Financial Health of California Hospitals June 2007
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California HealthCare Foundation The Financial Health of California Hospitals June 2007 The Financial Health of California Hospitals California HealthCare Foundation June 2007 Commissioned by a grant from the California HealthCare Foundation. PricewaterhouseCoopers’ services were performed, and this report was developed in accordance with our engagement letter dated Feb. 3, 2006, (CHCF reference 05-1574) and are subject to the terms and conditions included therein. Our services were performed in accordance with Standards for Consulting Services established by the American Institute of Certified Public Accountants (AICPA). The procedures we performed did not constitute an examination or a review in accordance with generally accepted auditing standards or attestation standards. Accordingly, we provide no opinion, attestation or other form of assurance with respect to our work or the information upon which our work was based. We did not audit or otherwise verify the information supplied to us in connection with this engagement, from whatever source, except as may be specified in this report or in our engagement letter. Our work was limited to the specific procedures and analysis described herein and was based only on the information made available through March 13, 2007. Accordingly, changes in circumstances after this date could affect the findings outlined in this report. © 2007 PricewaterhouseCoopers LLP. All rights reserved. PricewaterhouseCoopers LLP refers to the PricewaterhouseCoopers LLP (a Delaware limited liability partnership) or, as the context requires, other member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity. pwc Acknowledgments PricewaterhouseCoopers, LLP would like to gratefully acknowledge the assistance of the following: Advisory Board Blue Shield of California Andrea Brown, Director of Contracting Blue Shield of California Eileen Duncan, Director of Network Strategy California Hospital Association Sherrata Lane, VP Reimbursement & Economic Analysis California Nurses Foundation Anna Mullins, RN, DNSC California Office of Statewide Health Planning Mike Rodrian, Deputy Director & Development Catholic Healthcare West Lisa Zuckerman, Vice President, Treasury Services City & County San Francisco Dept. Public Health Mitchell Katz, MD, Director of Health Glendale Memorial Hospital Ignacio Valdes, MD Kaiser Permanente Michele Flanagin, VP, Delivery Systems Strategy Kaiser Permanente Roland Lyon, Executive Director, Regional Strategy New Century Healthcare Institute Wanda Jones, President Office of Assembly Member John Laird Michael Dimmitt, Principal Consultant Providence Health System of California Michael Madden, Chief Executive Officer San Joaquin General Hospital Kenneth Cohen, Chief Executive Officer SEIU, United Healthcare Workers West Richard Thomason, Policy Director Tehachapi Valley District Hospital Raymond Hino, Chief Executive Officer University of California Office of the President Santiago Munoz, Executive Director Clinical Service Development UCSF Medical Center Kenneth Jones, Chief Financial Officer Participants in the PricewaterhouseCoopers Interviews with California Healthcare Leaders California Association of Public Hospitals Melissa Stafford Jones, Chief Executive Officer California Office of Statewide Health Planning Michael Rodrian, Deputy Director & Development Cedars-Sinai Medical Center Thomas Priselac, Chief Executive Officer Cedars-Sinai Medical Center Richard Jacobs, Senior Vice President Cedars-Sinai Medical Center Edward Prunchunas, Chief Financial Officer Daughters of Charity Health System Marc Golan, Chief Financial Officer Healthcare Partners Robert Margolis, MD, President & Chief Executive Officer Hoag Memorial Hospital Presbyterian Richard Afable, MD, Chief Executive Officer Kaiser Permanente Roland Lyon, Executive Director, Regional Strategy Los Angeles County Department of Health Services Gary Wells, Chief Financial Officer Memorial Health System Francis Henckel, Chief of Hospital Operations Memorial Health System Barry Arbuckle, Ph.D, Chief Executive Officer New Century Healthcare Institute Wanda Jones, President Providence Health System Michael Madden, Chief Executive Officer San Joaquin General Hospital Kenneth Cohen, Chief Executive Officer SEIU, United Healthcare Workers West Richard Thomason, Policy Director Tehachapi Valley Healthcare District Raymond Hino, Chief Executive Officer University of California Office of the President William Gurtner, Vice President Clinical Services University of California Office of the President Santiago Munoz, Executive Director Clinical Service Development i Acknowledgments Principal PricewaterhouseCoopers Authors of This Report Kevin Baldwin, Engagement Partner Michael Galper, Partner Scott Burns, Director, Los Angeles Janice Drennan, Manager, Tampa Jackie Edwards, Director, Phoenix Susan Maerki, Director, San Francisco PricewaterhouseCoopers Subject Matter Specialists Deborah Allbach, Senior Associate, Dallas Christine Armstrong, Managing Director, Dallas Nancy Bateman, Managing Director, Phoenix Ann Filiault, Director, New York Gary Garbrecht, Partner, Denver Patricia Glenn, Manager, Dallas Sandra Hunt, Partner, San Francisco Chad Leopard, Partner, Dallas Sandy Lutz, Director, PwC Health Research Institute, Dallas Devindra Patel, Senior Associate – Data and Analytics, Los Angeles Vanessa Sam, Senior Associate – Data and Analytics, San Francisco ii Table of Contents Page Chapter 1: Executive Summary ..................................................................................... 1–1 Key Findings of 1995–1999 Report ...........................................................................1–1 Profitability............................................................................................................1–1 Volume, Operations and Other Performance Measures......................................1–1 Key Findings of 2001 -2005 Report ...........................................................................1–2 Profitability............................................................................................................1–2 Volume, Operations and Other Performance Measures......................................1–3 Dynamics of the California Health Care Market.........................................................1–4 Government Programs.........................................................................................1–4 California’s Seismic Law ......................................................................................1–4 Uninsured Population...........................................................................................1–5 Quality Initiatives ..................................................................................................1–5 Consumer-Driven Health Care.............................................................................1–5 Rising Expenses...................................................................................................1–5 Shifting Demographics .........................................................................................1–5 Consolidation of Health Care Payers and Providers............................................1–5 Health Care Reform in California...............................................................................1–6 Key Provisions of Governor’s Proposal ...............................................................1–6 Assessment of the Financial Health of California Hospitals ......................................1–7 Methodology...............................................................................................................1–7 Use of Medians ....................................................................................................1–7 Chapter 2: Historical Overview ...................................................................................... 2–1 Hospital Expansion through Public Financing ...........................................................2–3 Medicare and Medicaid Propel Hospital Expansion.............................................2–3 California Reacts to Federal Funding Shifts ........................................................2–4 California Legislation Further Challenges Hospitals ............................................2–5 National Health Care Expenditures: Recent Trends..................................................2–5 Competitive Environment...........................................................................................2–8 Growth of Managed Care.....................................................................................2–8 Kaiser HMO Opens to Public after World War II..................................................2–8 New Models of Managed Care Reshape California Health Care Market ............2–8 HMO Enrollment Declines....................................................................................2–9 Hospitals Feel Financial Pressure from Managed Care ....................................2–11 Mergers and Acquisitions...................................................................................2–13 Pricing Pressure.................................................................................................2–14 Consumer Influence on the Health Care Market................................................2–15 Summary..................................................................................................................2–17 Financial Health of California