San Clemente Hospital Doctors to Buy Facility for $28 Million

A group of staff physicians at San Clemente Hospital, citing a series of unfulfilled promises by current and previous owners to upgrade the facility, said Tuesday that they have arranged to buy the hospital from a bankrupt chain for $28 million.

The agreement between the doctors and American Healthcare Management is contingent on approval of lenders and the bankruptcy court overseeing the reorganization of the Dallas-based chain, which owns 26 hospitals nationwide.

More than 30 physicians so far are committed to joining a limited partnership that will acquire the hospital, said Ron McGee, one of the staff doctors. The physicians hope to complete the purchase by April 1.

David Langness, spokesman for the Hospital Council of Southern California, said the planned purchase reflects a national trend.

Over the past five years, he said, a growing number of local physicians and hospital administrators have been buying the facilities at which they work from large, financially troubled hospital chains.

McGee, a 41-year-old family doctor, introduced himself at a mid-morning press conference Tuesday as chairman of a seven-doctor interim board of directors that is planning the takeover.

Also present was Christopher Wheeler, a Dana Point real estate investor who, along with Paul Queyrel, a Newport Beach developer and manufacturer, formed National Healthcare Properties to participate in the San Clemente Hospital purchase.

Wheeler said National Healthcare Properties, which will serve as general partner of the acquisition partnership, will raise most of the $28 million needed to buy the hospital, and at least $14 million more to expand and improve it over the next five years.

Under terms of the acquisition, the participating doctors--all of whom must be active members of the hospital staff--will own 49% of the 116-bed hospital, which is on about 10 ocean-view acres directly above the San Diego Freeway on Camino de Los Mares.

American Healthcare will retain a 49% passive interest in the real estate by providing a second mortgage, and the general partner will have a 2% interest, according to David Huff, American Healthcare’s president.

$40,000 for Partnership Share

Wheeler said the doctors will pay an estimated $40,000 a share for interests in the limited partnership. Their cash investments will go into a fund to cover operating costs.

For about five years, Wheeler said, the doctors will probably receive no cash return on their investments because any profits from hospital operations will be reinvested in facility improvements and reserves.

Under the agreement, the doctors will own the hospital management company and control how the facility is operated. McGee said the doctors intend to keep the hospital’s management team, headed by Chief Executive Officer Tom McClintock.

McGee said that since the hospital opened on Aug. 21, 1972, it has been controlled by a series of hospital chains that siphoned off profits to support other, money-losing facilities in their networks.

McGee said the original investors who built the hospital and its subsequent owners--Greatwest Hospital, which bought it in 1982, and American Healthcare Management, which took over in 1985--promised many improvements but failed to deliver.

McGee said: “Too many times, we have been frustrated waiting for new equipment or personnel or expansion. . . . We got nothing but promises.”

As a result, he said, many staff physicians--including most of those who now want to be part of the buying group--send the bulk of their patients to more modern and better-equipped facilities “up the road” at Mission Hospital Regional Medical Center in Mission Viejo and Saddleback Community Hospital in Laguna Hills.

‘Embarrassment to Practice’

McGee said he considers it “an embarrassment to practice in this setting.” He said studies show that 40% of patients from the San Clemente area use other hospitals.

Among the initial improvements planned by the doctors is expansion of the emergency room, which has been in temporary quarters for almost a year.

The doctors also plan to modernize what they characterized as an “antiquated” obstetrics department, add a pediatrics ward, and establish an alcohol and drug detoxification program.

The doctors said a consultant is finishing a 10-year development plan expected to call for expansion of the hospital to about 200 beds.

In addition, McGee said the doctors intend to improve patient service, in part by hiring more personnel, including ward clerks to answer telephones more promptly.

American Healthcare’s Huff said his organization has invested about $3 million in new equipment and remodeling at San Clemente Hospital and had “a sincere commitment” to spend another $15 million to $20 million for rebuilding and expansion.

But he said the plans were cut short by the chain’s financial problems, which obliged it to seek protection from its creditors in a Chapter 11 bankruptcy proceeding in August.

Huff said it is difficult to persuade lenders to provide financing for expansion of a hospital whose parent company is in bankruptcy.

Huff said American Healthcare has been trying to strike a compromise with staff physicians on the management and ownership of San Clemente Hospital since April, 1987. “We spent six months negotiating something that would work for everybody,” he said.

But Wheeler said that at first, American Healthcare was “hostile” to the doctors’ purchase proposal. Huff acknowledged that American Healthcare was reluctant to sell any of its interest in the hospital, which he said is one of the more profitable facilities owned by the chain.

“We were trying every way possible to get the money together to do the (expansion) project,” Huff recalled.

Ultimately, however, American Healthcare yielded to the doctors’ argument that they were in a better position to run the hospital and pay for expansion, Huff said.

San Clemente Hospital at a Glance

San Clemente Hospital is a for-profit facility built for $2.5 million and opened on Aug. 21, 1972.

Beds: 116.

Employees: 300.

Doctors on staff: 180.

Site: just over 10 acres, including about 4 undeveloped acres.