California Healthcare Districts in Crisis

INTRODUCTION

While financial conditions in California cities have improved markedly since 2012, many of the state’s 78 healthcare districts are struggling. Last April, Palm Drive Healthcare District in Sebastopol filed for protection under Chapter 9 of the federal bankruptcy law.  In December, the West Contra Costa Healthcare District, which operates San Pablo-based Doctors Medical Center received a $3 million bailout from Contra Costa County after district voters rejected an additional parcel tax. Palm Drive and West Contra Costa are the two most visible cases of healthcare district financial problems, but our review suggests that they are not alone.

Healthcare districts are local governments dedicated to providing health services to their residents. They are special districts that operate independently from city and county governments. Although voters elect district board members, public awareness of these entities is often limited. Perhaps as a result, many of these districts have strayed from their original functions or even outlived their reason for being,

In the 1940s, California experienced a shortage of acute hospital beds, especially in rural and suburban areas, partially due to an influx of wounded soldiers returning from World War II. The state legislature responded in 1945 by passing the Local Hospital District Law. This act authorized the creation of local taxing districts to build and operate hospitals in medically underserved areas. Most of today’s healthcare districts were formed as hospital districts in the late 1940s and 1950s.

District hospitals created under the law were typically small, independent facilities. Many of the hospitals have had difficulty keeping up with industry changes in recent decades. Fee for service medicine has been largely replaced by third party payment and managed care, while the length of hospital stays has declined sharply. Large healthcare organizations, like Kaiser Permanente and Sutter Health, have proved better able to adopt to the new environment.

In some cases, hospital districts responded by closing their hospitals or transferring them to larger providers. Rather than dissolve, some districts diversified into other medical services prompting the legislature to rechristen the “hospital districts” as “healthcare districts” in 1994.  In other cases, districts continue to operate inefficient hospitals to the detriment of local taxpayers. We anticipate more bankruptcies in this area. Although harmful to creditors, bankruptcies and dissolutions of some healthcare districts may be the best outcome for local taxpayers and other stakeholders.

BANKRUPTCY FILINGS BY CALIFORNIA HEALTHCARE DISTRICTS

The Palm Drive district bankruptcy filing is the twelfth chapter 9 bankruptcy petition by a California healthcare district in the last twenty years. The following table lists these filings:

Healthcare District Bankruptcies – 1996 to 2014

Year	Health Care District	Court	Case Number
1996	Heffernan Memorial Hospital District	Central	95-10251
1996	Corcoran Hospital District	Eastern	96-15051
1997	Kingsburg Hospital District	Eastern	97-15254
1999	Southern Humboldt Community Health Care District	Northern	99-10200
2000	Chowchilla Memorial Hospital District	Eastern	00-13597
2000	Sierra Valley District Hospital	Eastern	00-30288
2001	Alta Healthcare District	Eastern	01-17857
2003	Coalinga Regional Medical	Eastern	03-14147
2006	West Contra Costa Healthcare District	Northern	06-41774
2008	Valley Health System	Central	07-18293
2009	Sierra Kings Health Care District	Eastern	09-19728
2014	Palm Drive Hospital District	Eastern	14-10510

 

Most of the bankrupt districts have not been dissolved. West Contra County Healthcare District continue to operate Doctor’s Hospital amidst ongoing financial crises culminating in the County bailout mentioned above.  On the other hand, Alta Healthcare District sold its facilities and no longer offers services, but remains in existence. Of the 12 districts listed above, only Valley Health System appears to have been liquidated.

FINANCIALLY CHALLENGED CALIFORNIA HEALTHCARE DISTRICTS

Below we look at a few of the more challenged districts. Along with this report, we have published a map of the state’s hospital districts with selected financial information and links to audited financial statements we have located. The visualization is available at http://www.govwiki.info/pdfs/Analysis/HealthCareDistricts.html.

California Health Care Districts – Positive vs. Negative Equity

 

To view district information, click on one of the green, red or black polygons. The coloration is based on the district’s reported equity, or the difference between its assets and liabilities (this concept is sometimes referred to as “Net Position”. Districts that reported negative equity (liabilities exceeding assets) are colored red; those that reported positive equity are colored green.  District that did not report an equity positon are colored black. Map boundaries were obtained from Association of California Healthcare District’s web site.

Sources:

Margaret Taylor, California’s Health Care Districts, California HealthCare Foundation, 2006. http://www.chcf.org/~/media/MEDIA%20LIBRARY%20Files/PDF/C/PDF%20CaliforniasHealthCareDistricts.pdf

Jennifer Baires. County supervisors approve $12 million for floundering West Contra Costa hospital. http://www.mercurynews.com/my-town/ci_27056277/county-supervisors-approve-12-million-floundering-west-contra

Robert Rogers, San Pablo: Voters reject tax to fund Doctors Medical Center, May 7, 2014. http://www.contracostatimes.com/contra-costa-times/ci_25711650/san-pablo-voters-reject-tax-fund-doctors-medical

Dan Verel, Palm Drive files for bankruptcy, plans to suspend services, North Bay Business Journal, April 7, 2014.  http://www.northbaybusinessjournal.com/90443/palm-drive-files-for-bankruptcy/

California State Controller’s Office. Special Districts Raw Data for Fiscal Years 2003-2013. https://bythenumbers.sco.ca.gov/Raw-Data/Special-Districts-Raw-Data-for-Fiscal-Years-2003-2/vi4x-fbus

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Eden Township Healthcare District (ETHD), Alameda County

Residents of Southern Alameda County voted to form a hospital district in 1948.  In 1954, Eden Township Hospital began operations. Today, the district no longer operates a hospital and is deeply in debt.

According to its 2014 audited financial statements, the district took out a $54 million line of credit from US Bank in 2007. Between 2010 and 2013, the bank agreed to six loan modifications – repeatedly extending payment deadlines and changing other terms of the loan agreements. Had the financing been secured through the municipal bond market rather than a more flexible bank lender, ETHD would have been required to report multiple events of default. Currently, ETHD owes US Bank $45 million payable on February 1, 2016.

ETHD also owes $19 million to Sutter Health. This debt arose from a legal judgment that Sutter won against the district in connection with the transfer of San Leandro Hospital. In 2004, ETHD purchased San Leandro Hospital and leased it to Sutter. In 2008, it gave Sutter an option to purchase the hospital and the right to recoup any losses from operations at the time of purchase. These losses proved to be substantial and by the time Sutter acquired the hospital in 2012, the accumulated losses greatly exceeded the purchase price. ETHD tried unsuccessfully to litigate away these costs, but ultimately failed in court. On June 2013, Sutter was awarded $17.2 million including damages. By late December 2014, the debt remained unpaid and had grown to $19 million with the accrual of interest.  The district has recently sought a hardship ruling which would allow it to pay Sutter over time.

ETHD currently owns and leases three medical arts buildings. It also administers a community health grants program funded by the 1998 sale of its original facility – Eden Township Hospital. Leasing and grant-making now represent the sum total of the district’s activities.

ETHD does not currently levy taxes on its 360,000 residents, but – as a governmental entity – it has the ability to place parcel taxes on the ballot and can also petition Alameda County Supervisors for a bailout. Also, as a governmental entity, it incurs election costs whenever board members’ terms expire. Given the nature of its activities (which could be easily provided by private not-for-profits) and the liabilities it has accumulated, district residents might best be served by a bankruptcy filing and liquidation.

According to district CEO Dev Mahadevan – who contacted CPC after seeing the original version of this study – the district is constrained from declaring bankruptcy because its assets exceed its liabilities. Because the assets are primarily in the form of land and buildings, ETHD lacks the cash to service its debts. Liquidating the district’s debt by selling most of its assets would require voter approval. In an email message, Mahadevan told me: “Our overhead, including election costs every two years runs around 8% of our total expenses. We don’t have expensive benefits costs and pension plans which the County department of health, with a similar mission has. Lastly, a private non-profit does not act in the public realm. We are witness to this every day and every week, right here. Sutter Health is a private, non-profit charitable organization; however, their interests are not focused on Castro Valley, Hayward or San Leandro but on the “East Bay”: a larger area and a much larger and more diverse population. Their meetings and deliberations are definitely NOT public. These are arguments that convinced our Local Agency Formation Commission (LAFCO) of our reason to exist and continue!”

With respect to the last point, I have found no evidence of a LAFCO eliminating any healthcare district. It appears that the LAFCO process has a bias toward creating and maintaining governmental units, rather than dissolving them.

Sources:

Rebecca Parr, Castro Valley: Health care district to file hardship claim to pay debt, Contra Costa Times, December 31, 2014. http://www.contracostatimes.com/breaking-news/ci_27236342/castro-valley-health-care-district-file-hardship-claim

Eden Township Healthcare District. 2014 Audited Financial Statements. http://ethd.org/wp-content/uploads/2014/11/FY-2014-Audited-Financials.pdf

Eden Township Healthcare District. 2015 Budget. http://ethd.org/wp-content/uploads/2014/06/Budget-Approved-FY15.pdf

Eden Township Healthcare District. History. http://ethd.org/about-ethd/history/

Why Should Eden Township Healthcare District Exist. Newark Editor. Castro Valley Patch. March 20, 2013. http://patch.com/california/castrovalley/why-should-eden-township-healthcare-district-exist

Local Agency Formation Commission of Alameda County. Eden Township Healthcare District Municipal Service Review Final. December 9, 2013. http://www.acgov.org/lafco/documents/finalmsr2013/eden-final.pdf

Eden Township Healthcare District – The Community Health Advisory Committee: A Brief History. http://ethd.org/wp-content/uploads/2014/10/CHAC-101414-Attach-B.pdf

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Palo Verde Health Care District, Riverside County

The Palo Verde Health Care district operates a small, rural hospital in Blythe – near the Arizona border. The hospital opened in 1937 and then came under district control in 1948. In the early 2000s, Palo Verde Hospital was operated by LifePoint Hospitals. At the beginning of 2006, Lifepoint terminated its operating agreement; since then, the elected district board has managed the hospital directly.

The results have not been good. The district reported a loss of $4.4 million in the fiscal year ending June 30, 2013 after losing $2.4 million the previous year. If losses continue, the district’s $4.1 million of remaining equity will soon be exhausted.

Small, rural hospitals under all ownership types have been under pressure for many years. Although their problems are often attributed to inadequate Medicare and Medicaid reimbursement rates, they often face low utilization as the population shifts away from rural areas and the length of patient stays shortens.

According to its most recent quarterly filing with the California Office of Statewide Health Planning and Development, the hospital is licensed to operate 51 beds but is staffed to handle a capacity of only 34 beds. The hospital reported a staffed bed occupancy rate of only 28%, implying that only 10 patients were staying in the facility on an average day. With such a small number of patients, the hospital is challenged to cover its fixed costs, such as executive pay. According to Transparent California, former CEO Peter Klune received $432,000 in total compensation during 2012.

A January 2013 editorial in the Palo Verde Valley Times surveyed a long history of litigation affecting the local hospital and concluded that the facility should be privatized. A few months after the editorial appeared, the district became embroiled in further legal action. Three dismissed hospital officials – including the former CEO – alleged that patients requiring air transport were being directed to an airline owned by a district board member. This choice of carrier was often detrimental to patients, who could reach a larger medical center more quickly via helicopters departing from a helipad at the hospital.

Sources:

Hospital Quarterly Disclosure Report, Palo Verde Hospital, California Office of Statewide Health Planning and Development, Quarter ending September 30, 2014. https://siera.oshpd.ca.gov/OpenFacsimile.aspx?oshpdid=106331288&rpedate=9%2F30%2F2014%2012%3A00%3A00%20AM&rpttype=A&outputtype=P&SystemId=4&rptid=47095

Times Editorial: Palo Verde Hospital needs to be privatized, Palo Verde Valley Times. January 3, 2013. http://paloverdevalleytimes.com/main.asp?SectionID=36&subsectionID=807&articleID=18118

Former hospital CEO, finance director and CNO file federal suits against Healthcare District, President Sartin and board members Hudson and Burton, Palo Verde Valley Times, July 31, 2013. http://paloverdevalleytimes.com/main.asp?SectionID=1&SubSectionID=1&ArticleID=19010

Palo Verde Healthcare District, Financial Statements, June 30, 2012. http://paloverdehospital.org/ArchiveCenter/ViewFile/Item/841

Palo Verde Health Care District, History, http://paloverdehospital.org/index.aspx?nid=62

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Kern Valley Healthcare District, Kern County

The district operates both an acute care hospital and skilled nursing facility near Lake Isabella, northeast of Bakersfield. As of September 30, 2014, the district had $10.6 million in assets and $17.6 million in liabilities, yielding a negative net position slightly in excess of $7 million.  Recent performance appears to be near breakeven with $155,000 in net income reported to the state controller for fiscal 2013.

I was unable to locate audited financial statements for the district. This is surprising since KVHD has municipal debt securities outstanding, and municipal issuers are generally required to publish audited financial statements on the EMMA system.

Unlike Palo Verde Hospital, the Kern Valley facilities have fairly robust utilization. In the three months ending September 30, 2014, the district reported 65% occupancy of its 99 licensed beds. KVHD’s financial challenge appears to relate more to its patient mix. About 85% of the district’s patient days were compensated by Medi-Cal, which typically provides lower reimbursement rates than either Medicare private insurance.

The large Medi-Cal share is likely due to the inclusion of a skilled nursing facility in Kern Valley’s service mix. Low income elderly patients become eligible for Medi-Cal long term care coverage once they exhaust most of their assets.

While the skilled nursing facility provides steady income, it has also opened the district to liability. In 2006 and 2007, three patients died at the home due to drug overdoses and nursing neglect. Investigators also determined that 23 other residents received unnecessarily large doses of antipsychotic drugs apparently administered for the purpose of keeping them quiet.  The allegations resulted in a federal fine and a prison term for one of the facility’s nurses, as well as community service for a doctor and the district’s former CEO.  Although I could not find evidence of any civil suits being filed against the district, such filings are clearly a risk – potentially tipping the financially vulnerable district into bankruptcy.

Sources:

Kern Valley Finance District, Unaudited Financial Statements for the three months ended September 30, 2014. http://www.kvhd.org/wp-content/uploads/2014/10/Finance-10-14.pdf

Hospital Quarterly Disclosure Report, Kern Valley Health District, California Office of Statewide Health Planning and Development, Quarter ending September 30, 2014. https://siera.oshpd.ca.gov/OpenFacsimile.aspx?oshpdid=106150737&rpedate=9%2F30%2F2014%2012%3A00%3A00%20AM&rpttype=A&outputtype=P&SystemId=4&rptid=46820

Chisum Lee and A.C. Thompson. Gone Without a Case: Suspicious Elder Deaths Rarely Investigated. Pro Publica. December 21, 2011. http://www.propublica.org/article/gone-without-a-case-suspicious-elder-deaths-rarely-investigated

Pamela McLean. Three Years in Prison for Nurse in Elder Abuse Case. Redwood Age. January 14, 2003. http://redwoodage.com/content/view/267223/49.

Steve Clawkins. 3 Arrested in Nursing Home Deaths in Lake Isabella. February 20, 2009. http://articles.latimes.com/2009/feb/20/local/me-nursing-home-deaths20

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John C. Fremont Hospital District, Mariposa County

John C. Fremont Hospital District operates a hospital and freestanding medical clinics in a sparsely populated area of the state. The district’s boundaries are the same as those for Mariposa County, which has less than 18,000 residents scattered across 1463 square miles.

The hospital has 34 beds and a 70% occupancy rate according to its September 30, 2014 disclosure report. Occupancy has declined from 87% in 2009.

According to its audited financial statements, the district was carrying $8.0 million in long term debt and had a net position of -$2.7 million. Fremont lost $1.0 million in fiscal 2013. Unaudited results suggest that Fremont is no longer losing money, but it lacks the cash to pay off obligations as they become due. Further, the hospital requires a seismic upgrade to meet earthquake safety standards set by the state legislature.

Consequently, the district will need to continue to rely upon debt financing to operate. This can be a costly proposition as evidenced by Fremont’s 2010 bond issue.  The unrated securities carried coupons of between 7% and 8.55%. If the district was part of a larger entity, it would most likely be able to secure bond financing at substantially lower rates.

Sources:

John C. Fremont Healthcare District, Financial Statements with Independent Auditors’ Report, June 30, 2013. http://www.jcf-hospital.com/docs/12_13_Audited_Financials.pdf

John C. Fremont Healthcare District, Official Statement: $2,000,000 Certificates of Participation.  Augist 1, 2010. http://emma.msrb.org/EP524372-EA313657-EA709355.pdf

Hospital Quarterly Disclosure Report, John C. Fremont Healthcare District, California Office of Statewide Health Planning and Development, Quarter ending September 30, 2014.  https://siera.oshpd.ca.gov/OpenFacsimile.aspx?oshpdid=106220733&rpedate=9%2F30%2F2014%2012%3A00%3A00%20AM&rpttype=A&outputtype=P&SystemId=4&rptid=47179

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Lindsay Local Hospital District, Tulare County

Although not in financial distress, Lindsay Local Hospital District illustrates issues that can occur in smaller districts that have ceased to operate hospitals. LLHD does not have a functioning web site; minutes of director meetings, budgets and audited financial statements do not appear to be publicly available, complicating the efforts of media and citizens to ensure that tax moneys flowing to the district are spent effectively.

According to State Controller’s Office special district data, LLHD collected $440,000 in property tax revenue during fiscal 2013. The district collected $157,400 in other revenue mostly by renting office space to medical providers. LLHD incurred $507,000 in expenses and reported net income of $101,200.

A 2011 staff report for the Tulare County Local Agency Formation Commission (LAFCO) reported that district funds were being spent on the following:

• Equipment for the Lindsay High School football team
• A portion of the salary for a nurse staffed by Lindsay’s Healthy Start Program
• Matching funds for a Agricultural Worker Health and Housing Program grant awarded by the Rural Communities Assistance Corporation
• City Wellness Center Solar Panels

The LAFCO report also estimated that the district’s five board members were paying themselves $1200 per year each – the maximum allowable under state law. It is not clear whether the district also incurs election costs, and, if so, how much those are.

A 2012 article in the Porterville Record suggested that if LLHD was dissolved, property taxes would still be collected and remitted to the state.  The article also quoted the district’s attorney as saying that without LLHD healthcare would be almost unavailable in Lindsay – quite an overstatement given the services the district actually subsidizes.

In 2014, ABC Action News 30 quoted Board Chairman Gary McQueen as follows: “People aren’t paying any more than they were if we didn’t exist, it would just go to the county. So this way we keep X amount of dollars that goes to our district and we spend it on needs of health care.” This comment appears to be correct. District funding is included in the 1% ad valorem tax rate applied to homeowners within LLHD’s boundaries. Their tax rate would be unlikely to change if the district was dissolved, but if tax revenues went directly to the city or county, a largely redundant administrative structure could be eliminated.

Sources:

Tulare County LAFCO, Health Care Districts, 2011 http://lafco.co.tulare.ca.us/documents/ItemVI2HDandMADMSRFinals.pdf

Emily Shapiro, Lindsay Hospital District continues to provide health care, The Porterville Reporter, September 28, 2012. http://www.recorderonline.com/lindsay-hospital-district-continues-to-provide-health-care/article_7cefd4bf-cb6e-5e26-9c70-15ec4575b3a9.html?mode=story

Mariana Jacob, Race to Choose Lindsay Hospital District Director Raises Concerns. ABC Action News 30. October 10, 2014. http://abc30.com/politics/race-to-choose-new-lindsay-hospital-district-directors-raises-concerns/346015/

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CONCLUSION

While the formation of hospital districts may have been a wise public policy in the aftermath of World War II, many of these entities are now struggling.  Several districts that continue to operate hospitals are experiencing poor financial performance compared to privately owned facilities. Districts that close or sell their hospitals try to find new missions, but may not be doing so in a cost-effective manner.

Although run by elected officials, the accountability of health care districts is often much less than that of general purpose governments or school districts. Board elections are low profile affairs attracting limited voter attention. Board proceedings, budgets and audited financial statements are less readily available to the public.

Once bureaucracies have been created they are hard to eliminate. But extraneous bureaucracies hinder public sector performance. The state and county governments should consider policies that encourage healthcare districts with underperforming hospitals to close these facilities, transfer them to private not-for-profit agencies or place them under direct County supervision. Policy changes should also encourage the elimination of districts that no longer maintain hospitals. Office leasing, grant making and operating wellness centers are functions that can be performed by the private sector or general purpose governments.

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Marc Joffe founded Public Sector Credit Solutions in 2011 to educate policymakers, investors and citizens about government credit risk. PSCS research has been published by the California State Treasurer’s Office, the Mercatus Center and the Macdonald-Laurier Institute among others. Prior to starting PSCS, Marc was a Senior Director at Moody’s Analytics. He has an MBA from New York University and an MPA from San Francisco State University.