small and Rural Hospital Relief Program. We have three speakers on this panel as well.

Elizabeth Landsberg, Director of the Department of Health Care Access and Information, JP Marion, Deputy Director for Health Facility Loan Insurance at the Department of Health Care Access and Information, and Carolyn Aboubechara, Executive Director of the California Health Facilities Financing Authority. Thank you to our panelists. And I will start with Elizabeth.

Thank you much, Madam Chair and Assemblywoman Soria. Elizabeth Landsberg with HCAI, Department of Health Care Access and Information, here to give a high level overview of some of our hospital financing programs. So among our programs working to expand equitable access to quality, affordable health care for all Californians, HCAI administers the Cal Mortgage Program, which offers loan insurance to nonprofit and public health facilities for the development and expansion of healthcare services in California. And we have been administering that program-- That program has existed since 1968.

Also of note is HCAI's longtime work collecting and disseminating hospital financial data. So you heard the first speaker from the California Health Care Foundation who is using HCAI data, which, of course, is our goal, is to have that financial data be useful and be actionable. So we have had that hospital financial data for 50 years. So, moving on, I'll start with the Small and Rural Hospital Relief Program, which, as you know, was created through SB 395 in 2021.

So this established the excise tax on electronic cigarettes, and 10% of that goes to this Small and Rural Hospital Relief Program. So we did an analysis and believe there are 102 potentially eligible hospitals that meet the criteria under the statute as the small or rural hospital relief program. 35 of those have initiated applications with us, 26 have submitted updated seismic compliance plans, and we have approved our first two grants thus far.

We really welcome this program and to have the ability to give technical assistance to the hospitals to try to work with them to understand the most cost effective ways that they can be seismically compliant. So we do encourage the remaining 67 facilities to engage with us in technical assistance for potential future grants. Since the inception, this excise tax on e-cigarettes, the 10% that's come to us, has produced $3.7 million.

And with the additional 50 million recently made available from the MCO tax, we'll really be able to scale up that program substantially. Moving to the Distressed Hospital Loan Program, which, as you know, was created last year through urgency legislation, provided the $300 million to implement the financial turnaround program. So we have had a wonderful partnership with CHFFA here with the California Health Facilities Financing Authority.

They're handling the loan servicing component, and then our team did the work around the hospital financial analysis and the loan award determinations. So we received applications from 30 hospitals wanting the Distressed Hospital Loan. The applications were evaluated on four main criteria. One was around their liquidity situation. One was around the profit loss analysis.

We did receive a turnaround plan from each of the hospitals and analyzed those turnaround plans and then looked at community needs factors such as payer mix and how close the next closest hospital was. So based on those criteria, we did make 17 loan awards. One hospital declined to accept its $5 million loan award due to an imminent sale, and the 5 million loan award was reallocated to Madera Community Hospital, which is still pending. So we've again appreciated the work of CHFFA.

They've been working with awardees on execution of the loan transaction documents to distribute the loan proceeds. So with that, very pleased to turn it over to our Deputy Director of our Financing programs, JP Marion, to share a current status of the Distressed Hospital Loan program and also some of the findings that we've had during that process.

Thank you, Elizabeth. So, as of today, 13 of the 16 hospitals that have loan awards have completed their loan transaction and received their disbursements, totaling $222.4 million. Of the remaining three loans in progress, one is on track to be closed in a couple of weeks. The remaining two transactions, for Madera Community Hospital and Hazel Hawkins, involve hospitals that are currently in bankruptcy. One is a closed hospital.

We're currently in the middle of the final steps of evaluating their reopening plan, and given that those will need some approval through the bankruptcy court process, they're going to take a little more time to close, but wanted to share with you some common observations that we had from the applications that we received. So all the applicants were very low in current liquidity, and they were all experiencing negative operating margins. Common theme that you've heard throughout today.

All the hospitals had exhausted all outside options possible for lines of credit or working capital loans or getting advances from their managed care contract partners. They were burning cash on a monthly basis. All were experiencing staffing challenges that you've heard about today. I won't dive into that too much because you've already heard it. And then lastly, the global inflation that we've talked about today, supplies, vendor contracts, professional services, all the things that it takes on a day to day basis to operate a hospital.

Increases in revenues have lagged behind the increases in these expense rates. And as Kristof evaluated, as he alluded to in his first presentation, each hospital had some sort of one off, extraordinary thing going on that was just adding to the challenges. Some were unexpected leadership changes. There were glitches and payment delays from third party managed care plans, banks not renewing lines of credit, just exiting the healthcare sector, no longer wanting to be in that business.

Situations like these, with already financially fragile hospitals were causing them to make decisions to possibly not participate in business opportunities for them. They have to look at how much cash do I have on hand? Do I want to try to participate in this program or open this line of service, or am I going to need that money to make payroll? So they are having to take that into account on a day to day basis.

Some common themes that we saw in the turnaround plans that was received were catching up on past due bills. Negotiating new rates with health plans, revenue cycle enhancements, staff and provider wage increases to improve employee retention and reduce that reliance on these traveling nurse organizations. Initiatives to produce a new revenue generating service to try and help create a profit center for the hospital.

Replacing equipment that is near the end of life, but it's still needed every day for patient care and then using loan proceeds as an alternative to a line of credit. They may have lost their line of credit, but still need some sort of account to be able to go in and out of on a day to day basis. And then lastly, seeking sale, affiliation or partnership opportunities with other hospitals. Now, there were 13 hospitals that applied that didn't get a loan award.

The characteristics of those applicants, they had relatively higher cash reserves or possibly had investment portfolios that they could rely on in the event that they needed to subsidize operations. Some had positive operating margins or were actually positive on net income. Some had financial forecasts that were not really showing turnaround plan initiatives, but they had a capital project or something that they wanted to take on and use the program to help finance that. And then lastly, some just had circumstances that made them ineligible with the statutes.

So, in conclusion, within the hospitals that received loan awards, there were eight to nine. That clearly demonstrated a concern of possibly needing to file for bankruptcy protection or facing closure within the next two years. At these hospitals, loan proceeds are going to be used for a combination of urgent needs like payroll assistance and paying past due bills, along with the implementation of longer turnaround initiatives.

The rest may not have been on the verge of missing payroll or being late on vendor payments, but clearly demonstrated the financial distress and a need for the program's assistance to be able to remain financially viable in the long term.

We believe that this program met its intent to assist the hospitals facing the highest degree of financial distress, and we're optimistic that with the hard work on their turnaround plan initiatives and the injection of working capital, that they will have an opportunity to reverse this downward slide that they've been experiencing. So with that, I'll now turn it over to Carolyn for a couple of updates from CHFFA.

Yes, thank you. Carolyn Aboubechara, Executive Director of the California Health Facilities Financing Authority, also known as CHFFA. We're housed within the treasurer's office and we provide a number of different financing tools for health facilities throughout the State of California, mainly for infrastructure projects. We have a number of bond, loan and grant programs that we participate in, and one of those is the Distressed Hospital Loan Program.

We've been working very closely with the HCAI team on the implementation of the program and as JP Marion previously mentioned, there have already been disbursements to 13 of the 16 approved hospitals, and we have already entered into legal agreements with these 13 hospitals. Obviously, these are loans, so there's legal agreements which have committed CHFFA to ongoing work for the next six years. They are to be repaid in 72 month term.

So we have now entered into loan documents with repayments to be done back in six years. So basically, there's a lot of ongoing compliance work that CHFFA will be working on and working closely with HCAI and sharing the information with HCAI. And those ongoing compliance include collecting and tracking monthly payments after the 18 month deferral period is over.

All the hospitals that got a loan award do not have to make any payments in the first 18 months, but after the 18 months is over, there will be a monthly debt service payment which includes principal over the next period of time until 72 months is over. Then we will be collecting and tracking and sharing over 16 reports annually per hospital to HCAI.

We'll be collecting them, sharing them with HCAI, which include annual financial audits, board approved annual budgets, utilization statistics of hospital services, annual financial ratio calculations, and a lot of quarterly reports we'll be getting from the hospitals, including progress update on their turnaround plan that they had submitted at the time of the application, that will show that they're going to become financially viable in the future.

And all this is to assess the hospital's progress on achieving financial viability and becoming sustainable and continuing to operate in the future. We also will need to continue engaging with our special outside counsel that we had hired. A lot of the borrowers are in a unique situation that CHFFA had not previously engaged with.

Hospitals in bankruptcy are at the verge of bankruptcy, so there could be a need to continue to engage with the special counsel on special issues that could arise that affect either the loan itself, the repayment of the loan, or the security that's supposed to secure the loans, which is Medi-Cal, 20% of Medi-Cal payments. So we are going to continue working with HCAI on the implementation of the program.

And in your material, you have proposed trailer bill language that would extend the deadline to utilize the administrative cost or the administrative funds that were allocated to both CHFFA and HCAI from 2026 to 2031 to just align the use of the funds with the sunset of the program, and that is it. So I'm happy to answer any questions.

Thank you very much to our panel. I'm going to see if there are any questions from Assemblymember Soria. Thank you. So just real quick for the trailer bill language, you are proposing that 7.5 million be stretched out. Not that we are asking for more money, just for more time to utilize those funds, correct?

Exactly. Yeah, exactly. No more funds, just aligning the dates and the statute to use the admin funds with the sunset of the program.

Thank you. So, seeing that these hospitals were clearly in significant financial need in order to receive these loans, do you think that they are going to be able to, one, repay them in the time fashion that has been designated, and two, that they'll be able to keep their doors open as they're repaying these loans. You've looked at their financials.

Under the statute, there is a provision that allows for loan forgiveness. And so HCAI is developing, working with our California Health and Human Services Agency and the Department of Finance on some loan forgiveness. But the turnaround plans did show repayment generally. And I'll also let JP Marion add in terms of our analysis of the turnaround plans

Yeah, you know, there are going to be some that are going to struggle. If everything goes as their turnaround plan was projected, they should have the capability to do that. But if something extraordinary happens between now and 72 months, it's possible that they may struggle and need some sort of loan modification or loan forgiveness on some level. So we're trying to work on this loan forgiveness process on something that makes sense, and the hospitals will be fair to the hospitals.

Thank you for that. And when you were looking through their financials, it sounded to me like there were a variety of different factors that kind of led them to be where they are financially. So do you feel like this loan is a one time thing and they'll be back on their feet and running, or do you think that this is something that we need to continue to look at in order to allow for these hospitals to keep their doors open?

There were some structural problems, and as we've indicated, some hospitals went back to their Medi-Cal managed care plans and their commercial managed care plans to renegotiate contracts. Some of them are looking at additional revenue streams. We do think that you heard from a number of the hospital CEOs earlier that their reliance on traveling nurses and the like is decreasing to some extent, and paying nurses some more so that we retain them can be a good thing in the long term.

So I think the jury is out as to what the need will be ongoing. We felt that we were able to meet a lot of the need with the $300 million that the Legislature appropriated for this purpose. Ongoing concern to address.

Thank you. Because you said you had 30 applicants. What about those that did not receive, the 13 that did not receive any financial assistance? Based on what you were looking at as far as their issues, do you see them being able to turn things around for themselves, or will they potentially need something like this in the future?

Given the rationale that we did not approve them for something, it's likely that they weren't in danger of closure within the next two to three years. So the jury is still out long term, but it wasn't any sort of imminent catastrophe on the horizon.

Well, thank you so much. Thank you for what you have done and coming here today to discuss this and answer our questions. We'll now move to our next panel, which covers Medi-Cal financing of hospitals. For this panel, we have Michelle Baass, Director, and Lindy Harrington, Assistant State Medicaid Director, both with the Department of Health Care Services. And we will start with Director Baass.

Good afternoon, Chair, Member. Michelle Baass, Director of the Department of Health Care Services. Just wanted to provide a brief overview of Medi-Cal hospital financing. As discussed earlier, it really is a complex web of reimbursement streams that are impacted by many, many factors. One critical reimbursement streams for many hospitals is Medi-Cal, as was discussed today. At the most basic level, hospital's revenue consists of revenues from inpatient admissions and revenues from outpatient services, which may include emergency room care, specialty care, primary care, and ancillary services.

And we heard today that a hospital looks at their payer mix, commercial, Medicare and Medi-Cal, as they really consider their overall financial situation. And there are different ways that the Medi-Cal system reimburses our hospitals. We have fee-for-service payments, which is a payment for each distinct type of service. We have capitated payments which really are for an assigned member to the hospital.

So these are bundled or episodic payments, and then we have performance based incentive payments or other kind of value based alternative payment arrangements. For Medi-Cal, 99% of the Medi-Cal population now is in managed care, so our hospitals are able to negotiate with their Medi-Cal managed care plans their rates. This is a significant shift over the last decade or so where many more individuals were in fee for service.

So a significant portion of our Medi-Cal Members are in managed care in addition to these rates, so the capitated or the fee-for-service rates, we have base and supplemental payments. As discussed earlier, this is really that difference between rates and total revenue to our hospitals. Medi-Cal payments to hospitals include both base and supplemental payments, and the supplemental payments are separate and in addition to the base payments rendered for service to our Medi-Cal Members.

Supplemental payment programs utilize federally approved financing mechanisms to increase reimbursements to hospitals. For inpatient services, the bulk of Medi-Cal payments to hospitals are inpatient, and hospitals are reimbursed via combination of base and supplemental payments in both fee-for-service and managed care. In the fee for service delivery system, both the base and supplemental payments are developed and proposed by DHCS. The department utilizes the full federal upper payment limit, which limits Medi-Cal reimbursement for inpatient facilities to what would have other been reimbursed under Medicare.

The state is able to raise fee-for-service rates is limited by the fact that fee-for-service rates are already set or already at near the UPL or the federal upper payment limit. In the managed care delivery system, the base payment is typically determined by the negotiated contract between a hospital and the managed care plan. The supplemental payments are developed and proposed by DHCS and approved by the federal CMS.

The total payment amount, including base and supplemental payments, is subject to a variety of considerations, including a hard cap at the average commercial market rate. Hospitals can seek increases to their base reimbursement through negotiations with managed care plans, while the department works with the Federal Government to seek approval of appropriate increases to supplemental payments.

Medi-Cal payments are made when a state generated share of the payment is passed up to the Federal Government, which then matches these payments based on federal medical assistance percentage and returns to the state a full payment that is then provided to health plans or hospitals. These state generated payments, also known as the non-federal share to be general fund or locally generated dollars.

The non-federal share of base payments to hospitals is financed predominantly, excuse me, using state general fund and with some exceptions in the fee-for-service delivery system. To speak a little bit about payment levels, the majority of Medi-Cal payments to hospitals are for inpatient services, as just discussed, and in the managed care delivery system at a statewide level, gross Medi-Cal managed care payment levels to hospitals match or exceed Medicare reimbursement rates on average and are roughly 50% of the average commercial rates.

In comparison, fee-for-service financing is more complex and variable by hospital type. Payment levels are often very different from one hospital to another, and reimbursement for outpatient services is generally lower than for inpatient services. In general, DHCS increases the value of hospital supplemental payments in the managed care delivery system every year.

Increases may be linked to growth in consumer price index or other inflationary indexes, programmatic changes such as benefit or eligibility expansions, and other policy considerations such as the implementation of quality based payments or the transition of supplemental payments. In recent years, in partnership with the hospitals, we've made a concerted effort to increase hospital supplemental payments in the managed care delivery system.

In the last three years, the increase has been about 3.2 billion annually for private hospitals, 900 million annually for designated public hospitals, and about 225 million for district and municipal public hospitals. A portion of these increases offset decreases to fee for service supplemental payments, and, as previously noted, the net benefit of these increases to hospital is less than the total amount of the increases due to the self financing.

In total, across the fee-for-service and managed care delivery systems, we make approximately 13 to 15 billion in net benefit supplemental payments to hospitals each year, in addition to their base payments. With regard to the managed care tax provider rate increases that are related to hospitals.

As part of phase two, the rate increases that would be effective January 1, 2025 we are increasing base payments for maternity care to 100% of the geographically adjusted Medicare rate plus the additional equity enhancements that we spoke about at the last hearing, increasing base payments for emergency physician services to 90% of the geographically adjusted Medicare rate increasing annual reimbursement for outpatient services by 490 million total funds and for emergency department facility services by 725 million total funds, and then the transition of the base payments for these services to an outpatient perspective payment system.

We are proposing an investment of 150 million of the MCO tax funds, so those are just the state portion of the funds annually into modernizing the reimbursement methodology for our designated public hospital systems. And that is in addition to the about 2.4 billion total funds of increases related to primary care and specialty care, which, as discussed earlier, really does also benefit the hospital system.

With regards to the question about maintaining adequate access to labor and delivery in some of our hospitals, would start by saying that this is really kind of a lens by all payer sources, not just Medi-Cal, but really recognizing the importance of labor and delivery in particularly rural areas, in certain kind of urban health deserts as well. The department actively monitors network adequacy of our managed care plans.

To understand the impacts of any types of these closures, we require our managed care plans to provide transition plans to the department to identify network adequacy, where services, the next closest available services. And we work with our managed care plans to understand kind of the impact and kind of as a result of losses, rate negotiations, et cetera, to have a better understanding for the impact and kind of what the department can do to assess. With that, I think open it up for questions. I have our expert here on health hospital financing.

Well, thank you so much for coming to our hearing today to shed some light. A couple of questions. Do you agree that public hospitals are facing a structural deficit?

Lindy Harrington, Assistant State Medicaid Director. I think because of the self financing that has historically been done with our designated public hospitals, there is a broader challenge in that as we bring in those dollars, they are putting up the non federal share, so the net benefit to them is generally smaller. So we have continued to work with them year over year to try to address that issue. But yes, there is an issue with the self financing.

And then do you agree, or what is your statement with the concern that public hospitals have that they may actually lose money as a result of the current TRI proposal?

That was not our intent. The 150 million that we put in is to change the mechanism so that they are not self financing. Our intent was never to have that phase out of the supplemental payments be a negative or a cost to those hospitals. We continue to have additional discussions so that we can ensure whatever goes forward does not have a negative impact on the public hospitals that was not our intention.

But you understand how they're now concerned.

We've had the further conversations with them. That's why we're continuing to have conversations to ensure that we can finalize a proposal that does not include any negatives for them.

Perfect. I'm very happy to hear that. Well, thank you all so much for being here. And we're going to move to our final panel now, which is going to focus on the role of commercial and public managed care plans. We have Dr. Robert Moore, Chief Medical Officer for Partnership Health Plan of California, Linnea Koopmans, CEO of Local Health Plans of California, and Jedd Hampton, Director of Legislative Affairs for the California Association of Health Plans. Thank you to our last and final panel.

And we'll start with Dr. Moore.

Great. Thank you very much, Madam Weber, Dr. Weber. My name is Robert Moore. I'm the Chief Medical Officer and a family physician at Partnership Health Plan, which is a non-for-profit county organized health system serving 24 counties, mostly rural counties, in Northern California. In our service area, we have 50 California Indian tribes, 18 rural tribal health centers, which have the double risk of being in a rural area and having a lot of historic discrimination, which have impacted their health outcomes greatly.

Our region also has 50 non-Kaiser hospitals, 25 of which don't provide OB care at the current time. And in the last nine years, in our legacy counties, seven hospitals stopped providing OB services. And then the counties we just took responsibility for, the 10 counties north of Sacramento, an additional three counties in the last nine years have stopped providing OB services. So a loss of about one hospital per year in that region. We've taken a deep dive into the causes of the closures.

The factors that were brought up very eloquently by the CEO of, I think, Ridgecrest are largely truth. I won't reiterate all the findings that he had. I think that he hit on many of them. There are financial margins, and the Medi-Cal mix definitely are factors. And the next speaker, Linnea, will talk more about how that's related to how DHCS funds the managed care plans. So I'm going to focus on the non financial, just briefly. The first is the low volume was a key common factor.

All the hospitals that closed in our region, we had under 300 deliveries a year. And the relative rates, doesn't matter if you pay higher rates, you can't cover your marginal costs with that low a volume. And the lower the volume, the harder it is to cover those marginal costs. In particular, in the most rural hospitals, a key factor was the requirement for continuously having two to three nurses, OB trained nurses at a time, even if they only are delivering less than one patient per day.

And that was a giant expense. Some of the other hospitals also are sustaining high costs of requiring pediatric coverage for in case there's some need for a pediatrician to come in and help with the baby, and then also the need for Anesthesia coverage. So all of those coverage, it becomes a fixed cost that they have to maintain. And those were some of the major factors that we found to be in place.

One thing I will differ from a previous speaker talking about the idea of below 300 deliveries being unsafe. We really believe that safe obstetrical care can be provided in low volume settings. The key is training and using simulators and cross training the nurses so that they can provide that care safely. If you take away obstetrics in a very rural area completely because it's low volume, you're not making care safer, you're making it unsafe because now you have a larger distance to travel.

And studies around the world show that after about 60 minutes of travel, the maternal and neonatal outcomes start to get worse, and they get worse with each additional hour. In some regions and partnerships area right now it's up to a three hour transportation to the nearest hospital providing obstetric services. The other proposal is to consider reopening hospitals with a different model. Plumas District Hospital, which is in a rural area of the northern Sierras, had closed about two years ago.

They're proposing opening a birthing center in combination with a new designation that they're proposing, standby perinatal services, no longer needing some of the required 24/7 nursing coverage, but to have it available on a standby basis, which we think is a model worth considering. And we hope that the regulatory flexibility will be considered by the Legislature.

There's other non financial levers we can talk about in other settings, but I'd like to turn over to Linnea to talk more about the complexity of the funding that managed care plans have available to pay for the hospitals.

All right. Good afternoon, Madam Chair. Linnea Koopmans. I'm the CEO for the Local Health Plans of California. We're the trade association that represents the local not-for-profit Medi-Cal managed care plans across the state in 51 to 58 counties, including Partnership Health Plan, that collectively serve over 70% of all Medi-Ca managed care beneficiaries. So, as you've heard just one example, local plans have a long history of being good partners to the providers in their community, including the hospitals.

And in fact, the genesis of the local plans is directly linked to the mission of serving the Medi-Cal population and providing support for the Medi-Cal safety net to improve access for Medi-Cal beneficiaries. While bolstering the safety net is a part of our history, it also includes support provided in recent years and during the pandemic. During the pandemic, local plans were the exemplars in supporting hospitals through advancing capitation payments or incentive payments and procuring PPE.

However, the issue of hospital financing, as you've heard this afternoon, is complex, including the role of Medi-Cal funding of the financing of our hospitals. It's nuanced and local. So I will briefly address how local plans are supporting their hospital partners, our role in financing of hospitals and Medi-Cal, and considerations for additional funding to support continued or expanded access.

So first, in their partnerships with hospitals and through the capitation rates paid by DHCS to local plans, first and foremost, negotiating sustainable rates is a part of that relationship. So we need to ensure that the rates that are paid to hospitals are fair and will support access to the Medi-Cal population. And those rates also need to be sustainable for the Medi-Cal program based on how DHCS pays plans, and I'll come back to that in just a moment.

Local plans are also timely, with authorizations and payments to hospitals. And then we also look at other opportunities to partner with hospitals to improve quality and make care more efficient. That includes things like coordinating care to support transitions from the hospitals to other levels of care and funding hospital pay for performance programs.

In fact, I'll just note that just last week, DHCS convened plans and hospitals to discuss best practices for supporting member transitions, and at that convening seven local plans with their hospital partners talked about how they're working together to do that locally. So to more specifically talk about the role of local plans in financing the hospitals. So DHCS spoke to some of the differences between how Medi-Cal pays hospitals and fee-for-service versus managed care. So I'll just elaborate a little bit.

So overall, the rates that local plans pay to their hospitals are reflective of what the local plans receive in their capitated rates from DHCS. So while local plans do consider requests for rate increases, and have in recent years often granted those requests, particularly given the impact of inflation and workforce challenges, we must also sure that the rates continue to be considered reasonable by the state and its actuaries.

So if the rates are not considered reasonable through the course of setting the capitation rates, which the state uses an actuary to do, those rates won't be fully funded in our capitation rates, meaning they're then unsustainable going forward. So many plans do pay at the Medi-Cal APR DRG rate or the set rate, so one time funding or paying significantly more than that rate is really not a viable solution and ongoing because it won't show up in the plans rates.

As has been discussed by the other panelists, the rates paid to hospitals by plans are of course only one source of the total Medi-Cal revenue provided to hospitals. The supplementals have been the topic of a lot of discussion, but represent, as the background paper discusses, $13 to $15 billion annually in addition to the base rates paid by plans.

And lastly, while I've given you the big picture of local plans role in supporting the hospitals, it's important to note, as other speakers have also said, that each situation is unique and that any funding solution, I think, should consider those unique challenges local issues and ensure that the solution is sustainable in the long term. So, as the Legislature considers ideas to address concerns regarding distressed or rural hospitals, we believe the following should guide those decisions.

First, ensuring that new funding goes to maintaining access to critical services, including maternity care and access to pediatric beds or strategies for reopening those services in areas where they've been discontinued and then any additional dollars, for example, through the MCO tax, which I know has come up in discussion this afternoon, should examine the needs across the entire continuum, including non hospital based care. Should funding be dedicated to hospitals, additional funding be dedicated to hospitals?

We believe there should be a way to ensure that the funding goes to hospitals that are serving a high volume of Medi-Cal patients or have a high percentage of Medi-Cal beneficiaries whose distress is driven by geographical challenges or an imbalanced payer mix, and that the funding be directly linked to increasing access to care and improving quality of care for medical beneficiaries. Thanks for inviting me to speak today and happy to answer any questions.

Good evening, Madam Chair and members of the committee. Jedd Hampton with the California Association of Health Plans. CAHP represents 43 Knox Keene licensed health plans that cover nearly 28 million Californians throughout the state.

California's health plans are deeply committed to working with the hospital community to meet the needs of all patients in the communities that we serve, and health plans are proud of the fact we have developed many contractual relationships throughout the state with these hospitals to serve their enrollees in a way where they can receive these vital services. In the interest of time, I am going to truncate my testimony a little bit today to ensure that I've answered the questions the committee has proposed.

So to that end, relative to the question about Medi-Cal and commercial managed care rates paid to hospitals in terms of what that looks like relative to financial distress, I'll just explain really briefly. In the commercial market, health plans and hospitals typically agree on a contract, and the health plan is obligated to pay the hospital the contracted rate agreed upon by the two parties.

Payment to an in network hospital can take a few different forms, but a majority of hospitals are paid under a capitated arrangement, which typically includes a per Member per month type of payment. These payments are not tied to patient volume and provide an important and consistent funding source to keep hospitals operating in a consistent manner. Overall, in the commercial market, health plans pay on average of 224% of what Medicare would have paid for the same service, the same facility.

This equates to approximately $4.5 billion per month from the health plans to the providers. Again, regardless of patient volume. It's important to note that health plans are required by law to promptly reimburse hospitals for services in a timely manner as set forth in the Knox Keene Health Care Act of 1975, and that failure to comply with the law subjects health plans to interest and financial penalties.

So I think we believe it's fair to say that, particularly on the commercial side, that we are doing our share in terms of hospital rates, in terms of what we're paying. In fact, I would note that the agenda points out as well that even California Hospital Association had mentioned that in the commercial space, that those rates are substantially higher in the commercial market. Number two, in terms of what challenges there are to increasing rates.

I think that's been hit on quite a bit today, particularly around how complex these financial structures are. I think my colleague from the local health plans of California had mentioned that it is a very complex process when it comes to increasing rates. I would mention that since 2020, hospitals have received about $170 billion in direct government aid since the pandemic began and received an estimated 100 billion in low-interest loans and a 20% boost to Medicare reimbursements for inpatient COVID admissions during that time.

So I think when we're looking at this situation, we do see, obviously, certainly, hospitals that are in financial distress. We see some that are doing just fine. And I think it really goes to the first speaker on panel number one today about how it's really tough to pin down unless it's on a case-by-case basis, which hospitals are struggling and what factors go into the reason why they're struggling.

So we really believe that the legislature must look at ways and examine some of the existing funding streams for hospitals and really understand and figure out why some hospitals are doing well and why some are not. So lastly, I will say other ways that health plans can support and stabilize hospitals, I just want to point out that health plans are committed, and we'll continue to do our part in working with the hospital community to meet the needs of the patients that we serve.

California health plans have stepped up to the plate numerous times over the past couple of years to support and stabilize hospitals, including providing stabilizing grants and advancing captain payments, like my colleague had mentioned, to hospitals in the midst of the COVID-19 pandemic, health plans were stepped up when several of the hospitals last year began signaling financial distress.

Specifically, as it relates to Madera Hospital, I would also point to our health plan efforts to support the MCO tax and ensure that as an industry, taxing ourselves as an industry to ensure the financial viability and stability of the Medi-Cal program and Medi-Cal providers. Moving forward has also been a way that we've continued to support and stabilize these hospitals moving forward. So, we remain committed to working with the provider community to address the solvency issues.

Want to thank you for the time and for the invitation to speak here today, and happy to answer any questions if you have.

Well, I really want to thank you all for coming and being a part of this panel and recognizing the role that you all play in the financial health of our healthcare system. Earlier, I think it was one of the first panels someone talked about equity and reimbursement, and when I asked her to elaborate, she specifically talked about negotiations with the health plans as far as reimbursement and how that can differ based on where you are throughout the state and essentially your negotiating power. Right.

But if a hospital closes, that's actually more expensive in the long run for health plans because what you're doing is you're creating an environment where people are unable to go and get early preventative care, early access. And so when they do show up at the hospital, they're sicker, longer stays, more infections, increased risk of surgeries that are not needed.

And so it really is more expensive to our healthcare system overall when we're not ensuring that these hospitals are able to stay open and afloat and provide all care to those patients there. So, thank you for being here and recognizing that you do have a tremendous role to play in this. One question that I have is, what are some of the other ways that you all can help support and stabilize our maternity care in our hospitals up and down the state?

It seems like every day I'm hearing about new maternity wards that are closing, or I like to just say labor and delivery wards that are closing, which is very concerning for me. So, in what ways can you all help stabilize that?

So, in partnership, because of all these closures, we convened a conference about two weeks ago to bring together national experts to really look at the issue. I think there are a series of policy levers separate from financing which can help. One is, I mentioned the nursing staffing ratio. The regulatory infrastructure that oversees hospital is controlled by the state through the California Department of Public Health.

So looking at some of those policies and realizing that they were built with an urban lens in mind, they're sort of structural urbanism, if you will, rather than what can work in a rural area. So, in particular, the idea of having a standby perinatal service combined with a birthing center is one, and then the other is the way we train nurses. Now, when nurses are coming through training programs and do their initial training, they're very specialized.

And the idea of training generalist nurses is a potential other area of policy change to try to really promote, whether it's first right in the initial training in nursing school but also fellowships that focus on rural nursing. So they're able to be cross-trained to work in many areas of the hospital in a rural setting. I think that would help a lot because if the hospitals, two of the most rural hospitals that closed, it was completely nurses.

We were offering extra higher rates, but they just couldn't find the nurses to staff that hospital with that amount of nursing. I think a key is to be able to have the nurses do the other work when there's not people in labor, so they don't have to just sit there and be paid to not work during that time.

And what exactly do you mean by standby perinatal services?

So the idea of a standby there are standby emergency services means that you have an emergency physician and other staff that are very nearby. And when a patient comes into the emergency room, they all converge to take care of that patient, but they don't have to be specifically in the hospital. So, standby perinatal service, if a woman is in labor at a birthing center and she needs to have an operative delivery, let's say the hospitalists that are covering need to be hospitalists that are usually their FPOBs that are capable of stepping in and doing an operative delivery if needed. They're already working during their hospitalist work on a rotating basis. So they have that piece.

They already have a surgeon on call, and they have anesthesia on call, and then the key is usually the midwife and a standby nurse can come in and provide the nursing support. So the idea is you can provide a safe, unexpected emergency delivery in a low risk person without having to have the nurses and the rest of the staff sort of physically in the building not doing anything.

A very interesting model. We can probably talk offline about that. It always makes me a little nervous because I didn't hear any OB in there, and when I hear emergencies, that's when you really need the specialized physicians in that particular area to handle that. But I am going to stop right now and thank all of our panelists, and I am going to open it up for public comment. Anyone with public comment can come to the mic, and you will have 1 minute.

Madam Chair, Mark Farouk, on behalf of the California Hospital Association, first, I want to thank you for holding this hearing and having this discussion that we had here today to talk about the financial difficulties facing hospitals. As we've talked about before, over 50% of California's hospitals operate in the red. One in five are at risk of closure. And I think you heard that today.

Go ahead,

You had eight hospital leaders, all coming from different geographic regions, different patient mixes, but all facing significant challenges due to high medical payer mixes. High MediCal and Medicare payer mixes, you can track. There was a contention made at the very beginning of the hearing that, somehow, there's money to be made in the medical system. I think if you track the payer mixes of hospitals that have high government payer mixes, you are going to see hospitals that are in distress.

Someone earlier named the different hospitals that have been in bankruptcy, and that tracks exactly with those high-payer mixes. And I'd also like to end on something we didn't talk about today because there probably wasn't enough time, but our critical access hospitals that are in rural areas in California that are at least 35 miles from another medical center. Two-thirds of those hospitals currently operate in the red, and there is a significantly more significant risk of closure that would be a disaster for our rural communities.

So another issue to keep in mind.

Thank you.

Madam Chair. Good evening. Awet Kidane, have the pleasure of representing the California Children's Hospital Association. We definitely want to align our sentiment and words with our colleagues from the Hospital Association, in addition to thanking the legislature for the efforts with the MCO tax, which, of course, is going to help when it's implemented. The specialized care of our eight freestanding hospitals adds to the complexities that my colleague just mentioned.

We have gene therapy that impacts, and that seeks to mitigate sickle cell in many of our regions, not just one that adds to the cost. Madam Chair, as you know, treating a peed is much different than treating an adult. Different complications, different costs. And what we ask for, in addition to thanking you for having this, is continuing to be at the table through these very difficult and detail-oriented conversations. Thank you very much.

Good evening. Matt Lege, on behalf of SEIU California, thank you for holding this hearing, and I greatly appreciate the committee's willingness to hold another hearing to bring in more diverse voices. I did want to appreciate the first panel from the California Healthcare Foundation to really talk about the overall picture and how, overall, many hospitals are doing very well, but I did want to echo the concerns by the Public Hospital Association with their long-term systemic deficits that we need to try to address.

Also want to just really make sure that as we're looking at some of these loans that are potentially turning into grants, that we're really making sure and focused on those hospitals meeting their performance improvement plans, their plans to make sure that they're financially on stable footing. Because as we heard from HCAI, we think that a lot of those are going to put them on the right ship.

Importantly, as we're looking at the long-term finances for the hospital, we did want to flag that largely, the drop in revenue from 2022 had to do with things that were not related to net patient operational income. It had to do with other factors that many of the economies had to face, such as like investment income that dragged the overall financials down. Also wanted to flag that the real importance of investing in the workforce.

I think we heard early on in the panel how they're paying absorbingly high rates to travel nurses, where that income really, in that grant dollars, largely from the federal government, could have gone to the workforce to try to retain that workforce.

And so that was what we heard from the workers during the pandemic of why should I stay if they're investing so much in travel nurses and so really appreciate the work by the legislature to invest in retention bonuses and then, of course, investing in the minimum wage to lift up healthcare workers, we think that's going to have a long-standing impact to try to retain our healthcare workforce and address some of these systemic issues.

And then lastly, or two things, just to finish just on the seismic requirements, I was brought up a number of times today. I just want to stress as we're talking about how important these hospitals are, I think it really does underscore how important it is to make sure that those hospitals are also operational after a major earthquake like the 2030 seismic standards would require.

And then, finally, just as we're considering additional money potentially for distressed hospitals, we would urge the Legislature to really think about the $500 million in proposed cuts for Cal Works and child welfare before considering additional funding for hospitals. Thank you very much.

Thank you. Madam Chair here on behalf of two clients today, first - and Sarah Bridge, sorry. Here, first, on behalf of the Association of California Healthcare Districts, we represent the 33 district hospitals in the State of California. There was a lot of talk today about designated public hospitals, but just want to underscore the continued need on the non designated public hospital side. Eight of the 17 hospitals that received the distressed hospital loan were district hospitals.

I think to really put a fine point on that, there is a need for our non designated public hospitals. In particular, want to point out that as independent hospitals, they have a really difficult time negotiating with their commercial plans. They lack the leverage that the larger public hospital system has. So really want to cement that point in front of the Committee. In addition, certainly look forward to working with HCAI on loan repayment to ensure that our district hospitals can repay those loans.

One factor in considering that is many of them do still have to meet their 2030 seismic requirement and desperately want to. They just simply don't have the cash capital to do it at this current juncture; on behalf of Plumas District Hospital they are one of the critical access hospitals in the state. Want to underscore the points made by the California Hospital Association. They have recently had to shutter their labor and delivery, mostly due to workforce, but largely also due to financial constraints.

Want to really take a look at the payment methodology that our critical access hospitals have in the Medi-Cal system to ensure that labor and delivery can remain open, as well as other important access to care issues. Thank you so much.

Good evening, Madam Chair. I'm Katie Van Deynze with Health Access California. Health access has supported efforts to provide support to distressed hospitals in order to prevent disruption of service to consumers, as long as those efforts are strategic, targeted, and time-limited towards hospitals that are in the most need and in our most underserved communities.

However, to protect access to care in the long term, we must keep working towards sustainable solutions that will control the out-of-pocket costs for consumers, such as the Office of Healthcare affordability. We also must carefully watch care mergers that drive up healthcare costs without improvements of quality in order to prevent increases in cost to consumers, as well as loss of services in communities, including labor and delivery.

As Madera seeks a potential partner to reopen, and as big hospital chains and private equity are acquiring different healthcare facilities, we are going to continue to support efforts for state oversight over healthcare mergers to prevent those increases in costs and protect access to services for communities. We must also pursue innovative solutions that reconsider how we pay hospitals, not just how much, including global budgeting and other payment reforms, to encourage innovation and sustainability in the healthcare system to ensure that we're prioritizing prevention and patients over profits.

And we look forward to conversations at the next panel and hearing and appreciate the hearing today. Thank you.

Well, thank you all and seeing no other public comment, I want to thank all of our speakers, the administration, the hospitals and the public for your participation today in this hearing. We are adjourned.