American Medical International, the health care giant that leases South Bay Hospital, wants the South Bay Hospital District to forgo $6-million worth of rent so the company can make the facility more competitive.
In a written proposal that the district board will consider Thursday, hospital Executive Director Lynn C. Orfgen said AMI--which has invested $12 million since 1984 to upgrade the Redondo Beach facility--must spend another $10 million to $12 million to “move South Bay into a dominant position” among area hospitals.
“It is difficult, if not impossible, to justify that kind of investment by AMI at this time,” he wrote. “What I would like to request is that this major investment be a type of ‘joint venture’ between the District and AMI.”
In interviews, Orfgen and hospital district officials said the request does not reflect recent AMI financial troubles. The company recently laid off about 300 employees at the corporate level, saw its chairman and chief executive resign under pressure and sold 36 hospitals, leaving it with 70 hospitals and 9 psychiatric facilities.
“A commitment has been made by the corporation to keep South Bay,” Orfgen said. “We are committed for the full 30 years.”
He said AMI, which is building a $14-million medical office building and parking structure on hospital grounds, has had to put more money into South Bay Hospital than it anticipated when it leased the facility four years ago for $3 million a year.
Orfgen said that if the request to skip the 1989 and 1990 payments is turned down, AMI will “plug along and try to add in piecemeal fashion,” taking 4 years to do the work instead of 2.
Lease Would Be Extended
Under the proposal, the hospital lease would be extended for 2 years--until May 31, 2016, but the $6 million in rent for 1989 and 1990 would not be repaid.
In an interview, Orfgen said the most critical need is for heart catheterization and open-heart surgery facilities, which account for about half of the proposed new spending.
He said that Little Company of Mary Hospital in Torrance and Torrance Memorial Hospital--South Bay’s major competitors--have those capabilities. He said South Bay also needs improvements in radiology, surgery, outpatient services, the alcohol and eating disorder unit and maternal child care to “round out the full spectrum of health care available at the hospital.”
Orfgen said South Bay presently is “holding its own and maybe gaining a little” on its two larger rivals in Torrance. He said the hospital began showing “about a million dollars annual profit” in 1988 after losing an unspecified amount since the AMI takeover.
The proposal represents a significant departure from the 1984 lease, which was touted as a solution to the long-term decline of South Bay as a competitive hospital. The hospital district has used the lease money to provide grants for health programs in Redondo Beach, Hermosa Beach and Manhattan Beach.
In 1984, the hospital, which was built in 1960, had failed to keep up with medical technology and services. AMI, which immediately gave the district $6 million representing the first and last years’ rent, pledged to make South Bay a full-service hospital once again.
The Orfgen proposal comes in the midst of a testy election for three seats on the 5-member hospital district board. The field includes the three incumbents and two challengers. Among other things, several candidates are calling on the district to increase the amount of money it grants each year.
Grant funds are derived from investment of hospital district funds, and the level this year was just over $1 million. Philip Valera, district executive director, said that grants could not grow beyond $1.25 million annually if 2 years of AMI lease payments were withheld.
He also said that no money would be available to increase the $12-million reserve--a large part of the district’s investment pool--that it maintains to assure services if the district should have to resume operation of the hospital.
Valera said he will recommend an analysis of the AMI proposal by district financial and legal advisers. He said one immediate question is whether forgoing lease payments would constitute an illegal gift of public property since the hospital, though operated by a for-profit company, is publicly owned.
Immediate reaction from board members and election challengers was mixed.
Board President Gerald R. Witt, who is not up for reelection, said he believes the proposal is “marvelous for the hospital and the district because it would enhance the hospital, make it the prime hospital in the area, and would not damage the district operation.”
But board member Jean G. McMillan, who also is in the middle of a four-year term, said she is concerned about whether the district can legally do what AMI is asking, and the effect it would have on the district’s income. She also questioned the wisdom of duplicating services of other hospitals, saying that while it might be good for South Bay Hospital, such duplication might not be good in the “big picture of medical care.” McMillan said AMI “would have to do a lot of convincing” to gain her support.
Among the incumbent board members running for re-election, Eva Snow said she did not want to comment until the proposal is considered by the board.
Incumbent Mary Davis said she has “mixed emotions” because she would like to make the hospital “a star.” She favors loaning the money with interest. “They are private enterprise,” she noted.
The third incumbent, Virginia D. Fischer, called the Orfgen proposal “a positive action because our objective is to see that this institution is a success.” She said the lease deferment would not reduce the level of district grants.
Jack Shakely, a challenger for the hospital board, said he is “reluctant to start varying provisions of that lease.” He said he opposes the duplication of hospital services such as heart catheterization and open heart surgery.
“They may strengthen South Bay Hospital, but weaken Little Company, and is that in the interest of the South Bay?” he said, adding that hospitals should “be competitive, but complement each other.”
Challenger Steve Schlesinger said the board should turn down the proposal because there is no benefit to the hospital district. He said if the district wants to provide money for hospital improvements, it should make a loan to AMI with interest.