The fate of yet another ailing California hospital hung in the balance last week, threatening to become the latest casualty of the state's financially perilous healthcare environment.
Brea (Calif.) Community Hospital, mired in Chapter 7 bankruptcy proceedings, was spared from immediate closure March 18 after receiving a last-minute loan of $500,000 from one of its potential buyers.
The emergency funding, provided by Prime Healthcare Systems, Riverside, Calif., allowed the 162-bed hospital to meet a payroll of about $360,000 and is expected to keep the facility open for at least one month while a court-appointed trustee determines how best to pay off its more than 500 creditors.
U.S. Bankruptcy Judge John Ryan approved the cash infusion just one day after seizing control of the hospital from its owners and appointing lawyer Richard Diamond as the trustee to run the facility.
Since then, Diamond has laid off several of Brea Community's 200 employees and held talks with its suitors. He said he expects to decide within 30 days whether to sell the hospital whole or close it and sell off its assets.
"Ultimately, it comes down to whether there is a proposal (for acquisition) that provides as much value to repay creditors as liquidating the hospital's assets," Diamond said. "Every case is unique."
Brea Community posted an operating loss of $3.5 million in 2004 on $26.1 million in operating revenue, according to California's Office of Statewide Health Planning and Development. It had $13 million in debt and less than $10,000 in the bank as of Jan. 28, when it originally filed for Chapter 11 bankruptcy protection; the judge later ordered it into Chapter 7 liquidation proceedings.
Brea Community's predicament underscores the mounting financial woes facing California hospitals, of which at least 16 others have filed for bankruptcy protection since early 2000. Five of those facilities have since closed, including 110-bed Elastar Community Hospital, Los Angeles, which was ordered to liquidate its assets in August 2004 (Aug. 23, 2004, p. 24). Another hospital that closed after filing for Chapter 11 in December 2003, 49-bed Santa Paula (Calif.) Memorial Hospital, may reopen in the fall if its sale to Ventura County Medical Center, Ventura, and reorganization plan are approved by a federal bankruptcy judge at a hearing set for April 6.
All told, 31 emergency rooms have closed statewide since 2000. In the past 18 months, nine hospitals have shut down entirely and three others have shuttered their ERs or converted them to urgent-care centers, which provide fewer services and don't accept ambulances. "The blows keep coming," said Jim Lott, executive vice president of the Hospital Association of Southern California. "Several other hospitals are teetering on the edge and could close if things don't change drastically. It's no exaggeration to call this a crisis."
Hospitals blame their predicament on a confluence of financial pressures, especially meeting about $30 billion in seismic-safety retrofitting requirements and complying with the state's nurse-staffing law, which regulators have estimated could cost the industry up to $956 million per year by 2008.
Compounding the situation has been the growing number of Californians in Medicaid-about 4.8 million in 2003, up 37% from 3.5 million in 1990. Hospitals typically lose money on such patients because Medicaid tends to pay less than it costs to provide services. In 2003, California hospitals absorbed a combined Medicaid payment shortfall of $1.31 billion, according to the state health-planning office.
Arguably the greatest strain on the state's hospitals has been the steady spike in the number of uninsured who are forced to seek care through emergency rooms. In 2003, roughly 6.4 million Californians were uninsured, up 19% from 5.4 million in 1990. And according to an October 2004 report by the California Medical Association, treating those who were unable to pay resulted in a combined loss of $635 million for the state's ERs and emergency physicians in the fiscal year ended June 2002, an 18% increase in losses from the year before.
As for Brea Community, its two principal owners have blamed the hospital's financial woes on the high cost of medical supplies and equipment and stiff competition from larger neighboring facilities. Brea Community's management referred all questions to the hospital's attorney, Sarah Petty, who did not return numerous calls.
Prime Healthcare is competing with at least one other bidder, Spectrum Medical Center Partners, a Newport Beach, Calif.-based group of about 30 physicians, to buy Brea Community. Prime Healthcare officials could not be reached for comment.
Spectrum, which had an option to buy Brea for $6 million, plans to bid again, said Jeremy Hogue, chief executive officer of Sovereign Healthcare, the investment firm that manages Spectrum. The doctor group exercised its option in November 2004, but the hospital's owners, who were then entertaining higher bids, challenged the validity of the transaction. The bankruptcy filing made the dispute moot.
Hogue said his group had offered to provide the same kind of emergency financing as Prime Healthcare. But he emphasized that Diamond's decision to accept Prime's offer would have no bearing on the acquisition process.