On April 27, the San Benito County Health Care District Board of Directors approved in a 4-0 vote a resolution to authorize the district to obtain a line of credit not to exceed $10 million with an as yet unnamed commercial lender. The board’s hope is that it will not have to dip into those funds, but according to B. Riley Advisory Services, which is a consulting firm Hazel Hawkins Memorial Hospital hired, the hospital remains in dire straits. The firm said even the line of credit might not be enough to save the hospital.
According to investopedia, a line of credit is a borrowing limit in which the borrower can take out money as needed until the limit is reached.
The resolution stated that interim CEO Mary Casillas would have sole authority to negotiate the terms and conditions of the line of credit, execute all documents and take actions necessary to carry out the intent of the resolution without coming back for approval from the board.
Neither the resolution language, nor the board, which governs the Hazel Hawkins Memorial Hospital, addressed specifics such as interest rates.
The district’s accounts receivable, which would include any income, would be collateral for the line of credit, to borrow or draw against as needed. Each individual draw will be repaid within five years of the draw, according to resolution.
Robert Bernosky, a Hollister resident who has been an accountant, financial analyst, controller and chief financial officer, told BenitoLink at the meeting that using accounts receivable as collateral would be “giving the lender the ability to foreclose or take back all of the accounts receivable.”
“The devil’s in the details,” he said. “Yes, the primary thing that they want to lean on is the accounts receivable, but sometimes in the fine print it says ‘and anything else,’ in case the accounts receivable doesn’t cover the debt.”
“The district doesn’t really have any kind of working capital surplus,” said Seth R. Freeman, a managing director with B. Riley Advisory Services. “You don’t have any extra margin of extra cash in the event something goes wrong.”
Casillas disclosed during the meeting that the district could not afford to replace $2 million diagnostic machines, and if they were to break, it would cause a reduction in services and loss of income.
CFO Mark Robinson said the hospital has cut back as much as it can, such as eliminating the Home Health Department, to save money.
“But at some point in time we’re going to have to have some of the capital to actually partner with the district and I think not only maintain services,” he said, adding that the line of credit creates “a lot of what ifs,” and that they need to move on the resolution because it will take a long time to go through the process. “It’s not something to do at the last minute, so it would be better for us to have that already approved going forward.”
Consultant Freeman said the long-term objective is to conclude a transaction with a larger organization that can “bring the benefits of greater capital and greater purchasing power and economies of scale so that we don’t have to reduce the level of services here at Hazel Hawkins Hospital. How do we model this in order to retain services, and if we’re not successful then we can anticipate that service lines are going to need to be adjusted.”
Bernosky told the board that each of them needed to have a firm grasp on what was in the financial statements. He has told BenitoLink he doubts any of them do.
“These types of credit facilities are incredibly complex,” he said. “They’re very expensive. They can change the entire dynamic of a company. There’s a huge administrative burden that comes with it. And before you do anything and before you give one individual [Casillas] the ability to negotiate the terms and conditions, and then sign the documents for it, it needs to come back before the board and you need to understand it completely, 100%.”
Director Devon Pack, who joined the board in approving the resolution, was the only board member who voiced an opinion, saying he regarded credit from a “private lender to be sort of the tertiary preference,” and wondered if there might be state, county or city funds.
“If there’s some other additional source of emergency [funds] from the state, which may or may not exist, I would like to hear about [that],” he said, “because [it’s] my understanding the private line of credit would probably be at a prime plus rate of interest.”
Freeman added the hospital’s efforts to cut expenses through state mandated mediation with unions and vendors involved with the district have been unsuccessful.
“Unfortunately, the mediation process with unions did not result in any changes in the current contracts,” Freeman said.
The California Nurses Association members agreed in January to postpone a 3% pay increase for 90 days in consideration of the hospital’s financial crisis.
The B. Riley Advisory Services presentation to the board and the public outlined both short-term financial stabilization status and long-term goals.
Short-term status
- Revenue from Services: Increasing revenue by adding three new gastroenterologists to increase surgery volume.
- Supplemental cash payments/financing: Increased cash flow by $10.7 million from December 2022 through April 2023 that is attributable to a California Health Facilities Finance Authority loan of $3 million and the acceleration of supplemental payments totaling $7.7 million.
- Cash Flow Enhancements: Increased cash flow by $380,000 per month by negotiating extended repayment terms with Medicare on a 2021 $5 million overpayment recoupment.
- Operational Savings: Generated over $1.9 million of savings by implementing staffing reductions, deferral of wage increases and other operational savings, which annualize to approximately $4 million.
- Cash Management Program: Ongoing tight controls on spending and cash management will continue to increase net cash flow from operations.
- Renegotiated Anthem Agreement: Starting in January 2023, an estimated $2 million in additional annual cash flow is anticipated from the district’s renegotiated payor contract with Anthem (one of the district’s largest non-governmental payors).
- Analysis of Underperforming Service Lines: Evaluating underperforming departments for potential partial or complete closures. For example, Home Health Services has been closed.
Limitations to the short-term stabilization
- Cost of Independent Restructuring: The 2021 study prepared by ADAMS Management Services for the district concluded significant capital improvements (in the hundreds of millions of dollars) were needed to expand services and make the district’s operations sufficiently competitive to remain independent.
- Limited Working Capital: The district’s days’ cash on hand has been lower than the average Critical Access Hospital since at least 2019 and was significantly impacted by unanticipated events in mid-2022.
- Advance Payments: The district has negotiated advance payments to stabilize operations to avoid immediate closure, but those advance payments decrease revenue that would be realized later in the year.
Long-term options
- Stakeholder Negotiations: The district concluded state-mandated confidential mediation with its interested parties on April 5, 2023. The district announced it April 19 and said it did not reach a resolution with all interested parties that would reduce expenses sufficiently and that it continues discussions with stakeholders outside of mediation.
- Governmental Negotiations: The district continues to pursue funding options with the state of California and local legislators.
- Sale or partnership transaction: The district and its financial advisors are conducting a disciplined marketing process with the objective of executing a transaction with a strategic partner or buyer. Ten parties have executed non-disclosure agreements. A transaction would not likely close until December 2023.
- Bankruptcy: The November 2022 fiscal emergency declaration authorized a bankruptcy filing but the district did not pursue the option at the time, in favor of stabilizing short-term finances. It remains a potential tool to restructure expenses if stakeholder negotiations are not successful.
- Reduction in services: The district may need to reduce services it offers as a last resort if it cannot stabilize operations by reducing expenses or partnering with a larger system. The district is developing the outline of an alternative pathway with reduced services.
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