JOHN C. GAFFNEY : A Healthy Outlook in Irvine : New Medical Center’s Chief Says Prognosis Is for Profit

After five years of planning, American Medical International Inc. is about to open the first hospital in the city of Irvine.

If the fire marshal and state licensing authorities give the final approvals, Irvine Medical Center at Sand Canyon Avenue and Alton Parkway will start accepting patients on June 11.

At the helm of Irvine Medical as its president will be John C. Gaffney, who has overseen construction of the 177-bed facility. He also has been in charge of developing the new hospital’s medical staff and patient services program and recruiting personnel.

The challenges facing Gaffney are immense. He is opening a $100-million hospital in an era when many other hospitals nationwide are suffering financially or closing because of new cost constraints imposed by the federal government and insurance carriers, and a shift in patient care from hospitals to outpatient services.

Moreover, during the hospital’s construction, Orange County has been rife with rumors that it is for sale--a scenario that was lent plausibility by the financial reorganization of its AMI parent, which has been selling a number of its holdings.

The new hospital also will have to cope with determined competition for patients from established medical centers in the region such as Hoag Hospital in Newport Beach and St. Joseph Hospital in Orange.

With the intention of thwarting the new contender, they have opened diagnostic and medical facilities in Irvine.

In an interview with Times staff writer Leslie Berkman, Gaffney, who has nearly 20 years’ experience in health care management, explained why he believes that despite these obstacles, Irvine Medical is in a position to thrive financially.

Q. There have been many rumors that Irvine Medical Center is being sold to another health care organization such as Kaiser Permanente. Has there been any interest expressed by a potential buyer?

A. To my knowledge there has been none. There have been no conversations with anybody.

Q. Not with Kaiser?

A. No. But the rumor persists. In fact, I sent a letter out to all of our medical staff just two weeks ago to clarify it, to tell them that the rumors that we are selling to Kaiser or that AMI wants to sell the Irvine Medical Center to someone else are absolutely unfounded.

Q. Do the rumors stem perhaps from the fact that AMI has had financial problems?

A. It could be. AMI announced a plan to sell a number of hospitals and I am sure that creates speculation. But the Irvine Medical Center is not on the list of hospitals they are going to sell.

Q. How important is the Irvine Medical Center to AMI?

A. I think it is very important. From a corporate point of view, it gets us into a market that is very attractive. Secondly, we are doing a lot of things very untraditionally here about how the hospital is organized and how the patient-care delivery system is going to work. I think people at AMI see what we are doing as a kind of laboratory for things that could be done in other hospitals within AMI.

Q. How much is it costing to build the hospital?

A. The total hard construction and equipment costs will be around $70 million. Then you need to add the land, for which we paid $15 million, and the start-up costs. All together it will be about $100 million.

Q. Then I imagine the hospital will operate at a loss for a while until it fills up?

A. It will. The response we have had from the physician community, however, would lead me to believe that we are going to be busier than our plan originally anticipated, which would be wonderful from a financial point of view.

Q. What is your plan?

A. We prepared a very conservative plan where after the third month of operation we would have an average occupancy of about 55 patients. After about a year that would be up to about 75. That doesn’t include outpatients. But because of the interest we have had from physicians, I think we have the possibility of exceeding those targets.

Q. When will the hospital break even financially?

A. We expect to be generating operating income within the first year. That doesn’t include debt or depreciation. It will be several years before we cover all that.

Q. Have the rumors about a possible sale of Irvine Medical hurt the new hospital’s prospects?

A. Perhaps a measure of their lack of impact is that we continue to receive applications from physicians in the area. I had hoped to have about 350 physicians on our medical staff when we opened and right now we have about 750 applications.

Q. Won’t your staff doctors also be on the staffs of competing hospitals in the area?

A. Most of them are on other hospital staffs, basically at Hoag (Hospital), Western Medical Center, Tustin (Healthcare Medical Center of Tustin), Saint Joseph (Hospital), Fountain Valley (Regional Hospital and Medical Center), Saddleback (Memorial Medical Center) and Mission (Hospital Regional Medical Center).

Q. How will you persuade them to send their patients to Irvine Medical Center rather than to any of the other hospitals?

A. By providing a level of service and quality that is better. That’s our goal.

Q. Why is it that at a time like this when many hospitals are closing throughout the country for lack of patients that you think this hospital can survive?

A. There are several reasons. First of all, you have to understand the growth occurring in this part of Orange County. There is probably nowhere in the United States that is having such a tremendous influx of people. If you were going to build a hospital anywhere in the United States, this is probably the best place because of the population explosion. It means there is a new market for health care services, both for physicians and hospitals.

Secondly, we benefit from the increasing traffic congestion in south Orange County. Based on a rigid calculation of the number of people and hospital beds in the county, you probably should close half of the hospitals. But access to health care is a different issue. We all know the problem of traffic in South Orange County. Particularly in emergencies it is very difficult for people in Irvine and surrounding areas to get to a hospital.

Q. So Irvine residents who once drove quite easily to Hoag and other surrounding hospitals are having more difficulty?

A. Absolutely. So as bad as the traffic is, it is a plus for Irvine Medical Center. The third reason we will succeed is that hospitals are a business and, like any other, it is competitive. So there is always room for a new, good hospital if we can demonstrate we can do things better than others.

Q. How are you going to differentiate yourself from other hospitals?

A. We spent a lot of time on that question. Clinically and from a technical point of view, we are probably not going to do a lot differently from most of the other major hospitals in the area. A normal delivery is a normal delivery and a hip operation is a hip operation.

But we plan to provide a higher level of service to the patient and physician. Our whole organizational structure, which is totally nontraditional, is built around setting up groups of team members who each have specific service responsibilities to make sure the level of care we give is the finest. We feel patients and physicians will perceive a level of cooperation and service that far exceeds our competitors’.

Q. You want to be the Nordstrom of the hospital industry?

A. That is exactly the example that I use.

Q. Explain how your organization will work.

A. We have created an organization split into three service lines: women’s and children’s medicine, orthopedics and community medicine. Each service section has someone heading it up.

We will have no director of nursing and no head nurses. Instead we will have patient-care teams headed by case managers. We want our team members to act and solve problems rather than create a bureaucracy. We want decisions made at the lowest level. I tell my new people that the fastest way to get fired from the Irvine Medical Center is to have me hear you say, “That’s not my job.”

Each patient who enters the hospital will have a case manager who will coordinate the nursing care, X-ray and laboratory work, surgical care and whatever else is required for the patient. The case manager, who will be a registered nurse, and the attending physician will lay out the care that is necessary and make decisions on what will be done. Each case manager will be responsible for about eight patients.

Q. What will Irvine Medical Center do to promote cost-containment?

A. Efficiency in a hospital is tantamount to being financially successful. That is one of the reasons we have reorganized our hospital, eliminating middle management such as head nurses and department heads in order to let people make decisions and do their jobs.

Q. Is there anything distinctive in the design of your hospital?

A. All of the patient rooms are private and are arranged in pods of four that will be supervised by the same case manager. Also, we have done a lot of things architecturally to break down barriers and open communication. Waiting rooms are wide open and not dark and cloistered.

The scariest thing is to be a patient in a hospital. You don’t want to be there and you don’t know what is going on and usually nobody tells you. We think one of the aspects of service is communication between the hospital team member and the patient. That lessens the patient’s anxiety.

Q. You want the patient to be part of the team?

A. Yes. Too often the patient is referred to as the gall bladder in Room 212. I just don’t ever want to hear that because that is not what we are here for. We are treating a human being and not a gall bladder.

Q. Have you ever been a patient in a hospital where you were the administrator?

A. Yes I have. I had a back operation at St. Joseph Hospital in Omaha and I learned a lot from hat experience. Even though I was getting tender loving care as the head of the hospital, I still thought of a lot of ways we could have done a better job.

Q. How do you plan to recruit nurses when there is such a national shortage?

A. We already have them. The patient-care organization we have developed with the use of case managers and putting more responsibility and authority on nurses has helped. Also, the new facility has a lot of attraction. Quite frankly, we have not had a problem.

Q. What have you done to attract physicians?

A. We have attracted a lot of physicians by giving them the opportunity to help us design new programs from scratch like cardiology or pulmonary medicine or obstetrics. They also like the attractiveness of a private-room hospital.

Q. Is the medical office building next to the hospital also an attraction?

A. It certainly is. It is being developed by Frank Rhodes, who also operates medical office buildings near Fashion Island in Newport Beach. He has put together a joint venture with physicians so they can participate in the ownership of the building and the building is filling up rapidly.

Q. Will you have other joint ventures with physicians? Will you be using joint ventures as a way to bond physicians to the hospital so they will have an incentive to send their patients to you?

A. I think there have been more mistakes made by trying to create financial relationships with physicians than there have been wins. There is a place for joint ventures if it makes sense for everybody. You don’t create a joint venture just to hope you will have increased admissions to your hospital.

Q. Will you be tailoring the hospital’s services to the Irvine marketplace?

A. Yes. Our market area is obviously Irvine and a five-mile radius around Irvine that goes into El Toro, Tustin and Newport Beach. There are well over 1 million people in our primary service area and most are young families. So women’s services will be a major program for us. Also, orthopedics will probably be one of our bigger programs because so many of the people in the area are into exercise. We also expect to have a lot of emergency patients because of our location.

Q. Will there be any services you do not have?

A. We will not begin with open-heart surgery, although we have built the facilities in the hospital to do that in the future.

Q. Do you have any special plans for AIDS patients?

A. We do not plan to have a special AIDS program at Irvine Medical Center. But if a patient was diagnosed with the HIV virus and the physician wanted to admit him, we certainly could take care of the case. It doesn’t require a special unit in the hospital to care for these patients on a short-term basis.

Q. I understand you already have established some orthopedic outpatient services.

A. Yes. It is called the PAR Center, which stands for Physical Assessment and Reactivation Center. It is on the fourth floor of the medical office building.

Q. What does the center do?

A. It is taking a different kind of look at rehabilitation of orthopedic injuries: no more hot packs, but a lot of exercise. We have diagnostic equipment that can determine a person’s physical ability. We are getting a lot of workers compensation cases. We are getting people, for example, who have strained their back or hurt their arms, and we are getting them back to work as fast as possible.

Q. How is this hospital different from one you might have opened a decade ago?

A. If this hospital were opening 10 years ago, we wouldn’t have had any outpatient facilities. Now probably 60% of all surgeries done in hospitals are done on an outpatient basis. That is why we have designed a large outpatient diagnostic center at the hospital. We know a good chunk of our revenue will be generated from outpatient business.

Medicine is changing so fast that already there are some things I would do differently if I were planning this hospital. Because of the emphasis on treating all but extremely ill patients outside hospitals, good hospitals are turning into critical-care units. The need for critical-care beds is increasing all over the country. And if I had it to do again, I would have added more critical-care beds to Irvine Medical Center.

Q. How are you doing in negotiating contracts with health-maintenance organizations?

A. We are just starting that. A lot of the companies are waiting until we open because they want to see what we are like. But we are negotiating with six or seven companies right now.

Q. How important is it to the hospital?

A. Very important. The managed-care business is becoming increasingly important to every hospital. The old days of indemnity insurance are about over and soon the majority of people will be in a managed-care plan of some sort, whether it is an HMO or a PPO (preferred provider organizations). About 35% to 40% of the people in our market region belong to managed-care plans right now.

Q. So it seems that managed-care plans, which once recruited mostly blue collar workers, are increasingly attracting middle- and upper-middle-income people.

A. Yes, it is changing. And the reason is that employers are forcing employees into HMOs and PPOs because the cost of their health insurance premiums is going up.

Q. Do your physicians mind working with managed care?

A. A lot of them dislike it very much. However, it is a way of life. I think if you polled all of the physicians in the area, you would find 60% to 70% are involved in some sort of managed-care contract.

Q. What will be the hospital’s relationship with UC Irvine?

A. We will have an affiliation with UCI’s medical school, which will run our radiology and anesthesia departments. And we will have their medical school residents here in training. I hope for a long and fruitful relationship with UCI. I think they are trying to make up their minds about what else they want to do.

Q. Do you support the idea of having UCI develop an on-campus teaching hospital? Some faculty at the university have complained that the Irvine Medical Center in Orange is too far from the medical school in Irvine to serve as its primary teaching hospital.

A. I don’t support the idea. I think there are some specialty clinics that could be developed on campus and would make a lot of sense. But I don’t think anybody could afford to replace the entire UCI Medical Center on campus.

Q. Why couldn’t that be done if AMI could afford to develop the Irvine Medical Center from scratch?

A. But this is a community hospital. A teaching hospital is a horse of a different color and it is twice as expensive. You need research and education space.

Q. Should this have been a teaching hospital?

A. Perhaps. That was fought out in the past and politically it didn’t work.

Q. Will you have a relationship with the industrial community around you?

A. Very much so. We will be active in the areas of rehabilitation related to workers compensation. Also, in the future we will contract with major companies and work out guaranteed hospital rates for their employees. There will be lots of those kinds of opportunities.