California Legislature Considering Bills to Ease CHFFA Hospital Loan Repayment
Introduction
In February 2024, lawmakers in California introduced Assembly Bill 2098 and Assembly Bill 2637. Both bills would make changes to loans offered by the California Health Facilities Financing Authority (CHFFA), an important entity that helps struggling California hospitals. These loans are often essential to communities because they help the local hospitals get back onto sound financial footing.
Background
The California Legislature created CHFFA in 1979 to provide financial help to hospitals and other healthcare providers via loans that are funded through the issuance of tax-exempt bonds. The financing can be used for a variety of operational costs, but state law limits these bonds to a two-year period.
2024 California Legislation
The two bills introduced this session would relax some of the requirements of CHFFA bonds, including the time frame to repay the loans.
AB 2098 would amend the California Health Facilities Financing Authority Act to extend the repayment requirements for loans given to hospitals. The Act currently requires standard CHFFA loans to be repaid beginning 18 months after the date of the loan; this legislation would bump the start date back to 24 months. The bill would also require loans to be at 0% interest and would give 72 months to repay the loan, instead of the current two-year window. At an April 16 hearing, California State Assemblymember Eduardo Garcia, sponsor of the bill, testified that the bill would extend a lifeline for hospitals by extending the repayment timeline of CHFFA bridge loans. This extended timeline is especially important given the current state of distress of many California hospitals and the importance of these hospitals to often underserved areas. During the hearing, the Committee voted unanimously to pass the legislation and referred the bill to the Committee on Appropriations.
AB 2637 would remove the current requirement that a loan made through CHFFA to a hospital for working capital be repaid within 24 months. According to the author of the bill, this limitation has “resulted in some hospitals seeking financing being turned away.” At a committee hearing regarding the legislation on April 23, testimony was given by Assemblymember Pilar Schiavo, the bill sponsor, stating that CHFFA has a number of programs that assist hospitals by finding the financing they need to improve infrastructure, equipment, and by connecting hospitals to private investors and loans, and that the current two-year loan repayment terms limits what CHFFA can do. The Assemblymember noted the challenges hospitals faced due to the pandemic and that allowing loans to be paid off over a longer window of time will reduce financial pressures. The Executive Director of CHFFA, Carolyn Aboubechara, testified about the role CHFFA played in helping hospitals weather the pandemic, and the need for long-term working capital finance assistance. Committee Chair Mia Bonta stated concerns about letting hospitals stretch out operating loans over decades, noting that this may make them more financially tenuous in the long run and could result in harmful consolidation. Assemblymember Schiavo responded by noting that if hospitals don’t get the financing they need through CHFFA, they will have to go out to the market and get their financing with potentially worse terms. Director Aboubechara testified that the two-year restriction has been in place since the 1980s – at the time there was a belief that there wouldn’t be a need for long-term working capital loans, but the healthcare environment has changed significantly since then. The Director stated that CHFFA staff does an analysis, as do investors, to make sure hospitals aren’t getting themselves into situations they can’t handle. At the hearing, the Committee unanimously passed the bill and referred it to the Assembly Appropriations Committee.
Why are so many hospitals distressed at this time?
Hospitals have shown significant financial stresses since the start of the Covid epidemic. While rising labor costs, inflation, aging infrastructure, and low reimbursements have been a continuing part of the problem, hospitals faced additional problems specific to the pandemic. These problems include continuing supply shortages, provider shortages aggravated by Covid-related burnout issues, and increases in volume of care as patients catch up on care postponed during the crisis. While Covid-19 relief funds helped in the short-term, these funds have expired, leaving hospitals to deal with the continuing problems on their own.
While recent research shows that the hospital industry is in a better overall financial state in 2024 than it was in 2022 and early 2023, a significant number of individual hospitals continue to lose money. In 2024, the majority of hospital had positive operating margins and were making a profit, but 40% of hospitals are still losing money.
Importance of local hospitals
The closure of any hospital can have negative ramifications for a community, but these problems are exacerbated in rural areas where there may be no other hospitals nearby to serve patient needs. Additionally, in these areas, the hospitals are often the largest (and best paying) employer, so their closure can have significant economic impacts, as unemployment rises and good paying jobs vanish, affecting the entire economy with a loss of local spending on goods and services. Research also shows that when a hospital closes, care delivery in surrounding hospitals is negatively affected.
Why public support could be crucial
Over a quarter of merger and acquisition proposals included a hospital or health system in financial distress. Hospital mergers lead to an increase in hospital prices, and consumers bear the price effects of hospital mergers in the form of reduced wages. A significant number of studies found no change or worse quality of care after consolidation. There are increased patient safety issues at hospitals acquired by private equity, and private equity acquisitions lead to higher charges, prices, and societal spending.
Despite the potential harms arising from consolidation, if struggling hospitals don’t get an infusion of cash, they may fail entirely. Communities that completely lose access to hospital services when the hospital closes are likely worse off than having a hospital with high prices and questionable quality of care. If public programs like CHFFA can continue to succeed, it may allow facilities to remain open without an acquisition by private equity or larger system.
In summary
When hospitals fail, in can have a profound negative impact on local communities. The California Health Facilities Financing Authority Act provides funding to assist struggling hospitals get back on sound footing. AB2098 and AB2637 are looking to make evolutionary, not revolutionary, changes to how CHFFA loans operate, but these changes could help to provide more needed relief to beleaguered facilities.