The Great Shakeout or The Great Shakedown?

As California hospitals scramble to meet state deadlines for seismic compliance, a bigger problem is looming: can they afford it? 

In the wake of the 1994 Northridge earthquake that struck the San Fernando Valley, causing structural damage to eleven hospitals, California lawmakers looked for ways to improve seismic resilience across the state. One of the resulting bills, SB 1953, mandates that California hospitals conform to more rigorous building standards so as to prevent significant damage during an earthquake and ensure their continued operation postevent. Lawmakers have given hospitals until 2030 to be fully compliant with SB 1953 building standards, yet the majority of California hospitals have not met the required standards. The biggest barrier to compliance — cost. 

While seismic upgrades to hospital infrastructure are incredibly important, they are also incredibly costly. In fact, a recent RAND report estimated that the total cost of compliance for all remaining non-compliant hospitals is anywhere between $34.2B and $142.9B, depending on whether hospitals retrofit old buildings or build new ones. Retrofitting hospitals would cost the average California hospital approximately $100M per building, and constructing new buildings would cost approximately $500M per building. These costs would need to be shouldered up front by each hospital, and the benefits of compliance would only arise if the hospital was hit by an earthquake of a magnitude that exceeds the building’s previous structural capacities. Hospitals have also cited concerns over community needs, disruptions of service while undergoing upgrades, surge pricing, and land availability as barriers to achieving compliance. 

The financial impact of seismic upgrades is felt by many hospitals in California, however, the hospitals that struggle the most to comply with SB 1953 are Critical Access Hospitals (CAHs) and public healthcare districts (which aren’t mutually exclusive). CAHs are defined as hospitals located in rural areas that receive federal funding in order to maintain essential services without falling into financial distress.  

In comparison to private hospitals, public hospitals are typically more financially flexible due to government benefits. However, only 21 of the 59 public hospitals in California are backed by these benefits. According to the RAND report, 57% of public hospitals are in severe financial distress or have the potential to fall into financial distress, and 93% of public hospitals are currently non-compliant. When it comes to CAHs, the statistics are just as alarming; 38% of CAHs already face severe financial distress or the potential for financial distress and 91% of CAHs are non-compliant. Due to their rural setting and smaller patient turnover, CAHs lack the ability to fundraise at the same level as larger, more urban hospitals. Even without the compliance costs, 14 CAHs have been forced to close their doors between 2013 and 2016 according to the Medicare Payment Advisory Commission

Ultimately, less than half of all California hospitals are financially healthy enough to afford compliance. If California hospitals work to implement SB 1953, then the percentage of hospitals in severe financial distress will likely rise from 22 to 40. As a result, many hospitals will scramble to stay afloat and will likely look to cut less profitable services and raise prices for patients in order to do so. 

As previously mentioned, the benefits of seismic compliance may outweigh the financial pains of achieving SB 1953 compliance if a hospital is hit by a damaging earthquake that the previous structure would not be able to sustain. Though it is difficult to estimate the likelihood of such an earthquake striking each hospital, the Lowe Institute is able to use historical USGS data to look at which hospitals are at greatest risk of being hit by a “damaging” earthquake. The USGS classifies “damaging” as enough to be felt by everyone in the area and to cause minor structural damages, which does not necessarily mean it would be of great enough magnitude to close a hospital. However, their classification gives us a good sense of the most earthquake-prone areas in the state. 

As the above map indicates, 7 of the 34 CAHs (denoted by the blue dots) are located in areas that face less than a 1% chance of a damaging earthquake, 10 face a 1-2% chance, 17 face a 2-5% chance, and none face a >5% chance of being hit by a damaging earthquake. It should be noted that these percentages represent the risk of a damaging earthquake each year, not the risk of ever being hit by a damaging earthquake. 

The variation in seismic risk for CAHs can be seen in San Bernardino county quite clearly. Mountains Community Hospital in Lake Arrowhead and Bear Valley Community Hospital in Big Bear Lake each face around a 2-5% chance of a damaging earthquake each year. They are located in close proximity to the San Andreas Fault Line and smaller fault lines that branch from it ‒ the Cleghorn Fault Line and Waterman Canyon Fault. In contrast, the third CAH in San Bernardino County, Colorado River Medical Center in Needles, is at a less than 1% risk of a damaging earthquake. 

The differences in seismic risk across California CAHs illustrates the shortcomings of a statewide bill that treats all hospitals equally. Certain hospitals are at substantially greater risk of being hit by a damaging earthquake than others, yet all hospitals must meet the same seismic standards. Because SB 1953 could put many hospitals with little to no earthquake risk into severe financial distress, such as Colorado River Medical Center, perhaps lawmakers should consider a redesign of hospital compliance policy.