New Hospital Puts USC at Crossroads in Health Care : Medicine: Private facility will adjoin county medical center and cater to affluent. Disparity is criticized.

In the barrios of East Los Angeles, just around the corner from the dilapidated County-USC Medical Center, a glossy new $157-million private hospital will be dedicated this week amid great fanfare.

They make an odd couple. County-USC is huge, understaffed and jammed with the poorest people in the county. Built in 1933 with taxpayers’ money, it is deteriorating because of the lack of it.

The new hospital, called USC University Hospital, is small and specialized, full of state-of-the-art technology and geared exclusively to patients who can pay their bills. It is owned by National Medical Enterprises Inc., a giant health care corporation known for its shrewd targeting of the profit centers of medicine.

The new facility is designed without an emergency room or obstetrical unit, key entry points into hospitals for masses of poor and uninsured people. Its doors will be closed, for the most part, to people insured by the state’s Medi-Cal program.

Both hospitals will be staffed by doctors from the USC School of Medicine--but they will serve very different populations in dramatically different settings.

Together, the two facilities represent USC’s bid to join the elite ranks of internationally renowned medical centers. As the vise tightens on health care dollars nationally, observers say such positioning is essential for a medical school to compete in the 21st Century.

The contrast between the two hospitals and whom they will serve makes some observers uncomfortable, particularly those already dismayed by increasing barriers to health care for the poor.

Lois Salisbury of Health Access, a consumer advocacy group, decried the irony of building “a brand-new hospital for the rich” in a poor neighborhood whose residents, for the most part, will derive little benefit from the facility.

“We are moving in the direction of apartheid in health care,” she said.

USC officials insist that their new ambitions will not in any way reduce their century-long commitment to care of the poor in East Los Angeles. County-USC, they say, will continue to be the medical school’s main teaching hospital, an invaluable resource because of its enormous volume of patients and the range of their medical afflictions.

The new hospital, they hope, will provide what the county has chronically lacked: state-of-the-art technology and support services that will attract top-flight doctors and, in turn, affluent, privately insured patients from all over the world.

The success of this ambitious undertaking is far from guaranteed. Enormous investments are on the line, not only for National Medical Enterprises, but also for the medical school, which is borrowing millions of dollars to hire additional doctors and to underwrite new program start-up costs.

Besides its expense, the venture has caused considerable turmoil among longtime USC faculty members. “It’s a real cultural change for this school of medicine,” said Dr. Robert Tranquada, dean of the medical school.

The new hospital will be dedicated during a week of fanfare that includes gala dinners, media events and a health care symposium featuring some of the world’s leading scientists. The flashy ceremonies notwithstanding, questions about the undertaking continue to be debated within USC and the larger medical community:

* Will the new hospital succeed? The health care market is already highly competitive nationally, and especially in Los Angeles County, where private hospitals fill only half their beds. Marketing experts say the hospital is no sure-fire cash machine. National Medical Enterprises officials agree that they will lose money initially. The corporation projects breaking even by the third year because of the hospital’s focus on profitable, specialized areas of patient care and USC’s determination to hire top medical talent.

* How will other local hospitals be affected? USC says it is casting its recruiting net internationally, but top medical talent in Los Angeles is being lured as well--some of them from the medical school across town, UCLA. Will the effect enhance medical services in the area, or merely reshuffle what exists now?

* How will the new private hospital affect health care for the poor at County-USC? Critics say its moneymaking attractions could lead doctors to ignore obligations at the county hospital, eroding the quality of patient care there. Proponents say profits from the new hospital will shore up medical teaching programs, which will improve care for county patients.

Critic Geraldine Dallek, formerly a consultant on health policy at RAND and the author of several reports on public health in Los Angeles, said she is “very suspicious of the trickle-down theory--that by making doctors happier, getting them to be able to increase their income, they (USC) will be able to attract quality doctors who will then serve the poor at the county hospital.”

She added: “It is unconscionable that you would have a hospital in the poor community of Los Angeles that will not serve the poor.”

Top county health officials say they are confident that the quality of medical care will be maintained at County-USC and that some of their indigent patients may benefit from services available at the new hospital.

The county has “an elaborate monitoring mechanism” in place to ensure that medical care at County-USC does not deteriorate, said Jerry L. Buckingham, executive director of County-USC. “I’m going to watch it very carefully.”

Despite such assurances, USC’s union with a for-profit corporation breeds lingering uneasiness. Some question how the interests of poor patients at the county hospital will be able to compete with stockholders’ expectations of ever-spiraling profits.

Harold Luft, professor of health economics at UC San Francisco’s Institute for Health Policy Studies, said: “It raises all sorts of interesting questions, like will the faculty start selectively spending their time at this new hospital which can probably shuffle lots more money back into the medical school than the county hospital can do?”

Adding to the unease is the fact that the arrangement with National Medical Enterprises departs so radically from USC’s traditional image as the benevolent caretaker of the poor of East Los Angeles.

Dr. Joseph P. Van Der Meulen, vice president for health affairs at USC, said: “I keep hearing this: ‘ You’re building this new hospital and you’re going to abandon the county.’ It won’t happen. It can’t. We need this (hospital) and the county together in order to survive.”

University officials said the two hospitals will provide what a medical school needs: lots of patients as well as sources of income to supplement faculty salaries, buy equipment and fund research.

Many medical schools have traditionally had such arrangements, though usually the partner is a nonprofit hospital rather than an investor-owned corporation. Through these partnerships, the schools have been able to generate income from privately insured patients by caring for these patients in separate facilities or in special wings of their teaching hospitals.

County-USC has virtually no privately insured patients. Most have no insurance or are covered through the government-sponsored Medi-Cal program. Its physical plant is so dilapidated that deficiencies last year threatened the institution’s accreditation. Hospital officials are constantly fending off deep budget cuts.

Dr. Henrik Blum, a veteran professor of public health at UC Berkeley and an advocate for the poor, said he sees nothing nefarious about USC’s arrangement with National Medical Enterprises. Medicine, he said, has always been a balancing act between charity and profit.

“You can’t regard it as sinful because it is something for profit,” he said. “They are doing it for money, but it is a way to get faculty and quality.”

USC and National Medical Enterprises first discussed joining together in the early l970s, but it didn’t gel until 1986 when three-way agreements were signed by USC, National Medical Enterprises and Los Angeles County. Under the agreements, USC acquired 14 acres next to County-USC from the county and Los Angeles Unified School District. The university then leased eight acres to National Medical Enterprises to build the hospital.

In addition to the 275-bed hospital, a parking structure and medical office building have also been built, at a cost of $157 million. Future plans call for a hotel, research facilities and the possible expansion of the new hospital.

The new hospital is offering services that marketing experts say are moneymakers. Money losers such as emergency rooms and trauma care have been avoided.

A substantial number of beds have been set aside for in-patient adult psychiatric care and physical rehabilitation--two areas that have remained profitable for hospitals.

Gerald G. Bosworth, the new hospital’s chief executive officer, said the facility will not be competing with local community hospitals because its specialized services are aimed at attracting patients not just from Los Angeles but from throughout the nation and world. To accomplish that, the goal is to develop highly specialized, top-quality services not found at many hospitals. Organ transplants and the neurosciences--specialties on the verge of explosive growth and innovation--are two areas where the new hospital will concentrate.

Health care analysts warn that while the hospital appears to have picked its services carefully, there is no guarantee of success in today’s health care market.

“To succeed, they’re going to have to take patients away” from other hospitals, said Glenn Melnick, professor of public health at UCLA. “They’re trying to become a ‘niche’ player. It’s a small market, so you’re looking for just the right set of health providers and professionals who have a reputation in the medical community to gain support from payers and from patients. There’s a small supply of those people, so they’re going to have to recruit away from existing facilities.”

Joan Trauner, a specialist in health enterprises at the consulting firm of Coopers & Lybrand, agreed that there is extreme competition for these specialized medical niches and the experts who staff them. But USC had no hope, she said, of entering that competition if it relied only on an impoverished county hospital as its operating base.

To meet the workload of the new hospital, USC plans to hire 100 additional faculty members and is wooing medical heavyweights from Europe and Japan and the UCLA Medical Center, The Hospital of the Good Samaritan, St. Vincent Medical Center and Huntington Memorial Hospital--a talent grab that has caused some anxiety at local hospitals.

At Cedars-Sinai Medical Center, Dr. Leonard Makowka, chief of surgery and a leading liver transplant specialist, is leaning toward accepting an offer from USC. If a deal is struck, Makowka said he would take with him the team of 25 postdoctoral fellow and research scientists that he has spent the last two years at Cedars assembling.

Specialists such as Makowka are expected to attract large numbers of paying patients to the new hospital. In some cases, these new recruits will be expected to devote some time to indigent patient care at County-USC. In other cases, they will be exempt from this service.

In an another effort to fill beds at the new hospital, all faculty members have been asked to market themselves to privately insured--and therefore profitable--patients who could be treated at the new hospital. About 100 of USC’s 700 full-time clinical faculty members have already developed a following of such patients.

USC’s top neurosurgeons, Dr. Martin H. Weiss and Dr. Steven Giannotta, have a flourishing private practice that has been based for several years at Huntington Memorial Hospital in Pasadena. Now, those doctors will treat these patients at the new university hospital, where they are setting up an expanded, innovative neurosurgery program.

Huntington Memorial Hospital spokeswoman Peg Kean said the hospital is sorry to see these doctors leave, but that she understands that this is in the best interest of the medical school.

Most USC faculty members have few if any private patients. They have devoted themselves solely to their duties at the public hospital--teaching, researching and providing patient care. For them, these are days of intense pressure to attract private patients to fill beds at the new hospital. Tranquada, the medical school dean, conceded that some doctors feel quite uncomfortable with this new order.

Especially troublesome for some is that setting up a private practice entails heavy upfront costs to pay for office space and staff. In some instances, doctors have had to borrow from the university--a debt that Tranquada said they will have to repay.

The start-up costs for the department of medicine’s 150 faculty members during the next three years will amount to about $3 million, according to its chairman, Dr. Richard Tannen.

Dr. Thomas Kirschbaum, professor of obstetrics, said the new money-generating requirements have introduced an upsetting ingredient into work at the medical school and that the level of tension is extremely high.

“The character of the medical school will change,” he said.

Difficult as they may be, the changes are necessary for the success of the two hospitals and for the patients, said Robert Gates, director of health services for Los Angeles County.

“To the extent we have the magnet--a series of high-quality institutions--we’ll draw better physicians and better medical care throughout the whole complex,” Gates said. “It’s a synergistic thing, where everyone wins.”

Medical Funding

Here is a breakdown showing the sources of revenue for the USC School of Medicine in 1990. One goal of the new USC University Hospital is to help the medical school reduce its dependence on funding from Los Angeles County and increase its research grant dollars and money from privately insured patients.

Affiliation agreements: 42%

Includes L.A. County contract, as well as agreements with other local USC-affiliated hospitals. Under these agreements, the hospitals pay USC to provide physician services at their hospital.

Gifts, Contracts and Grants: 19.4%

Contracts, grants, and gifts for research received from the federal government, pharmaceutical companies, and private foundations and individuals.

Private Practice Income: 19.7%

Revenue generated by USC physicians treating private patients.

Recovery of indirect costs: 7.4%

Overhead costs billed to federal agencies or private sources of research grants.

Tuition and Fees: 6.2%

Other: 5.2%

Here is the projected revenue breakdown in 2000, as a result of the new hospital.

Affiliation agreements: 30%

Gifts, Contracts and Grants: 25%

Private Practice Income: 30%

Recovery of indirect costs: 5%

Tuition and Fees: 4%

Other: 6%