El Segundo-based Pipeline Health System, which operates four safety-net hospitals in L.A. County and three in other states, has filed for Chapter 11 bankruptcy protection, citing financial challenges made worse by the Covid-19 pandemic.

Pipeline Health made its filing late on Oct. 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 to operate the hospitals and pursue debtor-in-possession financing in order to re-emerge from bankruptcy.

“We intend for the restructuring process to allow our hospitals to remain open and operating in their communities, while putting the hospital system in a more secure and sustainable financial position going forward,” Pipeline Health Chief Executive Andrei Soran said in the release.

However, no timetable was given for the debtor-in-possession financing or re-emergence from bankruptcy. Pipeline Health specializes in operating safety-net hospitals, which are required 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 Hospital Association of Southern California, of the 94 hospitals currently in Los Angeles County, 44 are considered safety-net hospitals, where the vast majority of patients are either on Medicaid (in California, Medi-Cal) or are uninsured.

In Los Angeles County, Pipeline Health operates Memorial Hospital of Gardena, Coast Plaza Hospital in Norwalk, Community Hospital of 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 healthcare executive Manoj Prasad, a hospital-turnaround specialist. Proceeds from the sale were to help Pipeline Health stabilize its finances.

But unspecified delays apparently came up in final negotiations to sell the pair of hospitals; those 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 some detail on Pipeline’s current finances. The company reported in a disclosure document total revenue of $3.2 billion during the 12 months ending in August. But a more accurate gauge of the company’s financial condition was operating revenue “after accounting for adjustments, denials and bad debt” of $684 million for the 12 months ending in August. Meanwhile, the company faced operating expenses of $761 million for those 12 months. The total net loss for that period was $272 million.

The company in its statement attributed its deteriorating finances and subsequent decision to file for bankruptcy to “significant, industry-wide financial challenges that have been exacerbated by the Covid-19 pandemic, including skyrocketing labor and supply costs, decreased ability to generate revenue, and delayed payments from various insurance plans for critical patient services already delivered.”

Pipeline Health traces its roots back to 2008 when a group of investors purchased two financially underperforming safety-net hospitals in Los Angeles County – Memorial Hospital of Gardena and East Los Angeles Doctors Hospital – with the aim of turning them around. The investors named the new company Avanti Hospitals.

Two more local hospitals soon joined the Avanti network: Community Hospital of Huntington Park, in 2010 and Coast Plaza Hospital in Norwalk, in early 2011.

From the beginning, Avanti’s hospitals provided mostly basic emergency care services; they did not have costly high-level trauma centers or highly specialized advanced surgery programs such as one might find at Beverly Grove-based Cedars-Sinai Health System or Westwood-based UCLA Health. This allowed the Avanti hospitals to keep a fairly tight lid on costs; for example, they didn’t employ a lot of high-priced specialty surgeons or academic researchers on staff.

Avanti received a major boost from a new state law that went into effect in 2010 that was aimed at bolstering hospitals reliant on low-income patients. The law levied new fees on non-safety net hospitals to raise a pool of money that could be used to assist safety-net hospitals. 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 greatly helped Avanti get off the ground and actually start to turn a profit,” said Craig Beam, an independent hospital consultant in Cowan Heights in Orange County who has held several board positions at hospitals and managed-care organizations.

In 2017, two of the original Avanti investors – Nick Orzano and Mark Bell – started a new venture they 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 City Hospital at White Rock in Dallas.

The following year, in 2019, Orzano and Bell bought out the other Avanti investors and then renamed the entire company Pipeline Health.

But just months later, the Covid-19 pandemic hit, exposing the inherent vulnerability of a business model reliant on attempting to keep safety-net hospitals financially viable. “Safety-net hospitals are always on razor’s edge for profitability,” Beam said. “The provider fee definitely helped, but even with that fee, it’s still challenging.”

Once the pandemic hit, the hospitals had their hands full treating Covid patients, acquiring personal protective equipment and making sure there were enough beds and ventilators available, Soran said in an interview with the Business Journal last year.

Revenues were also impacted as scheduled surgeries were halted for much of the first year of the pandemic, although Pipeline’s hospitals did not take as much of a revenue hit as their non-safety-net counterparts.

As the pandemic dragged on, staffing shortages became more acute. This drove up the cost of hiring more staff.

“Safety-net hospitals struggled due to the pandemic,” Beam said. “It was a major cash crunch for those (hospitals that) were not well capitalized.”

To raise additional revenue, in July 2021 Pipeline Health reached an agreement with Birmingham, Alabama-based Medical Properties Trust Inc. for a sale-leaseback of the land underneath its four Los Angeles County hospitals. Financial details of the transaction were not disclosed. It was the second sale-leaseback for the hospital operator; the first took place in 2013 and netted $86 million in additional revenue.

But even last year’s sale-leaseback was not enough to turn Pipeline’s finances around. That’s why in March Pipeline announced its intention to sell its two Chicago hospitals.

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