Nonprofit Hospitals Diversify

Times Staff Writer

Although nonprofit hospitals are prohibited from selling stock to physicians, that hasn’t stopped them from entering into all sorts of profitable ventures with staff doctors.

Joint ventures spun off by nonprofit, tax-exempt hospitals include multi-million-dollar magnetic resonance imaging centers, outpatient surgery centers and clinical laboratories.

Saddleback Hospital & Health Center alone has joined with 100 staff doctors to create more than $6.5 million in outpatient diagnostic and treatment facilities on its Laguna Hills campus.

All of Saddleback’s six collaborative ventures--including a clinical laboratory and centers for breast imaging, magnetic resonance imaging, outpatient surgery, urinary problems and digestive disease--have been formed within the last four years. Three opened their doors within the last three months.


Nonprofit hospitals are entering into such ventures for the same basic reason as their for-profit counterparts. They want to bond staff physicians to their facilities to be assured of an adequate supply of future patient referrals, which are a hospital’s life blood.

Nonprofit hospitals pay no taxes and are legally forbidden from distributing any of their earnings or assets to their owners or other private individuals.

In many cases, nonprofit hospitals create tax-paying subsidiaries to invest side-by-side with doctors in auxiliary hospital services designed to earn profits for everyone involved.

A new twist pioneered by Torrance Memorial Hospital is the formation of a venture capital company by staff physicians and the hospital’s holding company.


Physicians buy stock in the venture capital firm, entitling them to a share of the combined revenue generated by selected hospital operations. While the venture capital company has paid the hospital for the right to receive a portion of future revenue for 20 years, the hospital facilities producing the revenue remain in the hospital’s ownership.

“We accomplished something no one else had,” said hospital President George Graham. “We got a private ruling from the IRS that said we could in fact divest profitable revenues out of a nonprofit community hospital without losing our tax-exempt status.”

The doctors and the hospital holding company, who receive an equal split of the designated operational revenues, have benefited financially from the joint venture since it was initiated in January 1985, Graham said.

A group of 150 doctors, who each invested between $7,500 and $30,000, have realized a 33.5% return on their money so far, he said.

The hospital’s administration credits the program with increasing its share of hospital patients in the competitive South Bay area from 35% in 1984 to nearly 45% today.

Jerry Koppang, vice president of business ventures at Saddleback Hospital, said that institution is setting up a venture capital company similar to the one at Torrance Memorial to broaden investment opportunities for staff physicians, especially primary care doctors.

By investing in the venture capital firm, participating physicians would acquire an ownership interest in several new hospital services.

He pointed out that primary care physicians typically don’t have as much opportunity to participate in joint ventures as specialists who are given opportunities to invest in high-technology medical equipment with the expectation that they will use the equipment in their practices.


Yet hospitals want the allegiance of primary physicians such as pediatricians, family physicians and internists, Koppang said, because they generate a majority of patient referrals.

Incomes Squeezed

And many primary physicians, whose incomes have been squeezed by managed health-care plans and increasing competition, are looking for additional sources of revenue, said Richard J. Aprahamian, an Irvine lawyer who has helped form joint ventures.

Aprahamian noted that some hospitals are organizing doctors into joint ventures in the fear that otherwise, the doctors will organize a venture in competition with the hospital.

Graham said a major benefit of Torrance Memorial’s joint-venture efforts is that “we do not have our staff investing in boutique services surrounding the hospital to the exclusion of the hospital’s involvement.”

Those familiar with medical joint ventures stress that they are not sure things. In the past, doctors and hospitals have been burned by joint ventures that went broke.

Graham said some hospitals are reluctant to enter joint ventures because they don’t want to share revenue with doctors if they are capable of developing the enterprises themselves.

Another potential problem is a legislative proposal by Rep. Fortney (Pete) Stark (D-Alameda), chairman of the House Ways and Means subcommittee on health, to halt Medicare payments for outpatient services prescribed by physicians at facilities in which they are part owners.


“Because of the resulting economic alliance between referring physicians and providers, physicians are unlikely to exercise unbiased judgment in making referral decisions,” Stark said in introducing his bill to Congress. “As a result, patients may not be referred to the highest quality provider available.”

Harry Weis, vice president of financial services at South Coast Medical Center in Laguna Beach, said that hospital has placed several ideas for joint ventures “on hold” until more direction is received from the federal government.

But Kathy Judge, vice president for marketing at the Irvine Medical Center, which is scheduled to open next August, said she believes that most hospitals are moving ahead with their joint venture plans.

Several Joint Ventures

Irvine Medical Center, she said, is considering several joint ventures with doctors, including an orthopedic assessment and rehabilitation center and a medical office building.

“Our policy at this time is to look at every possible deal that is legal and in which physicians have an interest, as long as it has a good financial basis,” she said.

“The major reason is that the physician then has a financial investment in the success of the hospital.”