San Diego Business Journal

Legislative mandates requiring the state's hospitals to replace or retrofit buildings has caused fear and trembling in the industry ever since the Northridge earthquake knocked 23 facilities out of commission in 1994.

That quake caused $3 billion in damages and spawned what some consider the mother of all unfunded mandates in Senate Bill 1953 , which set milestones for hospitals to upgrade their buildings most vulnerable to earthquakes. The costs, originally estimated at $14 billion statewide, have skyrocketed in the past two decades.

The latest Rand Corp. report in 2007 estimated the costs at $110 billion. The figure did not include financing charges, which could double it.

"This is one of those classic state mandates that everyone got into and said, 'Oh my God. If we do this, we will either spend a lot of money or have to close and lose a lot of capacity,' " said Lou Smith, vice president of facilities for Sharp HealthCare, a not-for-profit which has seven hospitals and three affiliated medical groups in the county.

Buildings in the worst shape, called Structural Performance Category 1, have to be upgraded by 2013; and those slightly better off, in Structural Performance Category 2, have until 2030 to be upgraded, at costs estimated as high as $110 billion.

Hospital assessments required in 2001 showed that 40 percent, or 1,100 acute-care hospital buildings in the state , including 70 buildings in San Diego County , were at risk of collapse in a major earthquake.

The Office of Statewide Health Planning and Development, or OSHPD, has worked with hospitals to try to mitigate the financial fallout, which threatens to bankrupt struggling hospital systems throughout the state.

It helped push back a 2008 deadline for partially retrofitting buildings to 2013. And hospitals that can show they are making good faith efforts on construction can be granted an extension until 2015, said Pat Sullivan, spokesman for the OSHPD.

And in November, OSHPD approved a new assessment tool developed by the Federal Emergency Management Agency that is more accurate and is expected to upgrade the prognosis of as many as 600 buildings thought to be seismically challenged.

The software tool, called Hazus, uses a more sophisticated topography of California's seismic zones. It measures seismic risk based on a building's structural integrity, proximity to active faults and the underlying soil content.

Hazus was modified for hospitals over the course of about 18 months, replacing an earlier assessment tool developed by FEMA in 1995, Sullivan said.

All hospitals have until July 1, 2009, to request that their buildings be reassessed by Hazus , which OSHPD officials believe could save the industry as much as $4.6 billion.

Seven San Diego County hospital systems have so far applied for Hazus reassessment. Only Scripps Health, a not-for-profit health care system with four acute-care hospitals on five campuses, has benefited so far. Four buildings at its Scripps Memorial Hospital campus in La Jolla were upgraded from an SPC1 to SPC2 designation, buying time for major upgrades or replacements through 2030.

Scripps plans to submit reassessment requests for three other campuses that include 11 buildings.

Sharp HealthCare sent notification to OSHPD that it wants Hazus reassessment as well, but has not supplied all of the necessary paperwork. Sullivan said OSHPD has so far received only a fraction of reassessment requests expected by next year.

"They have time to look at it," Sullivan said. "They may just be looking at their own plans. Maybe they know that their buildings won't pass."

He said OSHPD would take six to eight weeks to reassess the buildings once they receive all the required materials.

Gathering the materials for Scripps, for instance, will cost several hundred thousand dollars in addition to the millions of dollars already spent to formulate seismic retrofitting plans, said Don Stanziano, a Scripps spokesman.

Temporary Victory

Adoption of Hazus by OSHPD at its Building Standards Commission meeting in November was a major victory for the hospital industry.

"It's much more sophisticated, which is why all the engineering experts believe that when the modeling is done, several buildings will be safer than previously thought," said Jan Emerson, vice president of external affairs with California Hospital Association, which pushed for it.

"They can really focus their resources on those buildings that are truly at risk. And there are buildings that are definitely at risk and do need to be replaced," she said. "By lasering in and focusing, we can get to those buildings first."

There's also companion legislation to SB 1953 that allows hospitals that can't meet the 2013 deadline because of financial conditions to qualify for an extension to 2020, said Emerson.

"The only hospitals that will qualify are those in junk bond financial status, considered to be safety net providers with high numbers of Medi-Cal patients or uninsured," she said, referring to Medicaid in California.

"We want to make sure hospitals withstand earthquakes, but at the same time, we don't want to reduce people's access to hospitals while we make them safer. It's a balancing act. Hazus is part of that," she said. "And for hospitals on the financial edge, we're still going to eventually have to have a conversation with the state about how to finance requirements."

The California Hospital Association says that 66 percent of hospitals in the state are operating in the red.

To meet seismic compliance, each system will have to find its own money.

Two local taxpayer-owned systems, Palomar Pomerado Health with hospitals and health centers in Escondido and Poway and Tri-City Medical Center in Oceanside, depend on voter-approved propositions for upgrades.

Nonprofits Scripps and Sharp medical systems rely on philanthropy and bond markets. And others aren't sufficiently creditworthy to qualify for revenue bonds, she said.

In the past decade, more than 70 California hospital facilities have shuttered because of financial problems, including a half dozen in San Diego County. Low Medi-Cal reimbursements for indigent patients in California, which ranks last in the country for its Medicaid funding, according to the California Hospital Association, puts further strain on hospitals.

In 2007, California hospitals were stuck with providing $9.7 billion in uncompensated care. Of that, $2.75 billion was related to underpayments from Medi-Cal and $3.5 billion was related to underpayments from Medicare, the federally funded health plan for senior citizens, CHA says.

"Clearly, given the (current) budget year with the state, this is not the year to have that conversation," Emerson said.

Financial Damage Control

For now, the hospital systems are hoping that Hazus will help mitigate some costs they would be facing.

Scripps, for example, is hoping that Hazus will reduce by as much as half of its capital costs from seismic compliance, currently estimated at $400 million, said Stanziano.

"The reason La Jolla was sent in first, is that we were further along in internal assessments," said Stanziano. "We had to do our own internal assessment of seismic vulnerability to see whether we thought this thing was a realistic possibility for us in the first place."

The internal assessments that OSHPD requires in order to perform a Hazus evaluation include: showing how the building is made, its materials, the joints where the materials come together, and the design.

"It takes about three to six months for an assessment," he said.

"The hope is that we will get some relief from the state on the seismic requirements that some buildings will be deemed safe and we will not have to retrofit them," he said.

The costs will be financed by a combination of bonds, philanthropy and cash reserves, he said.

"The seismic compliance isn't an isolated project any longer because we need to upgrade anyway. In many cases, we are rebuilding and adding new construction , we're using it as an opportunity to meet other health care needs that require new construction," Stanziano said. "It's an opportunity for us to generate philanthropy for some of that new construction. Getting donor support for straightforward seismic retrofitting is not likely."