Issue Paper

Earthquake-Compliant Hospital Buildings vs. Access to Care: California’s Careful Balancing Act
Issue Summary
March 2011

Hospitals are a vital part of communities throughout California, providing lifesaving care 24 hours a day, seven days a week, regardless of patients’ ability to pay. Hospitals also provide a safe haven to communities in times of natural disaster, such as earthquakes, or during public health epidemics, such as influenza outbreaks.

While California hospitals put the needs of patients and public safety first, some hospitals continue to face significant challenges in complying with the state’s mandated deadlines for earthquake build-ing requirements. The goal of having earthquake-compliant hospital buildings is a worthy public policy objective, and 82% of California’s community hospitals and hospital buildings report that they will be compliant with the state’s seismic deadline requirements by 2015. However, the cost of the mandate – estimated to be $110 billion without financing costs – is a financial barrier that many community hospitals just cannot meet. Hospitals who cannot afford the millions of dollars necessary to comply, or cannot otherwise reasonably meet the deadlines, may be forced to closed. Health care services in many communities could be eliminated if they cannot comply with the mandated 2013/2015 deadlines.

The Issue

In 1994, a few months after the Northridge earthquake, California enacted SB 1953 requiring all California hospitals to meet sweeping new earthquake-compliance standards. This law, the larg-est unfunded mandate passed in state history, was intended to ensure California’s community hospitals would remain operational after a large earthquake. While California’s hospitals have been working hard to meet the seismic deadlines, the eroding financial condition of hospitals is impeding many others from beginning or completing their building projects. If hospitals cannot meet the current deadlines, they will be forced to close. This will leave California’s growing population with less access to lifesaving health care services, and health care workers with no place to care for patients.

These economic impacts, along with the rising cost of the uninsured and other charity-care costs, have seriously weakened hospitals’ financial positions and their ability to fund the construction of new hospital buildings — estimated at nearly $2 million per bed.

The impact on hospitals and health systems in California is becoming clearer: more than half of California’s hospitals are operating in the red, many are not credit worthy and a number of hos-pitals are on the brink of, or in, bankruptcy. In this environment, ensuring access to capital mar-kets has become urgent. However, the bond markets that provide the bulk of capital to the hos-pital industry are more difficult and costly to access, even for hospitals with positive bottom lines. This financial environment is jeopardizing hospitals’ ability to meet the seismic retrofit and rebuilding deadlines required by SB 1953.

Cain Brothers, national investment bankers and capital advisers to hospitals, report that:

“Adding the additional burden of meeting seismic retrofit requirements will be difficult for all hospitals and may not be possible for some of the most financially vulnerable hospitals and health systems. For those that have the ability to raise the capital to meet the requirements of SB 1953, diverting this capital away from core operations and their balance sheets will mean compromising these hospitals’ ability to provide capital to their core operations and will signifi-cantly limit financial flexibility in the future.”

Since 1994, important programs and statutes have been enacted to help hospitals implement seismic building projects. One of these milestones was the implementation of Hazards US (HAZUS), developed by Office of Statewide Health Planning and Development (OSHPD) in conjunction with the Hospital Building Safety Board. HAZUS is a state-of-the-art modeling technology that allows for more accurate evaluation of the seismic-safety level of hospital build-ings. Through HAZUS, a number of hospital buildings have been reclassified to lower levels of risk, taking them from Structural Performance Category (SPC)-1 (highest risk of collapse) to SPC-2 (lower risk of collapse). As a result, more than half of the hospital buildings that pre-viously had to be retrofitted or replaced by 2013/2015 now can be rebuilt by 2030.

Recommendations

While better modeling has helped the hospital community and policymakers more accurately identify high-risk buildings, more needs to be done. California’s community hospitals have made significant progress in meeting the state’s unfunded seismic building safety standards and deadlines. However, a number of hospitals will not be able to comply with the deadlines for fi-nancial, scheduling or other practical reasons. These hospitals are already working with their communities to develop recommendations and plans to keep their community hospitals opera-tional while addressing the seismic mandate.

Policymakers must consider new and appropriate policy changes to the original SB 1953 mandate based on final requests for HAZUS exemptions and status reports from hospitals regarding their SPC-1 buildings and their projected compliance timelines.

Commands