In yet another sign of the increasing financial stress facing US hospitals, a public health care operator in California has filed for bankruptcy protection.
(Bloomberg) — In yet another sign of the increasing financial stress facing US hospitals, a public health care operator in California has filed for bankruptcy protection.
San Benito Health Care District in Hollister filed for Chapter 9 bankruptcy on Tuesday, citing labor costs, a years-long shortage of working capital and a $5.2 million overpayment from Medicare it had to return, the court filing said. The Chapter 9, which is filed by municipalities and public entities, is rare compared to other bankruptcy filings used by corporations and individuals.
The move allows the district to address excessive health-care costs for its workers and find a partner or buyer, a press release prior to the filing said. The district operates the 25-bed, 116-year-old Hazel Hawkins Memorial Hospital and a handful of specialty and rural health clinics and nursing homes.
In court papers, it listed assets of $100 million to $500 million and liabilities of $50 million to $100 million. It is one of California’s 76, mostly rural, health care districts which are run by locally-elected boards to operate and finance ailing hospitals in underserved areas.
Hospitals in California are in a “precarious position,” Matt Fabian and Lisa Washburn of Municipal Market Analytics wrote in a note on Monday, citing the closures of nine rural hospitals in the state since 2005. And 20% of the state’s hospitals broadly are at risk of closing, according to an April report by consultant Kaufman Hall, which also says more than 70% have “unsustainably low margins.”
Governor Gavin Newsom this month approved $150 million in interest-free loans to help financially-strapped hospitals. The program will boost the credit outlook in the short term, Fabian and Washburn wrote.
Read more: Newsom Approves $150 Million in No-Interest Loans for Hospitals
The challenges, of course, are not just in California, they’re particularly dire for rural facilities across the US. While patients are seeking care after early-pandemic shutdowns, hospitals are coping with notably higher labor costs and shortages, the end of pandemic-era federal aid and a long-term movement of many profitable procedures to outpatient facilities. Overall expenses rose 17.5% between 2019 and last year, according to a report issued by the American Hospital Association.
While larger facilities have big endowments and recognized brand names to cushion their balance sheets, smaller facilities lack those benefits. And rural facilities that treat a disproportionate number of elderly and poor patients get reimbursements from Medicare and Medicaid that are lower than what private insurance pays. That contributes to what Fitch Ratings has called “a renewed credit divide.”
Rural hospitals often lack the patient volume to support operations, said Brock Slabach, chief operations officer at the National Rural Health Association.
Slabach said California’s loan program can do a lot of good but repayment may be difficult, especially as rural hospitals are already looking at construction costs needed to bring their buildings up to code.
“Anything that provides access to capital for a rural hospital is very welcomed,” but finding financing continues to be difficult for rural facilities, Slabach said in an interview. “To access capital, you need to have a demonstration of financial strength and financial viability.”
The district, which employs about 700 workers, issued bonds in 2005, 2014 and 2021, according to a court filing.
The San Benito Health Care District has been cutting costs but will run out of cash next year if it can’t modify operations, Mary Casillas, interim chief executive, said in court papers. Like many bankrupt public entities, among the district’s main financial problems is unfunded pension obligations, according to the documents.
The district’s health care facilities will remain open during the bankruptcy, said Marcus Young, a spokesman for the district.
A consultant’s report from last year recommended three options to allow the district to increase enough revenue to remain independent, all costing at least $200 million. But management concluded that a merger with a larger system would be a more optimal solution.
Young said filing for bankruptcy will bring “more interest” from a buyer, adding that several parties have expressed interest in a potential partnership or purchase.
The San Benito Health Care District case is 23-50544, in the California Northern Bankruptcy Court in San Jose
–With assistance from Steven Church.
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