Downey hospital files bankruptcy to escape HMO contracts

Downey Regional Medical Center filed for Chapter 11 bankruptcy protection Monday, saying it would use the process to get out of money-losing HMO contracts.

The private, not-for-profit, 199-bed hospital said that it expected to emerge from bankruptcy within a year and that all services would remain open. It is near the intersection of the 5 and 605 freeways.

It also plans to emerge with a new business model that excludes HMO patients in favor of patients with preferred provider organization (PPO) health insurance.

The hospital said it had net losses in recent years of more than $100 million largely because of unfavorable HMO contracts. Under such contracts, health insurers pay hospitals a set fee per patient per month, regardless of the treatment costs for those patients.

Such arrangements put the financial risk on the hospitals.

PPO contracts, in contrast, pay hospitals a fee for each service provided, putting the financial risk on the insurers.

In recent years, the Downey hospital said, the costs of caring for HMO patients had exceeded the capped fees, pushing its finances into the red.

The hospital also blamed tight credit markets for its financial distress.

“Today’s necessary actions will allow us to clean up the remainder of the financial morass that the current management team inherited that was over a decade in the making and that we have been working to fix for two years,” hospital President Kenneth Strople said. “We are confident in our long-term prospects for success.”

He said the hospital had petitioned Bankruptcy Court to let it meet its payroll and other obligations to employees.

The hospital is a key part of the region’s emergency medical services network, recording more than 50,000 emergency room visits last year.

The hospital said it had contracts with five insurers for 32,000 HMO members at the beginning of the year. The insurers have converted most of those members to PPO contracts, so their relationship with Downey will not change. The status of the rest of the patients will be decided during bankruptcy, said Eric Rose, a spokesman for the hospital.

Downey is the second Los Angeles-area hospital in as many years to seek bankruptcy protection. In April, the 420-bed Brotman Medical Center in Culver City emerged from bankruptcy protection after an infusion of loans returned it to profitability.

“It’s always disturbing when a hospital announces it is looking at bankruptcy proceedings,” said Jim Lott of the Hospital Assn. of Southern California. “A hospital such as Downey Regional Medical Center, which is pivotal to the EMS system serving that area, is all the more disturbing.”

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lisa.girion@latimes.com