Layoffs, shuttered programs, disputes with insurers. San Diego County hospitals facing financial headwinds

Health systems across the county are scrambling to cut costs and find new revenue sources as increased labor and supply costs fray bottom lines.

Signs of financial stress are starting to nudge into public view at even the largest providers, local household names that have generally been profitable enough to shrug off market fluctuations.

Last week, University of California health providers in San Diego and across the state worked to avoid a contract lapse, warning their patients with Aetna health insurance coverage that they faced losing access as an April 21 deadline loomed.

Sharp HealthCare posted a layoff notice for 118 jobs lastweek, about one month after Scripps Health notified the public that it intends to cut 70 jobs in its administrative ranks.

These numbers, said UC Los Angeles economist Glenn Melnick, are the current reality in health care.

“Health care providers pretty much everywhere are dealing with increased costs at the same time as their investment income is shrinking and they are losing that extra revenue that they got during the COVID pandemic,” Melnick said. “And then you’ve also got to consider what’s happening with supply costs, which have also increased a lot due to inflation.”

It’s a situation that a study commissioned by the American Hospital Association called the worst since the pandemic started, one in which the best case scenario foresees losses in the billions and, in the most pessimistic, “hospitals will experience incredibly difficult financial changes.” Another study released this week put an even-more-dramatic point on the current health care financial turmoil, finding that 1 in 5 hospitals is at risk of closure due to budget difficulties.

Indeed, Melnick says that his research of the current financial turmoil in health care does indicate that it will be consumers who will ultimately end up closing these budget gaps.

“I would say I am very concerned that we could see significant pressure on premiums in the next 24 months,” Melnick said.

That appears to be exactly what occurred between University of California health systems and Aetna. After warning an unspecified number of its patients with Aetna coverage they would no longer have access to UC medical facilities and doctors due to a contract impasse, the university announced Friday that the two sides reached a tentative agreement.

The announcement does not indicate what compromise was reached to keep Aetna in the fold, but given the university’s statement before common ground was found, there was likely some adjustment in the rates that the insurer will pay to provider.

Before the breakthrough, UC made it clear that reimbursement levels were simply not covering costs.

“The equitable agreement we are seeking would begin to address substantially higher costs that UC’s non-profit academic health centers, like many nationwide, are experiencing due to inflation of supply and equipment prices, rising labor costs and increasing interest rates at a time when large commercial insurers, such as Aetna, are delivering billions of dollars of profits each quarter,” the organization said in a statement.

A look at UC financial documents does produce significant sticker shock. In its 2018-19 budget year, UC San Diego Health reported that it spent $980 million on wages and benefits compared to $1.3 billion in its most-recent budget report for 2021-22. That’s an additional $367 million added in just three years.

“Eight months in, we’re about $70 million off budget and I’d say the vast majority of it is staffing costs,” said Patty Maysent, chief executive officer of UC San Diego Health.

Financial disclosures to bondholders show similar situations at Scripps and Sharp. Both reported wage and benefit costs in the final three months of 2022 that were more than $100 million greater than they were in the same three-month period of 2019. Annual reports show that labor costs were about 20 percent greater in 2022 than they were in 2019.

A move toward “traveler” labor during the pandemic caused wages to swing wildly out of control, with some reporting paying staffing companies more than $300 per hour for contract nurses. Sharp reported that its expenditures on travelers increased from $18 million in 2019 to $97 million in 2022.

Chris Van Gorder, chief executive officer at Scripps, said in a recent email that the wage problem goes deeper.

“I think many like to just blame travelers, but that’s just part of the problem,” Van Gorder said. “Like everything in health care, it’s more complicated.

“It’s premium pay, which is partially travelers, but also overtime and much larger annual increases for all staff than normal because the market moved significantly due to the economy (inflation) and market changes.”

And, noted Christopher Howard, president and chief executive officer at Sharp, raises granted during the pandemic were not temporary.

“You can’t take them back, so those are now the new normal and what, over time, has to happen is health care systems, hospitals, have to find ways to be as efficient and effective as they can in what they do,” Howard said. “When your cost for your team members has escalated to the extent we have realized, every tool in the tool chest has to come out to find ways to pay for that.”

Add to that a loss of “Cares Act” funding during the COVID-19 pandemic. Sharp reported that it received more than $200 million in such funding over the past three years, but that revenue is no more.

For Sharp, financial pressures have spurred a deep look at operations, leading to the decision to shut down an existing home health division, which is the reason for the 118 upcoming layoffs. While executives said the decision to stop taking new patients into the program on March 29 has been under consideration for some time, analysis determined that “it is no longer operationally and financially feasible.” Existing clients, Sharp said in a statement, will be transitioned “to other home health providers in our community.”

Sharp has been working, like many others, to reduce the number of expensive short-term contracts it has with traveling nurses and other health care workers.

At the peak of the pandemic, said Brett McClain, Sharp’s executive vice president and chief operating officer, the organization was spending about $9 million extra per month on about 600 travelers. Today, he said, that number is down to about 150 and is expected to fall lower still.

McClain said many have filtered back into staff jobs at wages that are higher than they were when they left but less than the cost of temporary workers. Travelers, McClain noted, tend to work on three-month contracts which don’t include benefits, and, even when hospitals were paying $300 per hour for their services, a significant portion of that cash went to the staffing companies who placed them in their gigs.

“Some of it is these folks coming back and saying, ‘OK, now what’s the next step in my career gonna be? I’m not gonna go travel to Iowa or, you know, Chicago or wherever. I now want to come back to San Diego,’” McClain said.

And yet, there is no expectation that wages will return to levels similar to those seen before the pandemic. And hospitals have lost extra revenue paid by the federal government to help defray costs caused by the pandemic.

Some of the methods to cope with this new financial reality, Howard said, involve innovation. Sharp, for example, just purchased two outpatient surgery centers to help shift some procedures outside its hospitals, which cost more when patients stay overnight. And it is about to open a new innovation center focused on finding and disseminating new ways to operate more efficiently while maintaining quality results.

“We’re not going to simply cost-cut our way out of this,” Howard said. “We’re looking for new ways, new ventures, to transform our care.”

And yet, health care providers nationwide note that private health insurance and government programs such as Medicare and Medicaid have not yet shown that they are willing to pay more in order to close current financial gaps.

“Inflation, in combination with cost increases and anemic increases in government reimbursement and commercial payers, is creating a financial crisis,” Van Gorder said.

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