SAN FRANCISCO — A California health care district is swaying once again on the edge of bankruptcy after emerging from Chapter 9 protection only three years ago.
The West Contra Costa Healthcare District, also known as Doctors Medical Center, is trying to cobble together a piecemeal financial fix for its $20 million annual deficit to keep it from again falling off a fiscal cliff.
The health care agency in San Pablo is a dire example of the financial strains on many of California’s 85 health care districts, which mainly serve poor and rural areas.
The demographics they serve typically saddle the districts with a high percentage of indigent patients, a number that has grown during the recession.
“It will continue to be hard work,” said John Gioia, a member of the Contra Costa County Board of Supervisors and chairman of the Doctors Medical Center governing board. “But we are putting together a plan to make the hospital financially sustainable.”
The hard work will include a refinancing of $23 million of outstanding certificates of participation.
Earlier this month, Gov. Jerry Brown signed legislation that provides security to the bond investors in the form of a statutory lien, so that lenders would be assured they would be paid back even in the event of a bankruptcy.
“Without [this law], there was a real danger that the very existence of Doctors Medical Center might have been in jeopardy,” state Sen. Loni Hancock, D-Oakland, sponsor of the bill, said in a press release following the signing.
The remainder of the rescue plan relies on putting another parcel tax on the California ballot in November to raise $5 million annually, more internal restructuring, and partnerships with the regional hospitals.
For the time being, Gioia said the district has tabled discussions of a second bankruptcy until they know whether the strategy will work.
The West Contra Costa district wants to avoid what happened three years ago.
The health care agency filed for bankruptcy in October 2006 under the yoke of financial problems similar to what it faces today.
The bankruptcy left untouched the district’s $32 million of outstanding debt — $26 million of COPs backed by parcel taxes and $6 million of privately held revenue bonds. Unsecured creditors got back 40 cents on the dollar.
After emerging from bankruptcy protection, Doctors Medical Center cut its structural deficit under the leadership of a team of consultants using grants from regional health centers, loans from the county and cost reductions.
But in 2009 a new full-time management team took over and began to face the financial challenges.
The hospital district reported an operating loss of $15.5 million in 2010 after operating losses of $13.2 million in 2009 and $18.8 million in 2008, according to the comprehensive audited financial report for 2010.
In the June report, the hospital’s auditor, Moss Adams LLP, said the financial problems “raise substantial doubt about the district’s ability to continue as a going concern.”
The health care district has $3.6 million of worth of debt obligations coming due this year.
The district must pay a debt service payment of $775,00 this year on the 2004 COPs and a final principal payment of $1.1 million for the revenue bonds, also issued in 2004.
As a result of the operating losses, the report said the district only has around 15% of current assets available to cover current obligations.
The district is expected to refinance the debt sometime in the next few months.
The state has also left the district hanging after the California Medical Assistance Commission, a state program, cut $8 million of annual aid to the hospital last year. Gioia said the state slashed funding again this year.
The district’s financial struggles are directly linked to higher costs associated with an increasing percentage of uninsured and under-insured patients that has grown with the poor economy.
The medical center spent $3.58 million in 2010 and $12.19 million in 2009 providing care to the uninsured patients, according to the CAFR.
California’s unemployment rate has stood at around 12% since the end of the recession.
The state created hospital districts to serve populations that lack health care in remote areas or to help the poor in urban areas.
During the economic boom years of the 1940s, California lawmakers created agencies with the passage of the Local Hospital District Law in 1946.
The law allowed the independent districts to access funds, such as parcel tax receipts, to meet health needs.
Since then, the districts have been able to issue debt backed by voter-approved taxes.
“Typically these districts just inherently serve a large indigent population,” according to Standard & Poor’s credit analyst Misty Newland. “Their operating margins are typically very thin and then you add in the strains of a downturn as more people are unemployed and lose their insurance and rely more on public health services.”
Newland said the health care districts covered by Standard & Poor’s are generally rated from low-investment grade to junk levels.
And as the ratings reflect, Doctors Medical Center has not been the only district pushed to the brink amid rising costs and dwindling public support.
The Sierra Kings Health Care District filed for bankruptcy in October 2009 after discovering management had spent $1.7 million of bond funds on operating expenses and misspent other funds.
A larger nonprofit health system recently bought the small public hospital district, located in the Central Valley near Fresno, helping it out of bankruptcy. It had around $34 million of outstanding debt.
In 2007, Valley Health System in Riverside County filed for Chapter 9 bankruptcy.
The public health district has about $45 million of outstanding tax-exempt revenue bonds and certificates of participation outstanding.
The district eventually sold off half of its smaller hospitals, keeping the largest, to help exit bankruptcy.
In the tough economic times, without help from the private sector, other health care district may face evenharder times ahead.
“Like any government entity, [the health care districts] are created to be a safety net for citizens,” Newland said.
