Chapter 2
IT IS UNCERTAIN IF THE DISTRICT WILL REOPEN THE MEDICAL CENTER BY MID-OCTOBER 2018 AS IT PLANS
Chapter Summary
The district has made progress in meeting licensing requirements in state and federal regulations, but work remains. The district currently plans to reopen the medical center by October 15, 2018; however, it is not clear whether it will address all requirements to reopen by then. In late June 2018, the district’s board chose an affiliate partner (new manager) to operate the medical center and provide funding necessary to resume operations by mid-October 2018 through a long-term lease agreement. The district provided some documentation demonstrating that it is meeting with its new manager to address requirements to reopen by service area, such as laboratory, surgical, and pharmacy. However, it is still in the process of fulfilling those requirements and, in some cases, is still identifying items it must address. The new manager extended a line of credit to the district to reopen the medical center, but the district did not include in its budget some of the costs to reestablish relationships with vendors, which may prevent it from obtaining the supplies and services necessary to reopen the medical center. Although the district currently plans to reopen the medical center before its suspended license expires in late October 2018, it can request an extension of its suspension from Public Health if it is not able to open by the planned timeline. However, the district has not yet requested an extension.9 Without an extension in place before its temporary suspension expires, the district risks incurring additional costs to meet current building standards if it has to apply for a new license. These additional costs could compromise its ability to reopen.
The District Is Working Toward Reopening the Medical Center, but It Is Unclear Whether It Is Addressing All of the Necessary Requirements to Reopen
The district and its interim management consultant began working toward relicensing and reopening the medical center in October 2017, and the district plans to reopen the medical center by mid-October 2018. In spring 2018, when we initially reviewed the district’s progress toward reopening, we noted that although it had a list of various tasks it needed to complete, it did not have a comprehensive plan for reopening. A comprehensive plan is important because it identifies all of the licensing requirements by area, the activities that need to be completed, a time frame for completion, and any associated costs. Instead, the district referred us to department managers to discuss their plans and progress toward reopening. As shown in Figure 8, the district is making some progress toward meeting the requirements to reopen, but it has not completely addressed all of these requirements. Based on our initial review, we were concerned that the district had not fully considered its equipment and supply needs and the length of time associated with the tasks necessary to prepare the medical center to reopen. For example, the district did not provide a list of supplies necessary for the surgery service, nor did it incorporate the length of time associated with testing clinical laboratory equipment into its task list. Without considering these requirements, it was unclear how the district could determine a reopening date.
Figure 8
The District Is Making Some Progress Towards Reopening the Medical Center
Source: California Code of Regulations, title 22; 42 Code of Federal Regulations part 482; and documentation provided by medical center staff.
The district has recently engaged in more frequent and structured meetings to identify the remaining activities it needs to complete to reopen. However, planning documentation demonstrates that the district is still identifying items it must address before reopening. In June 2018, after our initial review in the spring, the district selected a new manager for its medical center. The district obtained approval from the bankruptcy court in early August 2018 to enter into several transactions with the new manager, including an interim management consultant services agreement, lease, and credit agreement. The district then began meeting daily with the new manager to discuss how each of the service areas will meet the requirements to reopen. The district provided us the task lists that its department directors use to identify all tasks they need to perform before reopening. Although the district is making progress, documentation provided by the district regarding its current daily meetings does not demonstrate that the district is fully aware of all it needs to do to reopen.
For example, the daily meeting documentation indicates that the district is presently conducting inventories of equipment. State regulations require service areas to have adequate equipment and supplies, such as oxygen and respiratory rate alarms for the surgery service. These regulations are designed to ensure that the medical center can address the needs of its patients. Because the district is currently conducting an inventory of equipment, it may not be aware of repairs or other actions necessary to ready equipment for use, or whether some equipment needs to be replaced. We asked the district for documentation of the inventory of supplies for the surgery service area, but it did not provide us with any. The daily meeting documentation notes that supply needs for the surgery service area were discussed, but it is unclear whether the district has completed an inventory of supplies and determined what is needed based on this limited information. Given that some tasks such as inventories of supplies and equipment have not been completed, we are concerned that the district may not meet all requirements to reopen the medical center by mid-October 2018.
Moreover, it is uncertain whether the district will have its equipment ready in time for the planned reopening. For example, according to the medical center’s current pharmacy director, the pharmacy’s intravenous (IV) hoods, equipment needed for creating liquid medications without contamination, must undergo testing before the pharmacy can make IV solutions. The results of such testing can take two weeks to process. The daily meeting documentation indicates that a check was sent to the vendor that will perform the testing and, once the check clears, the district is planning to schedule the testing. However, the district has also identified other equipment needs, such as an electrocardiogram machine, a device that measures the electrical activity of the heart. It is not clear whether this equipment needs to be repaired or replaced, but the daily meeting documentation indicates that the district still needs to obtain a quote on the price of repairing or replacing its electrocardiogram machine. In order to reopen by mid-October 2018, the district will need to demonstrate compliance with licensing operational requirements so that it can receive its hospital license from Public Health again. Given the short time frame in which the district is attempting to reopen the medical center and the outstanding tasks identified, it is not clear whether it will meet all requirements necessary to reopen by mid-October 2018. Therefore, it is critical that the district continue working toward addressing these requirements.
The New Manager Is Providing Funding Through a Line of Credit to Assist the District With Reopening
The new manager has extended a $10 million line of credit to the district to finance the reopening of its medical center. The line of credit is a loan that the district will have to repay. As shown in Figure 8, financing is a critical element in reopening the hospital. However, once the medical center is open, the new manager will administer operations for the hospital. The interim management consultant provided a budget demonstrating that the $10 million would cover some of the costs of reopening, such as salaries and employee benefits, supplies, and repairs. Although the budget will cover some of the costs of reopening, it notes a number of assumptions for its estimates. For example, the budget assumes that repairs will cost the amount budgeted and that the medical center will receive supplemental income—additional funds the State provides to hospitals that serve Medi-Cal and uninsured patients—on time. If repair costs exceed estimates included in the budget and the medical center does not receive supplemental funds on time, the costs to reopen may exceed the amounts included in the budget and the district may not have the funds available to reopen.
Further, the district has not budgeted for some of the costs to reestablish relationships with former vendors so that it can purchase supplies necessary for operating the medical center and obtaining its license. The district owes vendors both pre-petition debt, which is debt incurred before the district filed for bankruptcy, and post-petition debt, which is debt incurred after the district filed for bankruptcy, to reopen the medical center. The district’s budget includes costs to cover post-petition debt, but it does not cover payment of pre-petition debt. Several vendors have requested payment of some or all of their pre-petition debt before they will do further business with the district. According to the interim CEO, the district is assessing each contract to determine how necessary the vendor is to reopening, and is taking advantage of the new manager’s existing contracts with vendors when applicable and desirable. He also indicated that only a few vendor contracts remain to be negotiated. Documentation we were provided shows that as of August 2018 the district is prioritizing negotiations with a few vendors owed $1.8 million in post-petition debt and $2.9 million in pre-petition debt. However, the documentation also shows that the district has not yet established contracts with more than 100 additional vendors that are necessary for the medical center to reopen, and those vendors have more than $200,000 in post-petition debt and $1.1 million in pre-petition debt. Given the extensive number of vendors that the district still needs, and their associated debt, it is unclear whether the district will have the contracts in place to obtain necessary supplies and purchased services by October 2018, so that it can reopen.
Although the District Can Request to Extend Its License Suspension, It Has Not Done So
When the district voluntarily suspended its license in October 2017, it received a temporary suspension that is valid for one year, as specified in state regulations. Public Health informed us that it could also authorize an extension, if requested. Public Health also informed us that it had notified the interim CEO in March 2018 that it could make this option available, but the district had not requested an extension. Thus, based on Public Health’s representation, the district may request an extension of the suspension of its license, submit an application for reinstatement—which first requires relicensing by Public Health—before the end of the suspension, or allow the suspension to expire and lose the medical center’s license. If the district allows its license to expire, it will have to apply for a new license, which may require it to incur additional costs to meet current building standards for the medical center, such as requirements for seismic safety, fire and life safety, and environmental impact. Reinstating its suspended license, rather than letting it expire and applying for a new license, is critical to the medical center’s ability to reopen cost-effectively and as soon as possible. Any substantial costs would be a large financial challenge for the district to overcome in its efforts to reopen. According to the interim CEO, he has not performed an analysis of the costs associated with the medical center obtaining a new license because there was no need to do so. Given that the district is not yet certain whether it will be able to reopen by mid-October 2018, we are concerned that if it does not request an extension from Public Health, it risks incurring costs that would compromise its ability to reopen the medical center.10
Recommendations
To ensure that the district is able to reopen by mid‑October 2018, it should continue to address requirements to reinstate its license and should arrange for Public Health to verify compliance with licensing operational requirements as soon as it has completed addressing the requirements to reopen.
To ensure that the district budgets for all costs necessary to reopen, it should immediately include in its budget the costs to pay pre-petition debt for vendors with whom it must reestablish relationships before it can resume operations.
To ensure that the district is able to obtain the supplies and purchased services necessary to reopen the medical center, the district should continue its efforts toward reestablishing relationships with vendors so that it can reopen the medical center by mid-October 2018.
Footnotes
9 Shortly before our report was to be published, we learned that the district had requested an extension of its license suspension on September 7, 2018. Public Health approved the district’s request on September 19, 2018. Refer to comment 8 for additional detail. Go back to text
10 Shortly before our report was to be published, we learned that the district had requested an extension of its license suspension on September 7, 2018. Public Health approved the district’s request on September 19, 2018. Refer to comment 8 for additional detail. Go back to text