FRENSO, Calif. (KSEE/KGPE) – The Central Valley appears to be going through a healthcare crisis.

In January, Madera County, Madera Community Hospital (MCH) was forced to shut its doors. Soon after in Fresno County, a State of Emergency was declared as hospitals such as Community Regional Medical Center (CRMC) was forced to absorb patients from the now-closed Madera hospital, including state prison inmates.

At the same time, Community Medical Centers (the group operating CRMC) was negotiating with three commercial health plan providers that left some patients out of network – an issue that has since been partially resolved.

Last week in Tulare County, Kaweah Health CEO Gary Herbst gave a presentation to the Tulare County Board of Supervisors about the current challenges they are facing in staying open.

In all three cases, one of the biggest challenges cited was their attempts to keep up with inflation.

“Costs have risen steadily due to the impact of COVID-19 combined with extraordinary inflation,” writes Fresno’s Community Medical Centers on its website. “Added is the strain health systems are experiencing with wage inflation, labor shortages and the cost to fill positions with contracted labor at astronomical rates. Meanwhile, the demand for our health system’s services continues to grow.”

During Herbst’s presentation, he detailed that in California from 2019 to 2012, labor expenses rose 16%, pharmaceuticals rose 41%, and medical supplies went up 19%. Part of the cost of services also included being forced by the state to use traveling nurses to fill their staff, which in some cases cost hospitals three times the cost of a similar registered nurse.

While hospitals could negotiate new rates with private insurance companies, for programs such as California’s Medi-Cal, rates are set by the state government and those rates have not been raised in years – something Republican State Senator Shannon Grove says is impossible for hospitals to operate under.

“We expanded benefits, but in the Central Valley, we have a disproportionate number of Medi-Cal recipients, and the reimbursement rate hasn’t changed since 2001. What business model can you use or name that can still run on 2001 prices and operate in today’s market?” said Grove.

According to Herbst’s data, Medi-Cal pays hospitals 74 cents on the dollar for their claims, resulting in a 26% loss. In Tulare County, 60% of patients are covered by Medi-Cal; in Madera County, 58% of the patients they saw were also Medi-Cal patients.

So how are hospitals making up these losses from their Medi-Cal patients? According to Herbst, in the case of Kaweah Health, the burden ends up falling on the population with commercial health insurance.

“We look to generally about 15 to 20% of what is our patient population – and they generate not only the profit for our hospital to stay open and to reinvest in equipment, services, and facilities but they also cover for the losses that we incur through Medicare and Medi-Cal. It has a term and it’s called cost shifting. But what it’s doing is continuing to drive up the cost to our businesses, our employers who then pass that cost along to their employees,” said Herbst.

According to a RAND report from 2022, employers and private insurers for both inpatient and outpatient services averaged 224% of what Medi-Care would pay to hospitals.

The report shows that Fresno’s CRMC had a relative price of 250% compared to Medi-Cal; Fresno’s St. Agnes’ was 195%; Tulare County’s Kaweah Health’s was 237%.

This disproportion in price then makes negotiating with insurance providers difficult. Hospitals need to cover their costs and insurance providers need to try and keep their rates affordable for their customers.

Anthem Blue Cross officials say their negotiations with Community Medical Centers are “ongoing.” Anthem Blue Cross is the last of the three providers the hospital group was negotiating with. Agreements with Cigna and United Healthcare have been reached. In mid-January, they sent a statement on some of the terms that made it “difficult” for them to reach an agreement.

“Agreeing to those terms would create a significant financial burden for families and businesses as a majority of those we serve are covered by self-funded plans – meaning they directly pay for their medical expenses. Businesses and families across our state are already impacted by high inflation, which is why we cannot concede to requests for drastic cost increases,” said an Anthem Blue Cross spokesperson.

If the cost for insurance providers goes up, then the cost of health insurance premiums goes up too – while Medi-Cal rates remain the same.

“What it’s doing is continuing to drive up the cost to our businesses, our employers who then pass that cost along to their employees,” said Herbst.

In a statement, officials with the California Department of Health Care Services (which operates the Medi-Cal system) say that Kaweah Health is at liberty to negotiate rates.

In the Managed Care Delivery system, for most services, Kaweah Health is free to negotiate with Medi-Cal managed care plans (MCPs) for rates of reimbursement that are adequate to cover the cost of care of Medi-Cal patients. In addition to this negotiated “base” reimbursement, DHCS requires MCPs to make supplemental payments to district and municipal public hospitals (DMPHs) such as Kaweah Health, including payments for Medi-Cal covered inpatient and outpatient hospital services and payments for quality.

The California Department of Health Care Services

Statewide, the Department of Health Care Services estimates the total reimbursement (“base” plus supplemental) district and municipal public hospitals receive for inpatient services is roughly equal to 116% of Medicare – but acknowledges that an individual hospital’s experience could be above or below this statewide average.