Doctors’ Rx for Ailing Hospitals: Buy Out the Whole Operation : Health care: In an era of belt-tightening by big chains, San Gabriel Valley physicians take over five sick facilities. They say it’s good for what ails them.
Dr. Joe Valoria felt confident that he was on to a good investment when he joined about 60 other doctors to buy out the financially floundering Lark Ellen Hospital in West Covina in 1978.
“All the doctors were excited about the opportunity to own a hospital,” said Valoria, vice chairman of the all-physician hospital board.
“They were admitting about four patients a day in that hospital when we took over,” said Dr. Jesse Umali, a key player in organizing the group. In the first quarter of this year, the facility, now called Covina Valley Community Hospital, has almost doubled that figure. The number of investors has grown as well, from about 60 to more than 100.
At a time when large health-care chains are divesting themselves of less profitable facilities, doctors have bought or entered into joint-venture arrangements at four other hospitals in the San Gabriel Valley within the last two years. West Covina Hospital and AMI-Glendora Community Hospital were bought by local physician groups this fall.
Doctors are attracted by potential profit as well as the opportunity to have more influence on decision-making, and hospitals value physicians as the source of a steady stream of patients.
“Joint ventures are the current vogue,” said Bob Joiner, general counsel for Paracelsus Healthcare Corp. of West Germany, which owns 76 hospitals worldwide. The firm sold West Covina Hospital to 20 doctors in November. In 1987, it gave up a 49% share of Monrovia Community Hospital to SGV Healthcare Services Inc., a physician group formed by Valoria.
“Doctors are one of the primary customers in the business,” Joiner said, referring to the patients they bring in. “They can make a significant financial impact” as partners.
For instance, he said, “physicians in the old days would order every battery of tests possible. Under today’s environment, physicians have to say how many they really need.”
Also, doctors who used to order expensive drugs start looking harder at generic equivalents that work just as well, Joiner said.
“Every physician would like their hospital to have the latest in technology,” said Ken Rappoport, vice chairman of Nu-Med Hospitals Inc., a 14-hospital chain that signed a joint-venture agreement in 1988 with about 30 doctors at Terrace Plaza.
But in a joint venture, when physicians select equipment, they are more interested in making sure that it will be used enough to justify the cost, he said.
“They are more receptive to suggestions that can be cost effective and are more concerned about quality of care because (their own hospital) becomes the only facility they use,” Rappoport said.
Since the Terrace Plaza agreement was signed, patient admissions are up 10% and “fairly lucrative” outpatient surgeries are up 20% at the 95-bed facility, said hospital spokesman David Watkins. “The patient mix has improved considerably, with more commercial and private insurance-holders than (those on) Medicare or Medi-Cal,” he added.
Rappoport said: “There are physicians practicing there who were not before. Clearly, doctors are influential in bringing in other physicians” and their patients.
But the changes don’t happen overnight. And for Valoria and his colleagues at Covina Valley, it wasn’t smooth sailing for quite a while.
Valoria, who became the chief of medical staff at the 76-bed facility, remembers the nightmare of regulatory problems that the new owners had to straighten out. The hospital had lost its accreditation from the Joint Commission on Accreditation of Healthcare Organizations in 1977, the year before the doctors took over, because of serious violations. It was not reaccredited until 1982.
“We almost closed right away,” Valoria said. “We lost and lost and lost (money) until 1984,” when the doctors reaped their first dividends.
But from 1985 through 1988, he said, the eight general partners who had each invested $6,000 to $8,000 in the $3-million purchase received an average of $155,000 a year.
“It’s very profitable,” Valoria said.
According to the Washington-based Federation of American Health Systems, only 8% to 12% of physicians nationwide have ownership interests in health-care facilities.
But in California, “20% of hospitals are physician-owned,” said David Langness of the Hospital Council of Southern California, adding that the number has increased in the last five years.
The boom in buying and selling of hospitals in California has been fueled by higher real estate and health care costs as well as competition among the large number of hospitals here, said DeAnne La Rue, also of the 230-member Hospital Council.
A record number of California hospitals closed in 1988, Langness said, and 52% of the hospitals in the state lost money.
Beverly Hills-based American Medical International Inc., which had announced that it would close AMI-Glendora Community Hospital in November, signed an agreement that month to sell the 165-bed facility to a group of more than 50 local doctors. Escrow is expected to close Jan. 7, said hospital board Chairman Bill Raymond.
The sale illustrates the reversal of a trend in which doctors had been doing the selling, said AMI spokeswoman Suzanne Hovdey.
“Before, we were buying hospitals from doctors,” she said. When profits started declining, however, the firm, which owns more than 70 hospitals, started selling them off in 1985. “Today we look for smaller health-care chains or doctors” to sell to, she said.
Oscar Fauni, management consultant for Covina Valley, said: “The key of the future is a marriage between doctors and hospitals. Hospitals need physician involvement to give them the economic incentive.”
Paracelsus and Encino-based Nu-Med have entered into such marriages of convenience with physicians at Monrovia Community Hospital and Terrace Plaza, respectively. The chains report that doctors who are co-owners develop a greater respect for the economics of medicine.
But critics of doctor investment in hospitals say it could create a conflict between what’s best for the patient and what’s best for the doctors’ pocketbook.
Doug Cave, senior health policy analyst at Mercer Meidinger Hansen Inc. in Los Angeles, an employee benefits consulting firm, warns that doctors could find it difficult to practice objectively if they have an ownership interest.
