UCI Medical Center Seeks Prescription for Fiscal Health

Amid the gloomy talk of debts and emergencies, suddenly there was laughter in the Assembly committee room.

Witnesses had been testifying about the mounting deficit at the UCI Medical Center--a debt expected to be close to $10 million by June 30. The money problems, said the witnesses, were legion. What to do?

“Maybe,” said Tom Dooley, of the legislative analyst’s office, “maybe we can get Humana interested in buying it.”

Dooley’s reference to the profitable Louisville-based Humana Inc. hospital chain was in jest, and the joke produced the round of laughter from UC officials and legislators in the hearing room.

But the idea of a for-profit hospital chain at least managing one or more of the University of California’s debt-ridden medical centers is not being laughed at by all state officials. These officials note that permanent solutions are needed for the chronic money problems at teaching hospitals operated by the University of California at Irvine, Davis and San Diego.

And despite statements by some UC regents in opposition to commercial operation of university hospitals, officials at UCI Medical Center have been quietly investigating the possibility of a private, for-profit hospital chain leasing and managing its aging hospital complex in the city of Orange.

American Medical International, one of the largest hospital chains in the nation, has confirmed that it is talking with UCI Medical Center.

“We’ve had discussions with UC Irvine, and we continue to do so,” said Dr. Marvin Dunn, an AMI vice president. “We’re very flexible.”

AMI, with corporate offices in Beverly Hills, is one of several hospital corporations that have been talking to UCI Medical Center, Dunn said. Leon Schwartz, the medical center’s acting director, declined to name others UCI has contacted.

But AMI appears to be the chief contender. The hospital chain announced Friday it has agreed to build a new $86-million, 177-bed community hospital in Irvine and that the commitment only increases the hospital chain’s interest in securing a possible lease-management arrangement for the money-troubled UCI Medical Center in Orange.

“We at AMI were the first to get into ownership of former academic hospitals,” said Royce Diener, chairman and chief executive officer of AMI. “That occurred when we bought St. Joseph’s Hospital in Omaha (Neb.), the teaching hospital of Creighton University there.”

An increasing number of university-owned teaching hospitals in the nation have either been sold--or the management has been turned over--to for-profit corporations. In addition to Creighton University, hospitals that have moved to for-profit chains, or are in the process, include the University of Louisville (Ky.), University of Kansas at Wichita, and George Washington University (Washington).

“Until recently, few academic health centers would have considered being owned or leased by an investor-owned chain. Those now negotiating admit that the most pressing reason for their new, more friendly attitude is access to capital . . . ,” Medicine & Health Perspectives, a Washington-based industry newsletter, said in its March 4 edition.

UCI Medical Center, according to Schwartz, badly needs funds to build and renovate, but he said no decision had been made on the issue of having a private group take over management and operation of the hospital. Sale of the hospital isn’t considered likely.

Former medical center director William Gonzalez said that a key goal in the university’s talking to private hospital chains was to see if they could pump in capital for building and renovations.

Added UCI Chancellor Jack Peltason: “The situation (at UCI Medical Center) will not substantially improve until we improve our physical facilities. That will require about $25 million to $30 million.”

UCI Medical Center cannot immediately count on state government for all that renovation money, university officials point out. Gov. George Deukmejian’s 1985-86 budget calls for about $10 million for building and renovation at the three debt-plagued UC medical centers. But that $10 million must be divided among the medical centers at Irvine, San Diego and Davis.

“It’s only a part of what we need,” said Gonzalez, who is now Chancellor Peltason’s special assistant.

Nonetheless, the governor’s so-called “bailout bill” for the UC medical centers is the only solution UC is publicly discussing. The state Senate added $1.6 million to the $10-million building and renovation money Deukmejian proposed; another $15 million is in Deukmejian’s hospital “bailout bill” to cover operating debts of the medical center. The total bailout is thus $26.6 million.

Dooley, of the Legislative Analyst’s Office, told the Senate that the $26.6 million might keep the ship afloat a while longer. But he warned that the hospitals’ money leak is bigger than the bailout.

The basic problem of the university hospitals began with legislative budget cuts in 1982. Faced with enormous increases in health-care expenses, the Legislature that year tightened restrictions on Medi-Cal, the state-federal program for the poor.

The state also greatly reduced its support of medical care for “medically indigent adults,” called MIAs, and switched operation of their care to the counties. MIAs are the so-called “working poor,” those who are not on welfare but make too little to afford doctors. The Legislature recently acknowledged that the money it gives the counties for this health care is only about 60% of what it gave before.

Orange County, although statistically wealthy, has many working poor who become MIAs when they need a doctor. Although 32 hospitals in the county have contracts to treat them, most of the MIAs go to UCI Medical Center. The teaching hospital, which also has the highest costs, in turn must absorb the loss.

At the same time the state was cutting back MIA and Medi-Cal programs in the early 1980s, the federal government tightened restrictions on Medicare, its program for those 65 and older. Nonetheless, UCI Medical Center officials say that Medicare is still the only government-funded health program that meets the actual cost of treating a patient.

That situation may change, however, as Congress considers more federal budget cuts. The Reagan Administration is proposing a freeze on money it has allowed as medical education costs in Medicare bills paid by the federal government.

Legislation Introduced

In California, legislation has been introduced to enhance the reimbursements for Medi-Cal and Medically Indigent Adult programs, but nothing yet has passed.

And if more money does not come from Sacramento, there is little hope that Orange County will be more generous with UCI Medical Center. County officials currently are renegotiating two contracts with the hospital, one for the care of medically indigent adults, and a second for the treatment of poor patients--primarily undocumented residents----who do not qualify for other government health plans.

In fact, there could be cutbacks in store. Bob Love, Orange County Health Care Agency acting director, has said the county wants to shift the cost of delivering babies of illegal aliens--$3.4 million last year--to the state by having the mothers register their newborns, who are U.S. citizens, with Medi-Cal.

Beyond that, Love has said, the county’s attorney has issued an opinion stating the county may not be legally obligated to pay undocumented residents’ doctor bills.

May Have to Close

Despite speculation that UCI Medical Center may have to close unless the financial crisis is solved, Love said the county has no plans to bail out the hospital.

“UCIMC is a valuable institution for this county, and there certainly would be a loss if they were to shut down. However, I don’t believe it is the county’s obligation to make sure that the institution is financially sound because we don’t have control over it. . . . The county is not going to bail out its deficits; show me where we have the obligation to do that,” Love said.

State health care officials and UC administrators acknowledge that no significant improvement in patient-care reimbursement is likely any time soon.

“If you’re asking how we’re going to turn this thing around, I don’t know,” said Sumiyo Kastelic, senior associate director at UCI Medical Center. “I agree that the reimbursement scene is not likely to change.”

UC officials agree that if their three former county hospitals could attract more privately insured patients, government cutbacks wouldn’t hurt so much.

Doctors Rarely Refer Patients

UCI Medical Center has been trying for years to get a larger percentage of privately insured patients. But it has been hampered by the fact that few doctors in the county, even those who volunteer their services to the medical school, rarely refer patients there, said former center director Gonzalez. Further, there has been no push for the College of Medicine’s physicians to develop private practices that would channel paying patients toward the medical center, he said.

Gonzalez partially blamed the situation on what he said is an overemphasis on research by the UCI Medical School, adding that this was one area of friction through the years between him and College of Medicine Dean Stanley van den Noort.

“Our relationship has been less than cooperative over the years; that to me has been one of the big issues. I maintain that you can’t have a hospital succeed unless its medical staff wants to treat patients,” Gonzalez said.

The medical center has about 700 physicians with private practices in the community who volunteer time with medical students for professional and personal satisfaction, Gonzalez said. Yet, when their private patients need to be hospitalized, they rarely refer them to the medical center, he said.

“I maintain that if all those folks brought their patients to UCIMC, it would be a successful hospital. I think the difference is that much,” Gonzalez said.

Van den Noort strongly disagreed with Gonzalez’s claim that the College of Medicine is too research-oriented and not supportive enough of the UCI Medical Center.

“I think it’s totally false and represents an inappropriate statement and accusation,” said van den Noort. “We (in the medical school) are very interested in seeing patients. The major problem is that the medical center has large numbers of indigent patients supported by government sources that only give a few cents on the dollar.”

Friction between van den Noort and Gonzalez has been a problem at UCIMC, but not a major one, according to a university official who asked not to be identified. The official said, “I like both men. Stan van den Noort has done a tremendous job in building the medical school. Bill Gonzalez has done the best job possible in trying to make this medical center profitable. But it (their disagreement on some things) has caused some problems.”

Neither van den Noort nor Gonzalez will be in key roles at UCIMC after this summer. UCI Chancellor Peltason announced in January that van den Noort would not be reappointed medical school dean when his current term ends June 30. Less than two months later, Peltason announced the unexpected resignation of Gonzalez as medical center director.

Thinks Image Will Improve

Peltason said he wants to construct a new building specifically for private outpatients. The chancellor also said he thinks the medical center’s image will improve with the renovation of its intensive care ward, something that the governor’s proposed budget would fund next year.

Changing a former county hospital’s mix of patients, however, usually is a slow process. For instance, the teaching hospital at the University of Louisville in Kentucky moved into a new, modern building and leased the facility to a corporation formed by Humana Inc. about two years ago. Since then, it has attracted more privately insured patients, but the ratio still is 80% government-paid to 20% privately insured--higher than UCI Medical Center’s 70%-30% ratio.

While private operation of the debt-plagued university hospitals continues to be discussed, key figures in the debate are still skeptical.

‘A Teaching Mission’

“As a regent and as lieutenant governor,” Leo McCarthy said, “I’m not sure whether it would work. I’m open to looking at it. But I think the University of California has a teaching mission that is in the public interest.” The teaching mission might suffer under corporate ownership of the hospitals, he said.

“I certainly want any young woman or man with the academic record to be able to enter one of our medical schools, regardless of their income status, and I’m not sure what happens to that policy if we enter into a public contract,” McCarthy said.

He said he suspects that private management firms are able to produce profits by turning away the poor, and many times those patients--in addition to needing medical care--provide excellent teaching cases.

“I’m for anything that produces better efficiency, but what you have to do here is examine why those firms are making a profit elsewhere. They take higher income families who can pay upscale hospital costs,” McCarthy said. “They know how to run a profit-making business.”

Expressed Reluctance

McCarthy’s colleagues on the Board of Regents also have expressed reluctance to seek corporate management or ownership of the UC hospitals.

The regents likewise have been reluctant to make changes recommended by outside consultants.

Two years ago, Executive Consulting Group Inc. of Bellevue, Wash., recommended a management restructuring at the UC hospitals. Its consultants suggested the regents form a corporation, with its own board of directors, to govern the five hospitals, or form governing boards for each of the five hospitals to maximize local accountability. Either would produce a more flexible and efficient operation, the consultants said.

At the same time, an ad hoc committee made up of primarily UC representatives studied the issue. The committee recommended that each campus having a medical center also have a hospital and clinics board to advise and assist the campus chancellor in running the university hospitals.

Neither Report Acted On

Neither report was ever acted on by the regents.

A reorganization similar to one recommended for the UC hospitals took place at West Virginia University’s fiscally troubled hospital last year. In the process, however, the West Virginia University hospital became an independent corporation. The hospital’s goal was to become more efficient but to remain a university teaching hospital without direct state controls.

West Virginia University’s 34-year-old hospital administrator, David Fine, engineered the operation and garnered national recognition from the quick fiscal turnaround. In its first year as an independent corporation, West Virginia University Hospital not only climbed out of debt, but also accrued a $3-million profit.

In California, one key legislative staffer, Steve Thompson, argues that a new, smaller and more efficient hospital should be built for UC Irvine, and the old, sprawling UCI Medical Center in Orange should be abandoned. Thompson is chief of staff for Assembly Speaker Willie Brown.

Given the hospital’s problems, Thompson said, “I think the question facing the university system is: Should we phase out the current facility and phase in a small facility that would continue to meet our obligation to the poor, that would get us out of the business of having to operate a larger clinic where we’re never going to achieve the intended economies?”

Thompson said his suggestion would trade the economy of a modern, efficient and smaller hospital against the overwhelming costs of running a too-large, old and inefficient former county hospital.

Lt. Gov. McCarthy, meanwhile, still believes the $26.6-million bailout is the best immediate solution for the UC hospitals.

“The premise is you make capital improvements, you’re going to attract paying patients and that will help you do a better job in balancing the budget,” he said.

Will that be sufficient to turn the hospitals around?

“We’ll find out about five years from now,” McCarthy said.