El Segundo-based Pipeline Health System, which operates four safety net hospitals in LA County and three in other states, has filed for Chapter 11 bankruptcy, citing difficulties financial aggravated by the Covid-19 pandemic.
Pipeline Health filed its case late October 2 in the U.S. Bankruptcy Court for the Southern District of Texas. In a subsequent press release, the company said it plans to continue operating the hospitals and pursue debtor-in-possession financing in order to emerge from bankruptcy.
“We intend for the restructuring process to allow our hospitals to remain open and operating in their communities, while placing the hospital system in a more secure and sustainable financial position in the future,” the chief executive said. of Pipeline Health, Andrei Soran, in the release.
However, no timetable was given for debtor-in-possession financing or the resurgence of bankruptcy.
Pipeline Health specializes in operating safety net hospitals, which are obligated to serve all patients, regardless of insurance status or ability to pay. By their very nature, these facilities tend to have more precarious finances than other hospitals.
According to figures provided by the Southern California Hospital Association, of the 94 hospitals currently in Los Angeles County, 44 are considered safety net hospitals, where the vast majority of patients are either under Medicaid (in California, Medi-Cal) is under uninsured.
In Los Angeles County, Pipeline Health operates Memorial Hospital in Gardena, Coast Plaza Hospital in Norwalk, Community Hospital in Huntington Park and East Los Angeles Doctors Hospital.
The health system also operates White Rock Medical Center in Dallas and two hospitals in Chicago: Weiss Memorial Hospital and West Suburban Medical Center.
In June, an Illinois board approved the sale of Weiss Memorial and West Suburban Medical Center to a newly formed company called Resilience Healthcare, which was founded and led by Chief Health Officer Manoj Prasad, a specialist in hospital recovery. The proceeds from the sale were to help Pipeline Health stabilize its finances.
But unspecified delays have apparently surfaced in final negotiations to sell the hospital pair; these delays helped trigger Pipeline’s bankruptcy filing.
Pipeline said in its statement that during the Chapter 11 process, its executives “will continue to pursue all available options to complete the planned sale of the two Chicago hospitals to Resilience Healthcare.”
The bankruptcy filing itself provided details about Pipeline’s current finances. The company said in a disclosure document total revenue of $3.2 billion in the 12 months ending August. But a more accurate indicator of the company’s financial condition was operating revenue “after taking into account adjustments, denials and bad debts” of $684 million for the 12 months ending August. Meanwhile, the company faced operating expenses of $761 million for those 12 months. The total net loss for this period was $272 million.
In its statement, the company attributed the deterioration of its finances and its subsequent decision to file for bankruptcy to “significant industry-wide financial challenges that have been exacerbated by the Covid-19 pandemic, including the rise skyrocketing labor and supply costs, reduced ability to generate revenue, and delayed payments from various insurance plans for critical patient services already provided.
Pipeline Health dates back to 2008 when a group of investors purchased two financially underperforming safety hospitals in Los Angeles County – Memorial Hospital of Gardena and East Los Angeles Doctors Hospital – in an effort to turn them around. Investors named the new company Avanti Hospitals.
Two other local hospitals soon joined the Avanti network: Huntington Park Community Hospital in 2010 and Coast Plaza Hospital in Norwalk in early 2011.
From the beginning, Avanti hospitals mainly provided basic emergency care services; they did not have expensive high-level trauma centers or highly specialized advanced surgery programs such as might be found at Beverly Grove-based Cedars-Sinai Health System or Westwood-based UCLA Health. This has allowed Avanti Hospitals to control costs quite tightly; for example, they did not employ many specialized surgeons or high-priced university researchers.
Avanti received a major boost from a new state law that took effect in 2010 aimed at strengthening hospitals that rely on low-income patients. The law imposed new fees on hospitals not protected by a safety net to raise funds that could be used to help hospitals with a safety net. In the first four years of this fee program, Avanti received an influx of about $60 million, according to a 2013 Business Journal article.
“This law was a big help for Avanti to get started and start making a profit,” said Craig Beam, an independent hospital consultant in Cowan Heights, Orange County, who has held several hospital board positions and managed care organizations.
In 2017, two of Avanti’s early investors – Nick Orzano and Mark Bell – started a new venture called Pipeline Health, focused on taking Avanti’s business model and applying it to hospitals in other states. Their first purchase, completed in 2018, was White Rock’s City Hospital in Dallas.
The following year, in 2019, Orzano and Bell bought out Avanti’s other investors, then renamed the entire company Pipeline Health.
But a few months later, the Covid-19 pandemic hit, exposing the inherent vulnerability of a business model that relied on trying to keep safety-net hospitals financially viable.
“Safety net hospitals are always on a knife edge for profitability,” Beam said. “The provider fee certainly helped, but even with that fee it’s still difficult.”
Once the pandemic hit, hospitals had their hands full treating Covid patients, acquiring personal protective equipment and ensuring there were enough beds and ventilators available, Soran said in an interview with the Business Journal last year.
Revenue was also hit as scheduled surgeries were halted for much of the first year of the pandemic, although Pipeline hospitals did not suffer as much of a drop in revenue as their counterparts without a safety net.
As the pandemic dragged on, staffing shortages worsened. This drove up the cost of hiring more staff.
“Safety net hospitals have struggled because of the pandemic,” Beam said. “It was a major cash flow crisis for those (hospitals that) weren’t well capitalized.”
To generate additional revenue, in July 2021, Pipeline Health entered into an agreement with Birmingham, Alabama-based Medical Properties Trust Inc., for a sale-leaseback of the land beneath its four hospitals in Los Angeles County. Financial details of the transaction were not disclosed. This was the second sale-leaseback for the hospital operator; the first was in 2013 and brought in $86 million in additional revenue.
But even last year’s sale-leaseback was not enough to turn around Pipeline’s finances. That’s why Pipeline announced plans in March to sell its two Chicago hospitals.