Inside a $300M push to save failing hospitals

When Madera Community Hospital declared bankruptcy and suddenly closed its doors a year ago, an agricultural community of 68,000 Californians lost its sole source of emergency and specialty care.

The 132-bed hospital, which serves a largely Latino population 20 miles northwest from Fresno in the San Joaquin Valley, fell victim to familiar problems that plague hospitals across the U.S. Since the COVID-19 pandemic began in early 2020, labor and operational costs have outpaced revenue, particularly at facilities that serve patients predominately covered under programs such as Medicaid and Medicare.

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In Madera County, where 31% of residents live below the federal poverty level, these challenges converged and the hospital shut down. A last-minute bid to join Livonia, Michigan-based nonprofit Trinity Health fell through. The nearest location where low-income agriculture workers and others who live in the area can get emergency care or deliver their babies is 30 miles away.

Approximately 700 U.S. hospitals are on the brink of failure, according to the Center for Healthcare Quality and Payment Reform. Hospital bankruptcies have become commonplace due to mounting financial pressures since 2020, the American Hospital Association reported.

The hardest-hit facilities often are located in places with high percentages of Medicaid and Medicare enrollees or in rural areas suffering from population declines. California is attempting to reopen hospitals and prevent future closures by allocating $300 million in no-interest loans to nonprofit and public providers.

These hospitals requested and failed to obtain $1.5 billion from the California State Legislature to rescue troubled facilities last year, according to Gary Herbst, CEO of Visalia-based Kaweah Health. Out of these negotiations emerged the Distressed Hospital Loan Program, from which more 30 applicants sought to borrow $900 million. Ultimately, 17 hospitals received $300 million, which they are expected to repay within 72 months.

This one-time loan may be the lifeline Madera Community Hospital needed to reopen. Other hospitals stress that short-term financial assistance doesn't solve the underlying reasons they are distressed in the first place. Reimbursements from Medicare and Medicaid—known as Medi-Cal in California—have not risen at the same rate as medical inflation, for one thing, executives said.

This has hospital leaders skeptical about how sustainable the aid from the loan program may be. For some, the funding has accomplished little more than postponing an inevitable end. Others still await their allocations from the state.

Reopening Madera

In July, the nonprofit system Adventist Health signed a letter of intent to revive Madera Community Hospital. The facility had applied for funding through the California Distressed Hospital Loan Program and secured $50 million in August. But in November, Roseville-based Adventist Health withdrew from the deal, citing an inability to devise a financially viable plan.

The hospital subsequently found itself in bankruptcy court facing liquidation to settle demands from creditors. Last month, the Madera provider entered into a temporary management service agreement with American Advanced Management, with a full takeover pending approval from the California Department of Justice and a federal bankruptcy court.

American Advanced Management specializes in reopening and restoring hospitals, and operates 10 facilities in California and Texas that include specialty and critical access hospitals. The company, having previously exited the business of reopening hospitals due to economic challenges, views the state loan to Madera Community Hospital as key to making the project economically feasible, Chief Strategy Officer Matthew Beehler said.

The for-profit company has settled the hospital's bankruptcy debts and awaits approval for its reopening plan. Initially, the facility may offer limited services, but American Advanced Management aims to expand gradually, Beehler said.

Through bankruptcy, American Advanced Management will eventually take ownership of Madera Community Hospital and operate it as part of its hospital network. The company's facilities will share human resources, marketing and sales, supply chain, and revenue cycle management functions. This arrangement has enable American Advanced Management's other hospitals to trim expenses by 5%, Beehler said.

American Advanced Management also intends to refer patients from its other properties, such as Coalinga Regional Medical Center, a critical access hospital about 60 miles away. American Advanced Management believes this will address transfer challenges and direct new business to Madera, Beehler said.

“Our goal is to return as many services as were previously being provided as we can and do in a sustainable manner,” Beehler said. “Once that base stability of historical volumes has returned, we can begin to grow new services that the community needs and can support.”

The reopening process involves a 120-day period during which the management company will assess the facility's condition and determine what equipment needs upgrading, Beehler said. The hospital has been vacant since last January, and American Advanced Management will have to spend on facility improvements, food and service infrastructure, and licenses for pharmacy and laboratory services. The California Department of Public Health and the federal Centers for Medicare and Medicaid Services also must clear Madera Community Hospital to begin receiving Medicare and Medi-Cal reimbursements, he said.

A path to sustainability

For California hospitals on the brink of failure, the Distressed Hospital Loan Program has not helped build sustainability, executives said.

Kaweah Health is a public hospital that caters to a community of 475,000 people 70 miles north of Fresno in Tulare County, which has the highest concentration of Medi-Cal enrollees among California counties. More than six in 10 residents are Medi-Cal enrollees, according to the California Health and Human Services Agency.

Before the pandemic, Kaweah Health boasted an A3 credit rating with a stable outlook from Moody's Investor Service, CEO Gary Herbst said. The hospital's modest 2%-3% operating margin allowed it to thrive and invest in facilities and equipment, he said. But when COVID-19 struck, the landscape shifted dramatically.

Between March 2020 and June 2023, Kaweah Health endured a cumulative $150 million loss it primarily attributed to escalating contract labor costs. The provider spent $110 million on temporary workers during that time, employing as many as 240 traveling nurses per day at $200 an hour to address labor shortages. By comparison, staff nurses make $50 an hour, Herbst said. Inflation compounded its challenges and caused liquidity to plummet from 170 days to 62 days by last March. Consequently, Kaweah Health found itself out of compliance with bond covenants and its credit rating declined.

Internal changes, including reducing access to healthcare in its low-income community, have become necessary, Herbst said. Kaweah Health has laid off workers, reduced elective surgeries that don’t turn a profit, and cut executive pay. The health system also stopped contributing to employees' 401(k) retirement plans and is working to renegotiate with vendors and health insurers to cut costs and bolster revenue.

Despite these hardships, Herbst said the provider is beginning to see improvements. From July through November, the hospital incurred a $5.5 million loss, significantly better than the budgeted $15 million loss. Liquidity rebounded to 82 days, nearing the 90 days required under its bond agreement. Although finances are stabilizing, looming costs include California's new $25 minimum wage for healthcare workers

Kaweah Health got $20.8 million from the distressed hospital loan program in August. However, the funding has yet to materialize. The state demands collateral but the hospital's assets are tied up in securing $200 million in outstanding bonds, Herbst said. District hospitals in California can't pledge their buildings to secure debt, leaving future revenue as the only collateral option. Originally earmarked for the 401(k) match in the employee plan, the loan's delay has created uncertainty, Herbst said.

Delaying closures

In Los Angeles, nonprofit Martin Luther King, Jr. Community Hospital, a safety-net facility that received $14 million from the loan program, predicts it will run out of money within months. The state funding provided a temporary lifeline to sustain the institution while leaders search for long-term solutions that, at the moment, appear elusive.

"For us and similar hospitals, it is a bridge to help us stay afloat as we work on more lasting solutions to our funding challenges. It's not a permanent fix," CEO Dr. Elaine Batchlor said.

Nearly 90% of the provider’s patient population is enrolled in government health programs, with 70% on Medi-Cal and 20% on Medicare, Batchlor said. The South Los Angeles community faces high rates of poverty and significant deficits in community care, which creates substantial demand for the emergency department, she said. Inadequate reimbursements cause millions of dollars in losses in the emergency department alone and threaten closure, she said.

The overarching issue for many hospitals is inadequate compensation, particularly from Medicaid and Medicare, Batchlor said. The financial challenges reached a critical point during the pandemic, with an influx of patients, higher costs, inflation and the ongoing labor shortage contributing.

Yet Martin Luther King, Jr. Community Hospital, is not contemplating service reductions, Batchlor said. Cutting services would not solve the problem, especially since its emergency department is the only one in the area and is among the busiest in the city, Batchlor said. The hospital has advocated for additional supplemental funding for its emergency department, she said.

"The only way people get to us is through the emergency department, so if we closed the emergency department, we might as well close the hospital," Batchlor said. "If we close ours, we're just adding to the problem of access that's already bad in our community, and that is just not something that's consistent with our mission."