El Dorado's Marshall Medical, Barton hospitals face rising costs

The staff at Barton Memorial Hospital in South Lake Tahoe got the word at around 8:30 p.m. on Aug. 29, 2021, that they were evacuating.

The Caldor Fire, which had been burning for more than two weeks, was marching up Echo Summit from the east and was on the precipice of becoming the first wildfire in recorded history to cross the Sierra Nevada mountains and drop into the Tahoe Basin.

Earlier that afternoon, medical staff had already evacuated Barton’s skilled nursing facility, transferring its 36 residents out of the path of the fire.

“I am humbled by the dedication and servitude exhibited by so many Barton employees and physicians,” Barton CEO Dr. Clint Purvance wrote, in a column that appeared in South Tahoe Now in the aftermath of the fire.

By 1:25 a.m., all 26 patients in the 63-bed hospital were gone.

“We prepare for evacuation and emergency scenarios, but the intensity and seriousness of evacuating all patients safely, while also evacuating our own homes, was palpable,” Purvance wrote. “People loaded their car with their most precious belongings, then stopped at the hospital to add equipment and supplies that could be useful at alternate care sites."

Ultimately, fire crews stopped the Caldor Fire before it reached the South Lake Tahoe city limits, but not before it burned more than 200,000 acres of forest and hundreds of homes, making it one of the most destructive fires in the region's history.

It wasn’t the first time Barton has been under threat from fire, and it likely won’t be the last.

Wildfires are just one of the extra challenges rural hospitals contend with as they serve the communities of people eking out a living in the winding river canyons and rugged mountains of the Sierra Nevada.

These hospitals have always operated on a knife’s edge. Treating the very sick, old and poor rarely brings in enough revenue to cover their costs.

Now costs are getting higher, margins are getting thinner, and rural hospitals are at increasing risk.

Over the past six months, the Business Journal has analyzed the financial and utilization records of acute care hospitals in Sacramento and El Dorado counties, sifting through the tens of thousands of data points that they report to the California Department of Health Care Access and Information on an annual basis, to explore the differences between the region’s rural and urban hospitals. We found that El Dorado County’s rural hospitals face a number of distinct challenges stemming from their geography, the demographics of their patients and government health care programs whose reimbursement rates haven’t kept up with rising costs. These all make it harder for rural hospitals to strike a balance between serving their communities and generating enough revenue to cover expenses.

‘Not a profit-making endeavor’

El Dorado County stretches from the suburbs of Sacramento in El Dorado Hills, where more than a quarter of county residents live, to the Nevada state line, at the threshold of the high-rise casino hotels on the southern tip of Lake Tahoe.

Along the way, it gains nearly 6,000 feet in elevation, the median annual income drops from $139,810 to $57,976 and the poverty rate more than doubles, according to census data.

Highway 50, the backbone of the county, runs through both of its incorporated cities, and serves its two hospitals.

Barton Memorial Hospital serves South Lake Tahoe, a city of around 21,000 people, and the broader Tahoe region, where it sits as the only hospital in the Tahoe Basin.

Marshall Medical Center is a 111-bed hospital in Placerville, a city of nearly 11,000 people.

“Our history, our culture, our origin is really all about being part of El Dorado County, and that’s who we’re here to serve,” Marshall Medical Center CEO Siri Nelson said.

Building the hospital was a community effort. In 1957, Placerville was given top priority to receive federal funds from the Hill-Burton Act, which helped fund a nationwide push to build more nonprofit community hospitals. At the time, residents of El Dorado County seeking a doctor went to the Placerville Sanatorium, a two-story, 26-bed addition that was built onto a converted house around the turn of the century and was privately owned and operated by a group of local doctors.

In order to get the Hill-Burton money, the community had to raise $411,692 in matching funds — equivalent to more than $4 million today, from a county of fewer than 20,000 people. An article in the Placerville Mountain Democrat at the time estimated that 58% of the households in the area contributed to the capital campaign — they beat their target in less than four months.

At a 60-year celebration of the hospital in 2019, then-CEO James Whipple said that, once the land for the hospital was donated by the local lumber company, people would stop by after work to help build the hospital.

When it opened in 1959, it put the Placerville Sanatorium out of business, but the doctors who ran it assured the community that there were no hard feelings.

“The operation of a hospital, contrary to what many may think, is not a profit-making endeavor, and the responsibilities are great,” they said, in a 1957 statement to the Mountain Democrat. “For this reason, we are only too happy to relinquish our responsibilities to the Marshall Hospital.”

More than six decades later, the words of the proprietors of the Placerville Sanatorium have proved prophetic.

Marshall operated at $5.52 million loss in its 2022 fiscal year, according to its annual financial report. Factoring in the $15.1 million hit to its investment portfolio due to the dip in the markets, Marshall lost a total of $18.8 million last year.

“It was a rough year,” Marshall Chief Financial Officer Laurie Eldridge said.

Marshall isn’t alone.

The operating margins for rural hospitals, which have always been razor thin, are getting worse. The Business Journal’s analysis of the last seven years of California hospitals' annual financial reports found that since 2015, the average margin between the revenue rural hospitals get from seeing patients and their expenses has dropped from .15% to -8.5%.

Barton managed to cover the cost of operations in 2021, the most recent year for which data is available, but its operating income of $3.85 million had declined by 86% since 2015.

The pandemic is partially to blame for that. Covid-19 wreaked chaos and tragedy both on the hospital floor and on hospitals' finances.

“We have hospitals across the state in all types of communities that are teetering on the edge financially,” said Jan Emerson-Shea, vice president of external affairs for the California Hospital Association.

But as Covid-era policies are winding down, rural hospitals don’t have a solid ground to return to.

Peggy Wheeler advocates for rural hospitals in her role as the vice president of rural health care and governance for the California Hospital Association.

“Rural hospitals have been challenged financially and in their payment mix since before Covid,” Wheeler said.

In fact, she said some actually saw some stability during Covid, due to federal relief programs like the Paycheck Protection Program, and the Provider Relief Fund, which specifically went out to hospitals.

“Now that we’re coming out of Covid, they’ve had to account for those dollars that they were given by the federal government. Many of them are returning to a state that existed before they went into Covid,” Wheeler said. “So this is not a sudden change in rural status. Rural hospitals have always operated near the margins.”

A higher cost burden

Part of that is overhead expenses. Just due to economies of scale, larger hospitals are able to operate more cheaply than the ones serving fewer patients. Smaller hospitals aren't able to negotiate as large of a volume discount for things like medical supplies or contract labor. But many of their overhead costs are the same, to serve far fewer patients.

“Whether it’s Cedars-Sinai hospital in Los Angeles or Marshall Medical Center, Barton, Plumas District Hospital, they all have to have a certain amount of resource in order to operate,” Wheeler said. “They don’t have any relief on staffing requirements, they have to have the same nurse staffing ratios, they have to have a lab, they have to have a tech lab, all of that.”

At Marshall, Nelson said it’s a constant juggling act to balance the books.

“We’re looking at how to improve our net revenue, looking at service lines, looking at reducing denials, looking at all kinds of things at the top side of the income statement,” Nelson said. “And then also looking really hard at our expenses and seeing what we can do to help be more affordable.”

But there are only so many ways to cut costs, and rural hospitals have a few extra factors to contend with.

“I can’t change my utility costs, right?” Nelson said. “I gotta pay the bills, and when we have power outages, like we did over the last couple of days, I’m running an emergency generator on diesel. That’s hugely expensive.”

It costs $8,200 worth of diesel fuel to run an emergency generator to power Marshall Medical Center for 14 hours.

“When we’re on emergency generator power, we don’t do elective surgeries,” Eldridge said. “So that’s lost revenue.”

Elective surgeries are often where hospitals are able to make up a lot of their margins. And Nelson noted that “elective” surgeries include things like hernia repairs — although they’re not emergency procedures, they are often still very much needed.

“Patients move their whole lives around getting whatever it is they need taken care of,” Nelson said. “When we have to cancel because of weather or your insurance and authorization didn’t come through, it’s really difficult on patients, because they still have the hernia that needs to get fixed.”

The winter storms have repeatedly knocked out power across parts of the foothills. Toward the end of February, thousands of customers in the Placerville area lost power, some for more than a day. Blackouts during storms have always been common in the foothills — and now there are issues in the summer, as PG&E Co., the power supplier for much of El Dorado County, shuts off power to some rural customers during dry, windy weather to try to prevent its equipment from sparking wildfires.

The cost of powering emergency generators is just one rising expense rural hospitals are dealing with.

Between 2015 and 2021, Barton's operating expenses rose by 42%, and Marshall's has risen by 37%. In Sacramento, only UC Davis Medical Center's expenses rose faster — by 65% during the same period.

But at the same time, UC Davis has seen an increase in revenue from patients that has nearly kept pace, rising 60%, while the El Dorado County hospitals have seen just a fraction of that increase in revenue.

Like the rest of the hospitals, the biggest expense for the El Dorado hospitals is payroll, which is on the rise. A long-term shortage of health care workers was made worse when more people dropped out of the profession during the pandemic, and hospitals across the board have raised wages to try to attract the workers that are left.

But Marshall and Barton have also seen a disproportionate rise in the cost of supplies, another major expenses category.

In 2021, Marshall was paying $13.1 million more for supplies than it was in 2015, and Barton was paying $8.7 million. That’s an increase of more than 50% for both of them.

"In general, inflation, utility costs, our insurance cost, staffing costs, supply costs," Eldridge said. "The supply chain issues have been challenging."

Just finding supplies over the last few years has gotten trickier.

"So we're searching to try and find supplies and then when we do find them, they're really high cost and we're shipping overnight because we're desperate," Eldridge said.

In the last year, pharmacy costs alone have gone up 38%, Nelson said.

“It’s getting paid less for doing the work, and our expenses are going up,” Nelson said. “So we're working really hard right now to look at what we can do to reduce costs and not reduce care to patients.”

Rural America in decline

One of the biggest costs to rural hospitals is something that hospitals have no control over — the patients who walk through the door.

“They don't have a lot of commercial patients,” said Lynn Barr, who has been working in and advocating for rural health for more than a decade. “The commercial patients typically pay twice as much in California as Medicare does, and Medicaid pays even less.”

Barr first started working with rural hospitals while she was going through the University of California Berkeley’s master's degree in public health program. In 2016, she founded Caravan Health, which brings community doctors and hospitals together to share efficiencies and gain cost savings from Medicare. Caravan was acquired last year by Signify Health for $250 million. Now, Barr serves on the Medicare Payment Advisory Commission, an agency that advises Congress on issues affecting the Medicare program, where she represents safety net hospitals and rural hospitals.

“Rural America has been declining compared to urban America since the early ‘90s,” Barr said. “Their quality of life is poor. They’re poorer. They have a much shorter life expectancy.”

They are also much older.

“Most of their industry is gone, so a lot of the children have left,” Barr said.

Nearly a third of El Dorado County’s 193,000 residents are 60 or older, according to census data. With a median age of 45.7, it’s one of the oldest counties in the state.

In general, seniors can enroll in Medicare, the federal health care program for older adults, starting at age 65. According to enrollment numbers from the Centers for Medicare & Medicaid Services and census data, there are 48,000 people in El Dorado County enrolled in Medicare — that’s a quarter of the county. In Sacramento County, 17% of the population is enrolled in Medicare.

“It’s really that government dependence that puts health care providers at risk financially,” Nelson said. “It is because the government, the federal and the state government, does not pay the costs of taking care of the recipients under those programs. So Medicare doesn't cover the cost of taking care of Medicare patients. Medi-Cal is even worse about covering the costs of taking care of those Medi-Cal patients.”

Medi-Cal is the state’s implementation of the federal Medicaid program, which primarily serves low-income children and families and those who are disabled.

In 2021, 57% of Marshall’s care went to patients covered under Medicare — no other hospital in El Dorado or Sacramento counties saw that much of its care going to Medicare patients. But the Medicare program didn’t even pay Marshall two-thirds of what it spent to treat those patients. In total, Marshall lost $56.3 million in 2021 treating Medicare patients.

And that shortfall only accounts for the direct expenses incurred in seeing patients whose care is paid for by government programs. It doesn't account for overhead, like rent and utilities.

“If I added all of our costs in there, they're probably covering maybe 40% — maybe — what it actually costs to take care of that patient,” Nelson said.

And patients on government health plans make up 77% of the people Marshall treats.

Barton has its own challenges.

“Many patients in rural health areas, especially those with an aging population, are on state government programs such as Medicare, Medi-Cal, and Medicaid to help them get the care they need,” Barton public relations specialist Thea Hardy said, in a statement. “Additionally, the pandemic had a significant impact on small businesses who may have experienced less opportunity to provide coverage through private insurance, resulting in increased enrollment in government programs.”

Based on gross revenue, which is the top-line amount that hospitals bill for care — much of which is later negotiated down by the health plan — 57% of Barton's care is of patients on government insurance. Barton has a similar ratio of patients who come in for same-day, outpatient visits. However the vast majority of the patients laying in its hospital beds are on government insurance. By patient days, which measures the number of days a hospital’s beds are occupied, 89% of its care went to patients on government insurance. Most of that was for Medi-Cal patients. Just 9.3% of its patient days were from patients with third-party payers — that’s most commonly private insurance, which is typically the only payer that hospitals aren’t losing money on.

Although Barton has a lower percentage of Medicare patients than Marshall does, it still gets paid a fraction of what it spends to care for those patients. In 2021, there was a $39.8 million gap between Barton’s expenses to treat Medicare patients and how much it was reimbursed by the program.

Those shortfalls are getting wider, as reimbursement rates have not kept up with the rising cost of care.

Since 2015, the average rate that traditional Medicare (not including the Medicare Advantage program) pays Marshall per patient day has gone up 70%. Meanwhile, the money it costs Marshall to treat these patients has gone up 92%, according to state data.

That gap is getting wider for rural hospitals across the state. Statewide, costs have risen an average of 4 percentage points faster than traditional Medicare reimbursements.

“If you only have older patients, you can't be financially viable,” Barr said. “That's why so many rural hospitals are closing.”

The health services research center at the University of North Carolina at Chapel Hill tracks rural hospital closures. According to its data, from 2005 through last year, nine rural California hospitals closed their doors.

Before this year, a rural hospital hadn’t closed since November of 2018 — that was Adventist Health’s Feather River Hospital in Paradise, which closed after the Camp Fire burned the surrounding town nearly to the ground. But then Madera Community Hospital closed in January.

Hospital advocates are worried that more might be on the way.

“There's many reasons why they're closing, but a lot of it has to do with just the demographics and their payer mix,” Barr said. “There's just too many Medicare patients and the hospital cannot survive.