Economy a Hurdle for Children’s Hospital Bond Measure

Four years after winning a $750 million bond measure, children’s hospitals in California will ask voters on Nov. 4 for an additional $980 million in bond funds to help them continue expanding and improving facilities. This time around, however, the state’s fiscal predicament is casting a longer shadow over the debate.

Passage of Proposition 3 would make grant funding available to eight private, not-for-profit children’s hospitals and five children’s hospitals affiliated with the University of California for new construction and equipment, remodeling, and other infrastructure needs.

The ballot initiative comes amid heavy pressures on these specialty-care hospitals — declining state reimbursements, increasing costs and strong growth in demand for pediatric services.

“Recent polling shows that California voters want to help children’s hospitals meet the needs of the state’s most seriously ill and injured children, notwithstanding the failure to enact health care reform and the current state budget deficit,” said Diana Dooley, president and CEO of the California Children’s Hospital Association, which proposed the measure.

Greater Burden on Taxpayers

Whether voters are inclined to look beyond the state’s red ink and cloudy financial future remains to be seen. Although no groups officially have formed to fight Prop. 3, the Howard Jarvis Taxpayers Association says it will oppose this and two other bond initiatives on the ballot.

The taxpayers association believes that the state’s debt ratio already is too high, said Executive Director Kris Vosburgh. “That means all of our bonds are costing more, which means that taxpayers end up paying more.”

Including principal and interest, Prop. 3 would cost about $2 billion over 30 years. At a joint hearing of the California Senate and Assembly health committees in early July regarding Prop. 3, the state Legislative Analyst’s Office reported that California must pay a higher interest rate on the bonds it issues because the state “has a very low credit rating at this time — pretty close to the bottom of the pack compared to other states.”

The state currently services $53 billion in bonds. An additional $68 billion in authorized but unsold bonds are in the pipeline, according to David Vasche, LAO’s director of economics, revenue and taxation.  

Prop. 3’s interest-related expenses are troubling for the Service Employees International Union, some of whose members work at children’s hospitals. “We have a serious question as to whether these hospitals deserve to be first in line for what is the most extravagant way of getting dollars to them,” Beth Capell, SEIU’s Sacramento lobbyist, told the Senate and Assembly health committees.  

A Critical Role

Children’s hospitals play a critical inpatient and outpatient role in California. They provide 88% of all pediatric heart surgeries in the state, 97% of pediatric organ transplants and 71% of pediatric cancer treatments — services typically not available at general acute care hospitals. In addition, they house pediatric and neonatal intensive care units and treat severely injured children.

More than one million sick or injured children receive care at the 13 California children’s hospitals each year, regardless of their families’ ability to pay.

But the equipment, facilities and staff — including specialists and subspecialists such as pediatric gastroenterologists, nephrologists, and hematologists — necessary to provide these services are expensive.

On average, more than 50% of patients at children’s hospitals are enrolled in Medi-Cal, the state Medicaid program, and Medi-Cal reimbursements often do not cover the actual cost of care. The portion of Medi-Cal beneficiaries at Children’s Hospital Los Angeles and Children’s Hospital Central California in Madera is even higher — 70%.

Four Reasons To Try Again

So why do children’s hospitals need more money if, according to the California Health Facilities Financing Authority, as of July 2008 they had used only about $403 million of the $750 million available through Prop. 61, the 2004 bond measure?

A primary reason is the continuing squeeze on Medi-Cal reimbursements, which means the hospitals have little or no operating margins to apply toward infrastructure.

Moreover, the reimbursement situation could deteriorate in coming months.

A second reason children’s hospitals are seeking more grant funds is that planning, state approvals for, and construction of facilities take years to complete; the hospitals are projecting their budget needs well into the future.

Furthermore, the hospitals don’t receive reimbursement from Prop. 61 grant funds until building projects are finished. Hospital leaders expect to spend all of the $750 million from Prop. 61 funds, the availability of which expires in 2014.

Third, the hospitals say that passage of Prop. 3 is critical because, as a 2007 RAND study revealed, the cost of building new hospital facilities has soared to about $1,000 per square foot in recent years. That is double the cost of hospital construction in 2001, and it is now more than three times the cost for new office structures.

Expansion of the pediatric intensive care unit at UC-Davis Children’s Hospital, funded in part by Prop. 61 funds, exemplifies this inflationary spiral. The new unit had an initial price tag of $19 million but will cost about $30 million by the time it is completed, according to Anthony Philipps, chair of the department of pediatrics at UC-Davis Medical Center.

Finally, there is mounting pressure on hospital capacity as California’s pediatric population grows. The California Department of Finance estimates that the number of children will increase by 35% in the next two decades.

“We’ve had to delay — sometimes for months — elective surgery for some patients because there just wasn’t a bed to put them in after the surgery was over,” says Barbara Ryan, vice president for government affairs at 248-bed Rady Children’s Hospital in San Diego. Half of the nearly 143,000 sick or injured children treated there last year were Medi-Cal beneficiaries.

“When you are 50% Medi-Cal and the reimbursement is not adequate to cover costs, there’s absolutely no way you can put aside the money necessary to take care of infrastructure needs of all kinds — and certainly not enough to be able to build a building that costs $260 million,” Ryan says.  

Seismic Upgrade Requirements

Rady, like other hospitals in California, faces deadlines in 2013 and 2030 to comply with the state’s stringent building standards for earthquake safety.

The seismic requirements, the rapid increase in construction costs and crimped operating margins are a triple whammy for some hospitals, many of which will not be able to meet the seismic-upgrade deadlines, according to the 2007 RAND report. Hospitals that don’t upgrade face the risk of closure.

Children’s Hospital of Orange County exemplifies some of the pressures. Over the last 10 years its average daily number of patients has increased from 65 to 165, a number that Dave Schinderle, vice president of finance, expects will reach 180 in the coming fiscal year.

The hospital has used Prop. 61 grant funds to remodel and expand primary care and specialty clinics, build a 22-chair outpatient infusion center that opened in June and adopt a complete electronic health record system.

Difficulty Obtaining Loans

“Debt options have become complex and very, very difficult because of the subprime mortgage mess that you read about in the paper every day,” Schinderle told the Senate and Assembly health committees. “Without the grant funds,” he added, “many projects like ours might not be possible.”

Aside from the specialty and subspecialty care they provide, children’s hospitals differ from other hospitals in that their services are regional rather than local. If a facility were to close, patients and their families would have to travel many miles to receive similar specialty care elsewhere.

No one predicts that any of the children’s hospitals would close if Prop. 3 failed. Instead, hospital officials foresee possible cutbacks in services and/or staff, or a diversion of resources from one or more services to others, as the facilities try to cope financially.

Related Topics

Health Care Costs Insight Medi-Cal