Already on unstable financial footing, Hawaii’s public hospitals recently learned they must add millions to their contribution for retired workers’ health benefits. 

The Hawaii Health Systems Corp.’s network of 12 hospitals must come up with another $69.2 million to fund retiree health insurance costs in fiscal 2016 and 2017.

That brings HHSC’s projected deficit to $197.4 million after state appropriations in those two years. In addition to the newly discovered retiree costs, HHSC was already expecting a budget shortfall of $128.2 million in the two years due in part to the state Legislature not appropriating enough to the hospitals to cover expenses, which exceed income.

"To understand the gravity of this, you could probably close half of the HHSC hospitals and you would not erase the deficit," Edward Chu, HHSC’s chief financial officer, said in a statement. "To focus on cutting our way to solvency will not only require cuts of unrealistic magnitude, but also hurt the people we are charged to serve, and position us for closure within the next few years."

HHSC — the largest provider of health care in the islands — is expecting a $31 million budget deficit in 2015 and has begun eliminating services and reducing staff in an effort to decrease the shortfall. 

But for the first time next year, HHSC and other state entities will be required by law to set aside money for retiree health benefits, adding another burden that could put in doubt the future of some of the struggling rural hospitals. 

The Legislature passed a law in 2013 requiring state and county governments to pay 20 percent of the annual amount needed to fund health benefits for current and retired workers and their families.

This year the state covered the contribution for HHSC, but starting in fiscal 2016, which begins July 1, the HHSC will be on its own, said Wesley Lo, Maui Memorial Medical 

Center’s chief executive officer. HHSC learned of its obligation last month, Lo said. HHSC will have to increase its contribution to health benefits by 20 percent every year until the amount reaches the 100 percent funding level in 2019.

"Once again this underscores the incredible challenges we have to make our community hospitals economically viable," said Senate Health Committee Chairman Josh Green (D, Naalehu-Kailua-Kona). "This is additional evidence that we need to reform the system with a local partner that can simultaneously treat our workforce respectfully but get our system in the black. Otherwise we will see a loss of services and facilities."

Maui Memorial Medical Center and Kula Hospital, part of HHSC, are seeking a private partner to keep their facilities afloat. Both are in talks with Kaiser Permanente Hawaii and Hawaii Pacific Health, though they would need approval from the Legislature to sell assets or enter into a public-private partnership.

"The system is broken and we urge creative, patient-centered solutions to develop a sustainable model of care for our rural and neighbor island communities," Chu said. "Health care is unavoidably expensive and our current levels of service to our communities will require a greater commitment of resources than in the past — whatever the source."

Part of HHSC’s financial problems stem from its facilities in rural communities that are unable to generate sufficient revenue to support operations.

In addition, the state Legislature cut the hospitals’ $150 million budget request to $102 million for the fiscal year that began July 1.

The hospitals rely on state money for 15 to 20 percent of their annual $650 million budget, with the bulk of the money coming from patients and their insurers.

HHSC acts as a "safety net" for the state’s neediest population — many of the poor and chronically ill. Its aging hospitals are in a unique situation with nine of the 12 facilities having 85 percent or more patients covered by government-sponsored Medicaid, which does not cover the entire cost of care, the company said.

What’s more, the Affordable Care Act, also known as Obamacare, has restrained the growth of Medicare reimbursements to providers while imposing penalties to hospitals for readmissions and hospital-acquired infections, HHSC said.

"What is even more scary is that this is only the retiree health fund," said Lo. "Sooner or later they are going to probably have to start funding pension, too."