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Appendix D. Regional Cost Analysis

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Research Questions

  1. How can hospitals' future costs of compliance with SB 1953 be estimated? How would those costs be distributed among stakeholders?
  2. How can the magnitude of the financial burden that SB 1953 creates for hospitals be assessed? How do hospital ownership, trends in reimbursement rates, and access to financial capital affect the affordability of SB 1953 compliance?
  3. What alternative policy approaches could address common barriers to compliance, enhance flexibility in achieving compliance, and reduce overall costs of compliance?

The 1994 Northridge earthquake led to legislation in California — Senate Bill (SB) 1953 — that requires upgrades to hospital buildings to enhance resilience to seismic events. Since the passage of SB 1953, hospitals have been implementing structural and nonstructural upgrades to comply with the standards. The potential costs of SB 1953 have raised significant concerns regarding both the financial burden on hospital systems and the opportunity costs associated with hospitals investing large pools of capital in implementing seismic upgrades.

This report updates previous RAND estimates of the costs to hospitals of future compliance with SB 1953, with a particular focus on the 2030 deadline. In addition to generating direct estimates of the costs of retrofitting or rebuilding noncompliant buildings, the authors assess the affordability of compliance based on recent hospital financial data. Given the challenges of cost and affordability, the authors also present a range of policy alternatives that could be implemented alone or in combination to ease the compliance challenge while building seismic resilience in California hospitals.

Results from quantitative and qualitative analyses indicate that, despite decades of investment in seismic compliance projects, California hospitals still face a financial obligation potentially totaling tens of billions of dollars by 2030. Many hospitals are already experiencing financial stress, and the burden of future compliance is likely to exacerbate this stress. There are options for providing regulatory relief or flexibility to hospitals: public subsidies to share the costs of compliance or reduce financing costs, additional flexibility in compliance deadlines, new standards for what it means for hospitals to remain operational postevent, and streamlined administrative processes. Regardless, addressing long-standing knowledge gaps associated with the benefits and costs of SB 1953 implementation can provide important information to decisionmakers regarding the merits of pursuing future changes in seismic requirements.

Key Findings

Diverse stakeholders agree that the intent of SB 1953 continues to have merit, but it is appropriate to reassess whether SB 1953 remains the best policy for ensuring resilience and to consider potential alternatives

  • As seismic compliance efforts are reoriented toward the 2030 deadline, hospitals and regulators are likely to learn rapidly about the costs of future compliance.
  • Hospitals evaluate capital investments in seismic compliance in the larger context of individualized business planning, making it difficult to anticipate their actions and costs.
  • SB 1953 requires hospitals to make capital investments they would not otherwise make or at a time they would not otherwise choose.
  • The costs of future compliance with SB 1953 are large in aggregate but will vary significantly among hospital systems and individual buildings.
  • The costs of implementing seismic compliance construction projects have increased in recent years at a rate faster than inflation.
  • A number of factors influence the affordability of SB 1953, and affordability varies among hospitals.
  • The lack of public funding to incentivize implementation of SB 1953 overlooks the public-good benefits of hospitals, generally, and seismically resilient hospitals, specifically.
  • A range of alternative policy frameworks could be deployed to help achieve seismic resilience for California hospitals.

Recommendations

  • Addressing long-standing knowledge gaps associated with the benefits and costs of SB 1953 implementation can provide important information to decisionmakers regarding the merits of pursuing future changes in seismic requirements.
  • The more detailed reporting by hospitals to California's Office of Statewide Health Planning and Development (OSHPD) regarding seismic projects, combined with independent validation of project costs, would enhance the capacity of OSHPD and other actors to estimate costs and monitor capital investments in seismic construction projects over time.
  • Enhancing pathways of communication between hospitals engaged in the planning and implementation of seismic projects and OSHPD can build understanding of compliance challenges and facilitate the identification of mechanisms for enhancing regulatory flexibility.

Research conducted by

The research described in this report was funded by the California Hospital Association and conducted by the Community Health and Environmental Policy Program within RAND Social and Economic Well-Being.

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