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San Benito Health Care District

Restructuring Status & Loan Authorization

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Presented to:

San Benito Health Care District Board of Directors

April 27, 2023

Presentation Agenda:

• Short-Term Financial Stabilization Status
• Discuss Short-Term Initiatives
• Success of Short-Term Initiatives
• Limits of Short-Term Initiatives on Long-Term Stabilization
• Long-Term Financial Stabilization
• Long-Term Stabilization Tools
• Authority to Obtain Loan to Achieve Long-Term Strategy

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Short-Term Financial Stabilization Status

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Short-Term Stabilization Initiatives

The District declared a fiscal emergency in November 2022 because projections indicated the District would run out of cash in December 2022. The District has since undertaken initiatives to stabilize short-term operations.

• Revenue from Services. Increasing revenue by adding 3 new gastroenterologists to increase surgery volume.
• Supplemental cash payments/financing: Increased cash flow by $10.7 million from December 2022 through April 2023 that is attributable to a CHFFA loan of $3.0 million and the acceleration of supplemental payments totaling $7.7 million.
• Cash Flow Enhancements. Increased cash flow by $380,000 per month by negotiating extended repayment terms with CMS (Medicare) on a 2021 $5 million overpayment recoupment.
• Operational Savings. Generated over $1.9 million of savings by implementing staffing reductions, deferral of wage increases, and other operational savings, which annualize to approximately $4 million.
• Cash Management Program. Ongoing tight controls on spending and cash management will continue to increase net cash flow from operations.
• Renegotiated Anthem Agreement. Starting in January 2023, an estimated $2 million in additional annual cash flow is anticipated from the District’s renegotiated payor contract with Anthem (one of the District’s largest non-governmental payors).
• Analysis of Underperforming Service Lines. Analyzing and evaluating underperforming departments for potential partial or complete closures. For example, Home Health Services has been closed.

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Results of the Short-Term Stabilization Initiatives

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The District increased its actual cash position over its forecasted cash position through February 2023 by over $11 million from the December 2022 projections. The initiatives that contributed to this increase are summarized in Table 1.

In March 2023, the District received an advance QIP payment totaling $3.7 million that was previously scheduled to be received in June 2023.

Current Financial Projections

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The District’s short-term stabilization initiatives extended the “runway” for the District to pursue alternatives. The current projections are set forth in Table 2 and reflect the District will be critically low on cash in September 2023.

Short-Term Stabilization Limitations

The District’s short-term financial turnaround initiatives successfully stabilized short-term operations and avoided immediate closure. However, they are not sufficient to stabilize the District’s long-term operations.

• Cost of Independent Restructuring. The 2021 study prepared by ADAMS Management Services Corporation for the District concluded significant capital improvements (in the hundreds of millions of dollars) were needed to expand services and make the District’s operations sufficiently competitive to remain independent.
• Limited Working Capital. The District’s days cash on hand has been lower than the average Critical Access Hospital since at least 2019 and was significantly impacted by unanticipated events in mid-2022.
• Advance Payments. The District has negotiated advance payments to stabilize operations to avoid immediate closure, but those advance payments decrease revenue that would be realized later in the year.

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Long-Term Financial Stabilization Options

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Long-Term Stabilization Tools

The District cannot continue to provide the same level of services without restructuring its expenses or partnering with a larger system that can bring economies of scale to balance expenses.

• Creditor Negotiations. The District concluded state-mandated confidential mediation with its interested parties on April 5, 2023. The District did not reach a resolution with all interested parties that would reduce expenses sufficiently and continues discussions with interested parties outside of mediation.
• Governmental Negotiations. The District continues to pursue funding options with the State of California and local legislators.
• Transaction. The District and its financial advisors are conducting a disciplined marketing process with the objective of executing a transaction with a strategic partner or buyer. 10 parties have executed Non-Disclosure Agreements. A transaction would not likely close until December 2023.
• Bankruptcy. The November 2022 fiscal emergency declaration authorized a bankruptcy filing but the District did not pursue the option at the time in favor of stabilizing short-term finances. It remains a potential tool to restructure expenses if creditor negotiations are not successful.
• Reduction in Services. The District may need to reduce services it offers as a last resort if it cannot stabilize operations by reducing expenses or partnering with a larger system. The District is developing the outline of an alternative pathway with reduced services.

Loan Proposal to Serve Short and Long-Term Stabilization Objectives

The Board is considering granting authority to obtain a loan to serve the short-term and long-term stabilization objectives of the District. Granting authority does not mean the District is drawing-down on the loan immediately, but, instead, affords the District the option based on its cash needs.

• The District has obtained agreement in principle from the California Department of Health Care Access and Information (“HCAI”) that it would consider subordinating the liens of the 2021 Bonds to a loan on accounts receivable.
• HCAI is secured by a lien on accounts receivable and a lien on the District’s real estate assets. The District’s real estate is far more valuable than the 2021 Bond debt.
• The District has obtained two indications of interest from commercial lenders to provide financing and has been in discussions with governmental entities to provide lower-cost financing.
• The authority to obtain a loan gives the District optionality to achieve its long-term stabilization goals if determined necessary to: (i) extend the runway to complete a transaction; (ii) further creditor negotiations; or (iii) transition to reduced services.

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