Report 2002-019 Summary - September 2003

Los Angeles County Department of Health Services: Despite Securing Additional Funding and Implementing Some Cost-Cutting Measures, It Still Faces Significant Challenges to Addressing Its Growing Budget Deficit


Our review of the Los Angeles County Department of Health Services (Health Services) to evaluate the current status of its latest strategic plan revealed that:


At the end of fiscal year 2001-02, the Los Angeles County Department of Health Services (Health Services) estimated its budget deficit at $326.6 million for fiscal year 2003-04 and projected the shortfall would grow to $709.4 million by fiscal year 2005-06, if left unchecked. To alleviate the shortfall while maintaining an integrated and coordinated system of care for low-income and medically indigent residents, Health Services developed a new strategic plan, building on an earlier proposal to improve efficiency and identify new funding sources. Presented to the Los Angeles County Board of Supervisors (board) in June 2002, the new strategic plan outlines three scenarios for the county's health care system, each relying on different levels of funding and various reductions in program size and costs. The board instructed Health Services to begin implementing action items shared by Scenarios II and III, such as reducing services at High Desert Hospital and closing 11 health centers, pending the outcome of Health Services' efforts to secure additional funding.

Working with the county, the State, and federal officials, Health Services subsequently secured the funding it needs to proceed with Scenario III and avoid what Health Services predicts would be more painful cuts. A voter-approved initiative is expected to provide an estimated $146 million annually to support Health Services' emergency and trauma hospitals, and public health bioterrorism needs, starting in fiscal year 2003-04 and continuing indefinitely. Further, Health Services expects agreements with the State and the federal government to provide another $250 million over fiscal years 2002-03 through 2004-05.

Health Services projected that the full and timely implementation of the 21 proposals contained in Scenario III would result in annual net savings increasing to $357.5 million in fiscal year 2005-06. To date, Health Services has implemented or begun to implement 15 of the 21 proposals, including the avoidance of capital costs at High Desert Hospital, successfully reducing its system from six hospitals to five, closing 16 health centers, cutting public health and administrative expenditures, and reforming its partnership program with private-sector health providers. By taking these actions, Health Services expects to save $38.2 million in fiscal year 2002-03.

However, other Scenario III proposals face challenges. For example, preliminary injunctions have so far prevented Health Services from closing the Rancho Los Amigos National Rehabilitation Center (Rancho Los Amigos) and reducing beds at the Los Angeles County-University of Southern California Medical Center (LAC/USC). Further, Health Services expects to implement two proposals—restructuring psychiatric services and contracting out certain administrative services—later than initially expected. These and other delays have prevented Health Services from saving the full $56.8 million targeted for fiscal year 2002-03 and may reduce future savings as well.

Finally, even if Health Services successfully implements all the Scenario III proposals, it would still face a budget deficit of $345.4 million in fiscal year 2006-07, growing to $767.8 million in fiscal year 2007-08. The deficit results primarily from the expiration of temporary state and federal funding agreements. For example, the extension of the 1115 Medicaid Demonstration Project, an agreement between the State and the federal Centers for Medicare and Medicaid Services that provides Health Services with $900 million over a five-year period, ends in fiscal year 2004-05. Moreover, Health Services predicts that delaying the closure of Rancho Los Amigos and the reduction of beds at LAC/USC until July 2004 will cause it to run a deficit of $69.5 million by fiscal year 2005-06, increasing to $840.5 million by fiscal year 2007-08. Without stable funding and cost-cutting flexibility, Health Services' future financial viability and capacity to provide health care services to the residents of Los Angeles County will continue to remain in question.


Health Services generally agrees with the findings contained in our report.