Giant Health System Almost Saved a Community Hospital. Now, It Wants to ‘Extract Every Dollar.’

By Bernard J. Wolfson and Melissa Montalvo

For most of last year, St. Agnes Medical Center, based in Fresno, California, looked like a white knight poised to rescue smaller Madera Community Hospital from financial ruin.

Now, with the nonprofit Madera, California, hospital bankrupt and shuttered, St. Agnes looms as a dark knight, pushing to liquidate the hospital to get a loan it made to Madera paid back — even if that means dashing the hopes of the community activists, political leaders, and health care officials that the hospital can still reopen.

A pivotal moment in the case could come July 25, when a bankruptcy judge in Fresno will hear arguments on whether the Madera hospital should be allowed to spend its dwindling cash reserves on things such as building maintenance, security, utilities, and the salaries of its three top executives.

The hospital wants to run a skeletal operation while it seeks a buyer and develops a reopening plan. But the federal bankruptcy court in Fresno has authorized it to spend money only through July 29. If the judge doesn’t think the hospital has a viable plan, he may refuse an extension, which would likely mean liquidation.

Problems like Madera’s are common among other small, financially challenged hospitals in California and nationwide. They typically have low patient volumes and rely disproportionately on payments from Medicaid and Medicare, which constrains revenue and makes it difficult to attract talent or invest in cutting-edge equipment. Add to the mix a crushing surge in expenses stemming from the covid-19 pandemic, and dozens of such facilities are struggling to survive. Two others, both in California, have filed for bankruptcy this year.

Yet Madera had problems that were all of its own making. The hospital made money on patients insured by Medi-Cal, the state safety-net insurance program that pays notoriously low rates, according to financial data filed with state regulators. But it lost money on its commercially insured patients due to low volume and bad deals with insurance providers. It also failed to seek covid relief funds in a timely manner. A state hospital bailout fund came too late.

Plus, Madera had no backup plan when St. Agnes and its parent company, the hospital chain Trinity Health, walked away from a proposed merger with the troubled hospital late last year, giving virtually no notice and scant explanation. Their move shocked and infuriated officials, former employees, and community advocates in Madera and Sacramento.

In a brief December press release, St. Agnes and Trinity blamed their decision on “complex circumstances” and “additional conditions” imposed by state Attorney General Rob Bonta. But industry experts said Bonta had agreed to most of what St. Agnes asked for and were baffled as to why they walked away from the deal.

The spectacle of St. Agnes and Trinity now pushing in court for the liquidation of tiny Madera has drawn Bonta’s ire.

“For Trinity, it was always about profit, not the health of the Madera community,” Bonta told KFF Health News in a statement. “They are now attempting to use their position as Madera’s biggest creditor to extract every dollar possible, instead of keeping the community’s interests at heart.”

Bonta said his office had “offered maximum flexibility to Trinity in recognition of Madera’s financial circumstances.”

An agricultural area of 2,150 square miles and home to nearly 160,000 people, Madera County is 60% Hispanic, and more than one-fifth of its residents live below the poverty line, according to census data.

A Community Left in the Lurch

Jennifer Lara, a former Madera Community Hospital nursing assistant, said she and colleagues had been looking forward to positive change after the anticipated merger with St. Agnes. “We were floored when we found out the hospital was closing,” she said. “We didn’t think anything other than the hospital continuing on was going to happen.”

St. Agnes and Trinity declined to comment. The longtime CEO of St. Agnes, Nancy Hollingsworth, retired in May amid a reorganization that made the hospital part of a regional group based in Idaho. It’s unclear whether her departure was related to the collapse of the Madera deal. Hollingsworth could not be reached for comment.

St. Agnes’ considerable leverage in the bankruptcy case is the result of a $15.4 million loan it extended to Madera during merger talks last year. Madera has since repaid $8 million, leaving a debt of over $7 million, which still makes St. Agnes its largest creditor.

St. Agnes, one of 88 hospitals belonging to Trinity, a multistate, Catholic, nonprofit health system headquartered in Livonia, Michigan, argued in a recent bankruptcy court filing that Madera still has made no significant progress finding a buyer, more than four months after filing for Chapter 11 bankruptcy protection on March 10, and should not be allowed to continue spending money “without a serious path forward to either sell or mothball the hospital.”

The hospital has been talking to three potential partners, “one of whom is late to the game,” said Riley Walter, Madera’s bankruptcy lawyer.

Mohammad Ashraf, a cardiologist and member of the executive committee of Madera’s medical staff, said the first two entities in question, whom he declined to identify, are management service organizations, not hospital groups. “They don’t want to spend any money to buy it. They just want to run it,” he said.

Without a convincing strategy for the future of Madera Community Hospital, the end of the bankruptcy case could come quickly.

Ranjit S. Rajpal, a Madera cardiologist for over 40 years, said the closure of the hospital is bad news for patients who need time-sensitive care, such as for heart attacks, strokes, or other traumas, and who now must travel greater distances to get it.

And the closure will exacerbate existing health inequities for people who face challenges getting care because of immigration status, language barriers, lack of transportation, or other socioeconomic factors, he said. “Those disparities will be compounded as time goes by.”

Community leaders and the hospital’s leadership hold out hope for reopening. The hospital has applied for $80 million from California’s new, $300 million loan fund for distressed hospitals. Hospital leaders must produce a reopening plan by July 31, but even if it does, it’s unlikely to get the full requested amount: Sixteen hospitals have already applied for loans totaling over $385 million, said Joe DeAnda, spokesperson for the California State Treasurer’s Office.

“They’re not going to give a quarter of their total fund to one hospital that doesn’t even have a partner,” said Glenn Melnick, a health economist at the University of Southern California who authored an analysis commissioned by the AG’s office of the proposed St. Agnes-Madera merger. “Eighteen months ago, the ask would have been a lot smaller.”

Even if Madera Community Hospital finds a viable partner and gets the funding it needs, reopening would be daunting and expensive. The hospital would need to hire hundreds of nurses, technicians, and other staffers in a tight and expensive health care labor market and find a way to avoid the financial problems that landed it in bankruptcy.

“Some things an acute care hospital offers are profitable, and others are not,” said Jay Varney, Madera County’s administrative officer, whose role is akin to a CEO. “It doesn’t make much sense to have it reopen like it was and have it go bankrupt again.”

‘Running Out of Time’

Reopening the facility with all the services it provided before is not the only option. Baldwin Moy, an attorney for California Rural Legal Assistance, a community advocacy group, said he and colleagues have been arguing for the court to allow Madera additional time either to find a buyer or for the county “to put together a package that can reopen the emergency room with some stripped-down clinical operation.” But, Moy said, they are “running out of time.”

Karen Paolinelli, the hospital’s CEO, said the current suitors are interested in reopening it as an acute care facility that “may or may not have all services that were previously offered by Madera Hospital on day one.”

If the hospital can hold out for a few more months, it says, it can collect $23.5 million owed by the state for “provider fees,” and possibly an additional $10 million from the Federal Emergency Management Agency. Those payments would more than cover the hospital’s entire debt of $30 million. But the amount and timing of payments are unclear.

Paolinelli, voicing a common industry complaint, said the hospital has a disproportionately high number of Medi-Cal patients and Medi-Cal rates do not cover the cost of providing care. But state data shows that Madera received enough supplemental payments to earn nearly $15 million from Medi-Cal in 2021, though it lost over $11 million treating Medicare patients. Madera also lost about $6.8 million on commercially insured patients in 2021, the state data shows. Commercial insurance payments covered only 59.5% of what it cost to care for those patients. That compares with a statewide average of 156%, according to Melnick.

Paolinelli said Madera tried to negotiate better rates with commercial health plans but “does not have much leverage with the payors.” She added that many residents of Madera who get commercial insurance through their employers choose Kaiser Permanente, whose nearest acute care hospital is in Fresno, 20 miles away.

State Democratic Sen. Anna Caballero, whose district includes parts of Madera, Merced, and Fresno counties, said that if Madera Community Hospital were to successfully reopen, more people with commercial insurance would have to choose it over other hospitals outside the county, which they had not been doing frequently.

“The county and the city may need to say, ‘If you need hospitalization, you need to go to Madera, and there will be no copay, but if you go out of the county, there’s a copay you have to pay,’” Caballero said.

But with no clear path to reopening yet in sight, Caballero said, that discussion is premature.

[VM/KFF]

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