Mendocino Coast Filing Bankruptcy

In what could be a harbinger for California’s rural hospitals, the Mendocino Coast Health Care District voted late last month to file for bankruptcy protection after the hospital it operates in Fort Bragg all but ran out of cash.

The 49-bed Mendocino Coast District Hospital had actually enjoyed some of its best years after converting to a critical access facility in 2006, which boosted its Medicare revenues significantly, according to Raymond Hino, its chief executive officer.

However, a combination of the Great Recession, surgical equipment malfunctions and a loss of market share to larger hospital operators badly damaged its operating position over the past year, Hino observed.

On Sept. 27, the district board voted 3-0 to enter into a chapter 9 bankruptcy filing, which is reserved exclusively for municipalities such as cities and special districts. Two board members – local physicians who contract with the hospital – abstained.

Although Nov. 15 was targeted by the board as the filing date, Hino indicated it would likely occur before the end of this month.
“This kind of filing is specifically about restructuring debts,” he said.

The most memorable chapter 9 filing in California occurred in Orange County during the mid-1990s, although cities such as Vallejo and Stockton have entered into high-profile bankruptcies more recently.

The most recent hospital district bankruptcy occurred in 2010, when the Kings Sierra Health Care District in the Fresno County town of Reedley filed chapter 9. It emerged from bankruptcy last February.

In Mendocino Coast’s case, the move toward insolvency was entirely operational. Two particular calamities have befallen the hospital in the past year: What Hino termed a “disastrous” winter last year, when mild weather translated into far fewer admissions for pneumonia. And, a surgical instrument sterilizer was offline for months, forcing Mendocino to send its instruments to other hospitals for sterilization. That mishap cut surgical volumes by half – including lucrative procedures such as hip replacements, Hino said.

However, some observers say rural hospitals such as Mendocino Coast are in a particularly difficult position to begin with.

“They’re out in the middle of nowhere, and they have trouble getting physician support. And because of that, they have difficulty offering the full breadth of services,” said Steven T. Valentine, president of The Camden Group, an El Segundo-based consulting firm which has ties to the region. Valentine sits on the Payers & Providers editorial board.

As a result, Valentine observed that there has been a lot of patient out-migration to Santa Rosa, 110 miles to the south and the nearest city of any size, where regional powerhouse Sutter Health operates a hospital. Adventist Health also operates several smaller hospitals closer to Fort Bragg.

Physician shortages have bedeviled many hospitals in rural areas, according to Tom Petersen, executive director of the Association of California Healthcare Districts.

“If you don’t have surgical specialists, the secondary effect is that the patients also wind up using primary care physicians out of the area,” he said.

Petersen added that nearly 60% of California’s physicians practice in just five of the state’s 58 counties – those that are the most heavily urban. And California’s overall shortage of physicians is already severe to begin with, he noted.

Hino confirmed that his hospital has struggled with out-migration to other facilities for years. And while Mendocino Coast recently recruited a second orthopedic surgeon, it did not stem the flow of patients out of the area.

“People got used to leaving town and then referring their friends as well,” Hino said. He added that his hospital’s size makes it difficult to compete with Sutter and Adventist on price.

The district’s fate was sealed over the summer when negotiations with its major creditors failed. They included the United Food and Commercial Workers union, which represents 80% of Mendocino Coast’s 320 employees, and Cal-Mortgage, which holds about $30 million in district bonds.

By the time the board decided to vote for bankruptcy, it was projected the hospital could lose as much as $2.5 million this year, a negative operating margin of nearly 6%. Cash on hand had dwindled to where it could sustain ongoing operations for less than three days.