What is New:
Department of Health Care Access and Information (“HCAI”) posted a draft methodology for evaluating applications for the Distressed Hospital Loan Program (“Loan Program”) and is surveying California hospitals to assess interest in the Loan Program.
Why it Matters:
Hospitals considering participation in the Loan Program:
- can begin evaluating the information that HCAI may use to evaluate loan awards; and
- should consider participating in the HCAI survey.
This post provides further updates to Sheppard Mullin’s previous posts dated May 10, 2023 and May 19, 2023 regarding Assembly Bill 112 (“AB 112”), which created the Loan Program. As outlined in those previous posts, the Loan Program aims to provide critical financial relief for qualified hospitals across the State of California.
Since AB 112 became law on May 15, 2023, HCAI and the California Health Facilities Financing Authority (“CHFFA”) have taken several steps to meet the requirements of AB 112.
- May 16, 2023 – HCAI began surveying California hospitals. The surveys aim to assess interest in Loan Program participation and demand for loans from the Loan Program.
- May 23, 2023 – HCAI posted a draft methodology for evaluating Loan Program applications and hosted a webinar for feedback on the draft methodology. The draft methodology, which is outlined below, is subject to change based on the ongoing stakeholder feedback. The draft evaluation methodology and webinar slides can be found at Distressed Hospital Loan Program – HCAI.
- May 25, 2023 – CHFFA approved loan administration.
- June 2023 – The following are expected to occur this month:
- CHFFA will hold an informational webinar about the Loan Program for interested applicants; and
- loan applications will be made available.
Analysis of the Draft Methodology:
On May 23, 2023, HCAI clarified its evaluation process for determining the eligibility criteria of hospitals to receive funding under the Loan Program, by publishing a draft methodology. The evaluation methodology, consists of four key criteria: (1) liquidity; (2) profit/loss analysis; (3) turnaround plan; and (4) community need. Applicants will be reviewed on a points system, with HCAI awarding higher points for hospitals that show a more significant need and community impact.
- Liquidity: HCAI expects to evaluate the applicant’s liquidity by evaluating its days cash on hand, current ratio, and access to working capital.
- Days Cash on Hand: A hospital’s days cash on hand indicates how many days the hospital has before it depletes all its working capital needed for operations, services, and employee payments. HCAI expects to award more points to applicants with a lesser ability to sustain operations.
- Current Ratio: The current ratio is intended to be a financial metric used to assess a hospital’s ability to pay its short-term financial obligations. HCAI expects to calculate the current ratio by dividing a hospital’s current assets by its current liabilities. HCAI expects to award more points to applicants with lower current ratios (i.e., greater difficulty in meeting short-term obligations).
- Access to Working Capital: HCAI expects to measure a hospital’s access to working capital by determining whether a hospital has attempted to secure lines of credit or other working capital financing, whether the hospital was successful in obtaining the alternative financing, and the economic viability of terms offered on such financing. HCAI expects to award more points to applicants with fewer financial alternatives, and fewer points to applicants with greater access to unutilized working capital financing or to applicants that have not attempted to obtain such financing.
- Profit/Loss Analysis: HCAI expects to consider a hospital’s financial performance and general profitability by examining its operating margin and the impact of operating loss on liquidity.
- Operating Margin: The hospital’s operating margin will be evaluated by considering operating and net losses and comparing the operating margin for the last audited financial statement and the operating margin for the current year-to-date financial statements. More points will be awarded to applicants where the operating margin for both periods is negative, fewer points if one period was positive and one was negative, and even fewer points if the margin for both periods was positive.
- Impact of Operating Loss to Liquidity: The impact of the operating losses or net losses on how long the applicant can sustain its operations based on its current cash balance will be measured using an equation that divides cash balance by the monthly average operating loss (excluding depreciation and non-cash expenses). HCAI expects to award more points to applicants with a shorter financial runway and fewer points to applicants that have a longer runway.
- Turnaround Plan: HCAI expects to evaluate the applicant’s plan to achieve financial viability with the loan proceeds. The turnaround plan, which must be submitted with the loan application, is required to include: (1) a 24-month cash-flow projection; (2) a narrative describing actions being taken by leadership to achieve financial viability; (3) projections to show how the loan proceeds will be utilized; and (4) a description of how the planned actions will affect various revenue and expense line items. HCAI expects to award points for the turnaround plan on a continuum, as follows:
- More points – Demonstrates a return to financial stability with no change to lines of services and hospital begins making payments on the loan.
- Fewer points – Demonstrates a return to financial stability with limited change to lines of services and hospital begins making payments on the loan.
- Fewer points – Demonstrates a return to financial stability with major change to lines of services and hospital begins making payments on the loan.
- Fewer points – Demonstrates the hospital has engaged professional consultants to solicit a sale, merger or partnership that will return the hospital to financial stability.
- Fewest points – Demonstrates the hospital will need to engage professional consultants to solicit a sale, merger or partnership or demonstrates that the loan will extend the runway but does not illustrate a feasible path to financial stability.
- Community Need: HCAI expects to consider the hospital’s geographic location, including: (1) its distance from alternative hospitals; (2) whether it plans to eliminate certain services; (3) whether it is located in a medically underserved area and/or serves a medically underserved population; and (4) its payor mix.
- Distance to Nearest Alternative Hospital: HCAI expects to award more points to an applicant if the nearest hospital is greater than 15 miles or 30 minutes driving time, and fewer points if there are multiple alternatives offering similar services nearby.
- Hospital Planning to Eliminate Needed Lines of Service in its Community: HCAI expects to award more points to an applicant if the hospital does not plan to eliminate services in its community as part of its turnaround plan, and fewer points if the hospital is planning to eliminate needed services in its community.
- Service Area Designation: HCAI expects to award more points to an applicant if the hospital is both located in a medically underserved area and serves a medically underserved population, fewer points if it meets only one of these criteria, and even fewer if it meets neither the medically underserved area nor medically underserved population criteria.
- Payor Mix: HCAI expects to award more points to an applicant if it has a greater payor mix of Medi-Cal, Medicare, and uninsured/discount or charity care, and fewer points if there is a lower proportion of these payor types.
- Other Factors: HCAI expects to also consider whether the hospital is in technical or payment default with long-term debt covenants, whether the lender is taking any remedial actions, and whether the hospital has already pledged Medi-Cal revenues to creditors (i.e., whether the Medi-Cal revenue collateral for the Loan Program will be subordinate to existing liens).
Overall, the draft evaluation methodology published by HCAI indicates that an applicant will be considered more favorably if it has demonstrated a high financial need, established that it offers critical care for the community, and has a high likelihood of achieving financial viability with a loan award.