High Desert Hospitals Fighting for Financial Solvency

Three rural, stand-alone hospitals in the Inland Empire are in various stages of addressing daunting financial challenges.

Victor Valley Community Hospital in Victorville, Colorado River Medical Center in Needles and Hi-Desert Medical Center in Joshua Tree are all attempting to emerge from financial distress, but in different ways. The bankrupt Victor Valley Community Hospital has been sold to a health care conglomerate in Riverside that plans to convert the not-for-profit hospital to a for-profit organization. Colorado River Medical is in the process of being sold to a group of investors, who plan to turn the city-owned and -operated hospital into a private not-for-profit. Hi-Desert Medical Center, a publicly owned not-for-profit, is exploring ways to defray costs and regain financial solvency by forming strategic partnerships in the region.

These hospitals play a critical role in providing care in a region that is nearly the size of Vermont and New Hampshire combined, where long stretches of desert separate small, remote towns and communities.

But they are grappling with high numbers of uninsured or underinsured patients, as well as economies of scale that larger hospital systems are not subject to.

The financial pressures these hospitals have encountered are similar to those being faced by small, rural hospitals across the nation, experts said.

Those challenges include declining Medicare and Medicaid reimbursement, the costs associated with health care reform, implementing electronic health records, maintaining or upgrading aging infrastructure and obtaining funding for construction to meet California’s seismic safety requirements.

“I think the pressures that small, rural hospitals are feeling are the pressures that hospitals in general are feeling,” said Peggy Broussard Wheeler, vice president of rural health care for the California Hospital Association. “I think small, rural communities just don’t have the resources that some of their larger brethren have to cover all of these challenges.”

Victor Valley May Be Part of ‘Dying Breed’

After a long bankruptcy process that began in 2010, Victor Valley Community Hospital in Victorville was recently sold to KPC Global, which has purchased two other distressed hospitals in the region. KPC will invest in capital improvements for the hospital and restore the hospital’s financial footing, said Kali Chaudhuri, KPC founder and owner.

In October, a judge approved the sale of Victor Valley for $26.7 million. But the price tag for the hospital is actually higher, Chaudhuri said. Another $7 million in stabilization funds will be set aside for improvements at the hospitals. KPC also was required to allocate $3 million for emergency operations and put another $3 million in escrow until the hospital becomes profitable, Chaudhuri said.

Some observers believe it’s becoming more difficult for small, stand-alone, not-for-profit hospitals like Victor Valley Community Hospital to survive.

Sam Maizel — a partner with the law firm Pachulski Stang Ziehl & Jones, which represented the hospital in its bankruptcy proceedings — thinks small, not-for-profit hospitals in rural areas are a “dying breed” and predicts that more not-for-profits will become affiliated with for-profit hospitals or for-profit hospital chains in the future.

“The bankruptcy wasn’t caused by poor leadership; it was caused by market forces. One of the major drivers for the bankruptcy was uncompensated care,” Maizel said, citing the high unemployment rate in the High Desert, which has been hit hard by the foreclosure crisis and economic recession.

“These hospitals operate on really slim margins, even the slightest disruption in their payment stream can be devastating,” he said.

Even though KPC Global plans to convert the hospital to a for-profit entity, Chaudhuri said he believes not-for-profits can exist as long as they have educated leadership.

“It’s not about for profit or nonprofit,” he said. “We should talk about management. Management should be done right.”

Like others interviewed for this article, Chaudhuri said one of the challenges facing small, rural hospitals is negotiating contracts with health insurance plans. Small hospitals typically do not have the negotiating power of large hospitals or chains, experts said.

Chaudhuri is no stranger to legal and financial problems. His former company, KPC Medical Management, filed for bankruptcy in 2000, shuttering nearly 40 clinics and disrupting care for 250,000 patients. The company reportedly suffered from management problems. Last year, a lawsuit was launched by Prime Partners against Chaudhuri alleging racketeering activities in Riverside County. A U.S. District Court judge dismissed the racketeering charge in May.

Needles Hospital Moves Toward Not-For-Profit Status  

In September, the Needles City Council and hospital board of trustees took a step toward divesting Colorado River Medical Center when they formally accepted proof of funding from Community Healthcare Partner. The medical center is a designated critical access hospital.

The plight of the medical center has been an issue of central importance in the small community on the Arizona border for a number of years. In 2008, the city took control of the ailing hospital to avoid closure. But turning around the hospital’s balance sheet proved difficult. In 2010, voters approved Measure Q, a proposition requiring the city and board of trustees to sell the hospital. After the sale to a group of local citizens stalled in May, the city council accepted an offer from a group of investors called Community Healthcare Partner, which plans to convert the hospital to not-for-profit status, said current hospital CEO Jon Freeberg.

“This is not Beverly Hills. It’s a poor, dying town trying desperately to figure out how to stay alive,” Freeberg said. “Big hospital chains have economies of scale. That’s very hard to do for small hospitals.”

Freeberg acknowledged that even as a not-for-profit, the hospital may face future financial difficulties.

“I assume they think they can bring doctors in here, and the doctors can get enough patients so they can get enough money so they can make a return on their investment,” he said. “They feel they can do that. God bless them.”

The deal is expected to close Jan. 4, 2013. Freeberg attributes the medical center’s troubles to a cash flow problem. About 70% of the hospital’s revenue comes from Medi-Cal and Medicare. Medi-Cal is California’s Medicaid program.

“You have to pay vendors and personnel day to day, but if 70% of your income is coming 18 months after you’ve spent the money, you’ve got yourself a problem,” he said. “For both Victor Valley and Hi-Desert Medical Center and especially me, that cash flow problem is mammoth.”

But the continued existence of a hospital in the remote region, 200 miles from the county seat, is still critical.

“We’ve saved many a life here because we’re open,” Freeberg said. “People would have died had we not been here.”

Joshua Tree an Important Part of Safety Net

Like Colorado River Medical Center, Hi-Desert Medical Center, which is part of a public health care district, has been struggling to make ends meet.

On Nov. 14, the hospital released a statement explaining that the district would enlist the help of consultants to find ways to regain financial solvency.

“It is very important that our community understand our financial circumstances and the steps we are taking,” said Lionel Chadwick, Hi-Desert Memorial Health Care District CEO, of the decision to issue the statement.

The medical center has a patient demographic common to rural areas — a high number of charity and uncompensated care cases, as well as Medicare patients, he said.

Like Victor Valley Community Hospital, the medical center has been hit hard by the economic recession and a large volume of uninsured patients.

“It presents huge solvency issues for small hospitals,” Chadwick said.

The Hi-Desert Medical Center, which is nearly 75 miles from the county hospital, Arrowhead Regional Medical Center, remains an important safety-net facility, according to stakeholders.

Chadwick said it’s imperative the hospital survive, which is why the board is taking steps to identify opportunities to improve the hospital’s financial standing.

Asked whether the district might need to declare bankruptcy, he said, “Is it imminent for us? It is not.”

But he added that the hospital has turned to some of its reserves, which is concerning. And if the hospital keeps drawing upon its reserves, it would only be a matter of time before bankruptcy would be reached, he said.

Health Reform’s Impact on Hospitals Still Unclear

Whether health care reform will accelerate the consolidation of rural hospitals remains to be seen. Experts said these hospitals could face increasing challenges as more people turn to them for care.

There also is speculation that the health care reform law’s mandate to form accountable care organizations may push rural hospitals toward new partnerships.

Maizel believes the ACO mandate may actually hurt small, rural hospitals. Because these hospitals are so isolated, they don’t have access to the synergies to create lateral and vertical groups that larger hospitals in more urban areas have. As a result, he thinks that could leave small, rural hospitals at a disadvantage.

An “Environmental Scan and View of the Future” — released by the California Hospital Association this year — predicts that rural hospitals will turn to telemedicine and technological partnerships with other hospitals to deliver health care services and that many will affiliate with hospital systems.

“I think health care reform will certainly bring about discussions about consolidation, affiliation, perhaps mergers,” Wheeler said. “But that’s yet to be seen.”

Throughout the state, some rural hospitals are already weighing these options.

“A number of hospitals are looking to form networks or collaboratives with other hospitals to marshal the resources of their surrounding facilities to try to shore up the financial situations they find themselves in,” Wheeler said.

In addition, over the last two years the California Critical Access Hospital Network has been formed by the “smallest, most vulnerable hospitals” in the state, those with 25 or fewer beds that are at least 35 miles from another hospital, Wheeler said. Through the network, hospitals are sharing best practices and trying to figure out ways they can develop group purchase options.

Similarly, Chadwick believes small, rural hospitals will need to start looking at aligning with other hospitals to achieve economies of scale. In the case of Hi-Desert Medical Center, those partnerships could be with more urban hospitals or with other rural hospitals, such as those in Blythe or Needles, he said.

Shared Challenges

Another major challenge facing small, stand-alone hospitals in rural areas is that they don’t have financial infrastructure to fall back on like hospitals in larger systems. 

“When you’re on your own, you’re often relying on government reimbursement, which we know is declining,” Wheeler said.

In addition, rates of the uninsured and those who are underinsured are higher in rural areas, saddling rural hospitals with a heavy financial burden, she said.

Hospitals must provide care for everyone who visits the emergency department, regardless of a patient’s ability to pay. In rural areas, hospitals often don’t receive the same amount of reimbursement from Medi-Cal and Medicare as urban hospitals, although rural patients are often sicker, older and poorer, tipping the financial scales even further, according to experts.

Small, private not-for-profit hospitals may face an even greater challenge than hospital districts because they are not eligible for certain kinds of government assistance, experts said. For example, if a hospital district experiences financial difficulties, it can ask the community to apply a bond or a parcel tax, but a not-for-profit can’t.

Still, Wheeler doesn’t think the demise of the small, rural, not-for-profit hospital is near.

“Their communities need them and want them to be there, and I think that desire on behalf of the community and hospital will spark the kind of innovation required,” she said. “It may not be business as usual, but it will continue to be business.”

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