Report 2001-119 Summary - May 2002

Los Angeles County Department of Health Services:

Current Proposals Will Not Resolve Its Budget Crisis, and Without Significant Additional Revenue It May Be Forced to Limit Services

HIGHLIGHTS

Our review of the Los Angeles County Department of Health Services (Health Services) to evaluate its financial capacity to render necessary health care services to the residents of Los Angeles County revealed that:

  • Health Services' projected budget deficit of $688 million by fiscal year 2005-06 is likely to be larger than it has forecasted.

  • Efforts to reduce costs and improve efficiencies are not likely to avert the forecasted budget deficit.

  • To maintain current levels of service, additional sources of revenue are required.

  • Health Services has identified four options for reducing the size of its system, but has not yet offered a specific proposal for accomplishing these reductions.

RESULTS IN BRIEF

The Los Angeles County Department of Health Services (Health Services) currently forecasts a budget deficit beginning in fiscal year 2003-04 of $365 million, and it projects the shortfall will grow to $688 million by fiscal year 2005-06 of which $628 million is related to its enterprise units. The deficit threatens the department's ability to continue providing the current level of health care services to low-income and medically indigent residents of Los Angeles County.

To address the deficit, Health Services is developing a strategic plan to improve efficiency and seek new sources of funding. If this effort is not successful in eliminating the projected deficit, Health Services plans to propose reducing the size and capacity of the county's health care system. According to Health Services, these reductions will require a change in the historical definition of the department's mission and role as the safety net provider in the county.

In fiscal year 1995-96, facing a similar deficit of $655 million, the county and the State negotiated a special Waiver agreement with the federal government that provided $1.2 billion in federal funding over 5 years. The Waiver was intended to give the county time to restructure its health care system, reducing hospital-based services and increasing the volume of primary and preventive care delivered in less-expensive outpatient settings. Although progress was made in restructuring the delivery system, a continuing budget deficit led to a 5-year extension of the Waiver beginning in fiscal year 2000-01. The Waiver extension provides a total of $900 million in federal funding and requires Health Services to meet several operating objectives.

Health Services' baseline budget deficit, before considering the impact of initiatives that may result from the current strategic planning effort, will likely be larger than it has forecasted. In fiscal year 2005-06, Waiver funding will be eliminated, resulting in a loss of more than $230 million in revenue annually. Further, Health Services has identified, but has not yet incorporated into its baseline budget, additional losses in state and federal funding totaling an estimated $67 million. Changes in the mix of payors, toward a greater proportion of uncompensated care, have exacerbated Health Services' revenue problems. The unbudgeted reductions in funding and the changing payor mix, combined with unfavorable pending, or as yet unimplemented, federal and state laws, suggest that Health Services' revenue forecast may be optimistic.

While important revenue streams are forecasted to remain flat or to decline, the cost of providing health care continues to grow. Employee salaries and benefits, predicted to grow at the rate of inflation, are expected to add more than $300 million to the deficit by fiscal year 2005-06. Overall, Health Services forecasts that its total costs will increase by 4.2 percent annually through fiscal year 2005-06, a rate less than the recent rate of increase in the hospital Consumer Price Index and also less than the rate of growth in Health Services' spending in the last five years. Like the department's revenue forecast, the expense forecast appears optimistic. Regulatory changes and other factors not reflected in the baseline budget, including new minimum nurse staffing ratios, the need to accommodate seismic retrofitting of hospitals, and the requirements of the Health Insurance Portability and Accountability Act, may increase Health Services' operating cost by approximately $103 million above the baseline forecast by fiscal year 2005-06.

We found that the accounting tools and procedures used by Health Services to track and report on the status of the budget deficit are sufficient for that purpose. However, the department lacks the clinical or financial information systems needed to effectively manage a multibillion-dollar health care system.

Past efforts to resolve the budget deficit have not succeeded in averting another crisis. With respect to revenue, Health Services has been innovative in finding new sources of funding to support its health care systems. Examples include the aggressive use of intergovernmental transfers to maximize federal matching contributions and negotiation of the Waiver and Waiver extension that together provided $2.1 billion in federal funding over 10 years. With respect to costs, labor productivity fell and operating expense rose somewhat more quickly at Health Services hospitals than at other public and teaching hospitals in California during the early 1990s. However, recent efforts to contain costs and improve operating efficiency have helped limit growth in spending. Health Services reports savings of $259 million annually from cost-reduction efforts initiated since fiscal year 1996-97. Our comparison of Health Services hospitals with other benchmark hospitals supports Health Services' claims of improved efficiency at its hospitals.

Health Services is scheduled to present its plan to address the budget deficit to the County Board of Supervisors on June 18, 2002. As of the time we performed our work, this plan was not complete. Only a limited number of immediate opportunities to reduce costs and enhance revenue were sufficiently specified to allow potential fiscal benefits to be estimated. However, because Health Services' hospitals are already moderately efficient compared to the benchmark facilities we analyzed, cost reductions alone are not likely to eliminate the department's budget deficit. To maintain the current system and level of service, additional sources of funding will be required.

Although it has identified four options for reducing the size of the county health care system in the event that immediate cost-reduction efforts and revenue enhancements are not sufficient to balance the budget, Health Services has not yet offered a specific proposal for accomplishing these reductions. Each of the four options would require the county to focus its resources more narrowly on those residents that it is legally obligated to serve.

AGENCY COMMENTS

Health Services generally agrees with the findings contained in our report.


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