A Hospital Looking to Get Well : Health care: Irvine Medical Center has made a slow start and continues to lose money. Its ability to woo patients and doctors is hampered by poor timing and failure to negotiate key insurance contracts.

Almost a year after it opened, the Irvine Medical Center still has more empty beds than it would like and more troubles than it bargained on.

The center’s woes have prompted layoffs and stirred rumors in the medical community that it might be up for sale. But hospital officials, while acknowledging that the center has problems, angrily deny that there are plans to put it on the auction block.

“There are absolutely no discussions that have occurred or that are taking place to sell the hospital to Kaiser (Permanente) or anyone else,” said John C. Gaffney, president of the center.

Still, Gaffney said the long-awaited hospital, built to be a state-of-the-art facility at a cost of more than $100 million, has made a slow start and continues to lose money. This burdens the hospital’s owner, American Medical International, a publicly held Dallas-based hospital chain that has been selling off hospitals and streamlining its operations for the last 20 months to staunch annual corporate losses totaling $25.4 million through May.

The hotel-like structure offers the latest in medical technology and all patient rooms are private. It is landscaped with towering palm trees and features a lobby with a waterfall and a cafeteria with a revolving art exhibit. Its emergency room waiting area is decked out in cherry wood paneling and fancy furnishings.

Its location also would seem to bode well for the center. The hospital sits at the top of the Sand Canyon Avenue off-ramp of the San Diego Freeway--a well-traveled spot in the heart of Orange County’s population boom.

And yet, Irvine Medical Center’s “patient-occupancy growth rate,” a measure of the hospital’s ability to attract patients, is dragging about four months behind original projections, Gaffney said.

Although licensed for 177 beds, so far two of the hospital’s four floors are open and 75 beds are staffed for patient use. “We didn’t build 177 beds thinking they would be full when we opened the door,” Gaffney said.

Nonetheless, he said, he expected the beds would fill faster. The hospital housed an average of about 35 patients a day in July, well short of its goal of holding 55 to 60 patients by the end of its first year. Throughout Southern California, patient-occupancy rates have been low, averaging 55% last year.

Scaling Back

In response to poorer-than-anticipated business, Gaffney said, the hospital scaled back its financial projections in March and laid off about 55 employees. Also, about 85 of the hospital’s 450-person staff agreed to take an unscheduled vacation day in June when the patient count took a steep drop.

Dr. Howard Fishbein, an Irvine family physician and member of the hospital’s board of directors, said that morale is low among medical center employees and that there have been a number of staff resignations.

“There is a lot of stress and job insecurity in the place, and it shows,” he said.

A major reason for Irvine Medical Center’s less-than-stunning debut, most everyone agrees, is unfortunate timing. The environment for hospitals has changed from that of a decade ago when many organizations, including the UC Irvine, battled for the right to build the first hospital in Irvine.

David Langness, vice president of communications for the Hospital Council of Southern California, called the early 1980s the “go-go years,” when the majority of hospitals operated comfortably in the black and expansion was pushed.

By contrast, he said, 58% of California’s hospitals operated at a loss last year and the average profit margin of remaining hospitals in the state was a meager 2%. Orange County’s hospitals fared even worse, with 0.89% gross profit. The council believes that Orange County hospitals actually lost $100 million after expenses for maintenance and upgrading of equipment.

Langness said the “budget ax fell on health care” in the mid-1980s, just before American Medical International started planning the Irvine hospital, when Medicare and Medicaid programs began to limit the amount they would pay for treatment.

About that time, medical experts began questioning the need for a new hospital in south Orange County.

“Many people said the hospital would have a long struggle to become economically viable,” he recalled. But he said American Medical International cited older studies that had shown Irvine to be a potentially lucrative market and refused to back away. “The wheels were in motion.”

But Gaffney noted that since American Medical International started planning Irvine Medical Center five years ago, there has been a tremendous explosion in the popularity of health maintenance organizations, preferred provider networks and other “managed care” insurance plans.

These organizations have tried to tighten the reins on runaway medical costs by encouraging shorter hospital stays and the performance of more medical procedures outside hospitals. As a result, many metropolitan areas such as Orange County have more hospital beds than they can use.

Irvine Medical Center also opened its doors during an economic recession, at a time when many surgeons are reporting that demand for elective surgery has declined because people either are unemployed--and thus uninsured--or are worried about their futures and unwilling to spend money on any medical care unless it is urgently needed.

The hospital also was hampered by an unexpectedly long delay in receiving federal government approval to treat Medicare patients, Gaffney said. Not only did that hinder admission of elderly patients to the hospital, he said, but it discouraged the admission of other patients whose private insurers look to Medicare certification as a measure of quality.

‘Testing Period’

Even if everything else had gone smoothly, Gaffney said, some start-up problems were to be expected. A new hospital always has to face the challenge of persuading doctors to change their patient referral patterns. That takes time.

Although about 900 physicians rushed to join the Irvine Medical Center staff, many of them also are members of the staff of one or several other hospitals in the county.

“There is a testing period,” said Dr. Gerald Sinykin, the Irvine Medical Center’s chief of staff. “If you have been working at one hospital and now are working at two, you take your time and decide what will be to your advantage.”

About 85 physicians have rented all the available space in a 10-story office tower next to the Irvine Medical Center, but most of their patients are sent elsewhere, doctors said.

“IMC will be a spectacular success when most of its medical staff gets off the fence,” predicted Terry Hargadon, the hospital’s vice president for physician services and marketing.

But board member Fishbein, who campaigned for 10 years to have a hospital built in Irvine and says he very much wants it to succeed, contends that it is not providing the service it promised. The number of clerical staff is inadequate throughout the hospital, he said, and a plan to centralize diagnostic services has not worked out so there are scheduling and other problems.

Gaffney downplayed Fishbein’s complaints about service, arguing that although there have been a few “glitches,” the hospital tries hard to accommodate its physicians and patients.

Insurance Contracts

The most serious problem holding the hospital back, according to Fishbein, is its failure to negotiate key contracts with health insurance providers. He said that 70% of his own patients are obliged to go to other hospitals because Irvine Medical Center has not been able to secure contracts with their insurance groups.

The center’s staff physicians complain that even Irvine city employees have an indemnity health plan that gives them a reimbursement incentive to go to Irvine Medical Center’s rivals, such as Hoag Hospital in Newport Beach, St. Joseph Hospital in Orange, Saddleback Memorial Medical Center in Laguna Hills or Western Medical Center-Santa Ana, rather than use the hospital in their own city. City employees who chose treatment at Irvine Medical Center pay a higher percentage of the medical costs.

Meanwhile, the center’s well-established competitors are doing their best to protect their turf. Several have opened new or expanded satellite medical centers in Irvine on Barranca Parkway, which some doctors refer to as “Band-Aid Row.”

Peter Foulke, senior vice president of Hoag, said that hospital’s walk-in and radiology facilities in Irvine have not suffered a decline in business since Irvine Medical Center opened, and the Newport Beach hospital has not lost a significant number of patient referrals to the Irvine Medical Center. He added, however, that some of the physicians on Hoag’s staff have been trying out the new hospital.

In the last year, St. Joseph Hospital, like many other hospitals, has seen patient admissions decline. But Donald Hicks, vice president of marketing and development at St. Joseph, said the hospital’s admissions from south Orange County during the same time increased by 11%.

As it struggles to turn its fortunes around, Irvine Medical Center is trying to concentrate on services that its neighbors want most while at the same time attempting to drum up business.

On the promotion front, Irvine Medical Center’s strategy has been to appeal directly to Irvine residents as well as physicians. The hospital has been marketing its emergency room to the extraordinarily large number of households in Irvine--an estimated 35%--who do not have family physicians.

Since April, the hospital has mailed 100,000 flyers to families in its service area, including all Irvine households, that give directions to the hospital and offered a $50 discount for any visit to the emergency room through last week. In an effort to build up a patient base, the hospital is inviting Irvine residents to come to the emergency room with ailments such as sprains and fevers that could also be treated in doctors’ offices.

Gaffney said the discount offer helped boost the number of monthly emergency room visits at the hospital from about 800 to 1,100.

And the center has built up its orthopedic and obstetrics departments, Gaffney added, in an effort to appeal to Irvine’s young population.

“I’m very happy to use the hospital, and I think the service has been good,” said Allen David, Irvine Medical Center’s chief of obstetrics, who said the hospital delivered about 70 babies in July, which he considers very promising for such a young hospital.

Another pleased client is Dr. John Micha, a gynecological oncology specialist, who said Gaffney and his staff “bend over backward” to satisfy patients and doctors. He said Irvine Medical Center is the only hospital in the county that will agree to accept his cancer patients at whatever reimbursement their insurance companies will pay, so that his patients do not have to pay anything out of pocket.

Physicians who do not refer many patients to Irvine Medical Center frequently cite inconvenience, noting that their offices are located closer to other hospitals. And specialists such as surgeons say that they have established patient referral networks with internists and other primary care physicians who prefer Irvine Medical Center’s competitors.

Dr. Antonio Ferrey, a family physician in Santa Ana who practices at Western Medical Center and St. Joseph, said he has no interest in joining the Irvine Medical Center staff. “I already have enough patients and time commitments to other hospitals” that require attendance at staff administrative meetings, he said.

Other physicians note that building a practice at a new hospital is not easy. “I’d love to come up here and do 10 cases a week,” Dr. John Harch, a general surgeon, said recently while he was eating lunch at Irvine Medical Center’s physician dining room.

Harch said that, instead, his six-member surgical group sends only a few patients each week to Irvine Medical Center because the group has not yet developed a strong relationship with primary care physicians in Irvine who use the medical center. That may change, he said, because his group, which maintains offices near Saddleback Memorial Medical Center and Mission Hospital Regional Medical Center, will soon open an office at Irvine Medical Center.

Small Sign

Hospital officials said they are making progress in landing more contracts with health insurance providers. The hospital now has 27 such contracts, they said.

Last month, Irvine Medical Center entered an arrangement with Coastal Communities Hospital in Santa Ana that will allow Bristol Park Medical Group, a large medical practice with a newly expanded office in Irvine, to admit patients to Irvine Medical Center.

The hospital is negotiating a contract with Kaiser Permanente that would allow Kaiser members in south Orange County to obtain emergency care at Irvine Medical Center, rather than being required to travel to Kaiser’s hospital in Anaheim Hills.

A small but irritating problem for the medical center is that it lacks a sign large enough for motorists to spot it from the freeway or even from its own parking lot. Irvine residents hunting for the city’s only hospital have gone inside to ask if they were in the right place.

Irvine Medical Center is seeking city approval for a more prominent sign. For weeks, a banner has been flying high on an outside wall of the hospital, sporting a variety of lettering from which hospital officials can choose what they hope will help create the most eye-catching sign.

Ultimately, though, the medical center’s ability to woo doctors and patients may depend on two factors beyond its control: the state of the Orange County economy and congestion on the local freeways.

“As the economy revives, population growth will take off again,” said Hargadon, the marketing vice president. New growth will mean more cars on already jammed freeways, he added, and that may encourage residents and physicians to seek medical care closer to their homes.

Said Hargadon: “John (Gaffney) sometimes tells me our greatest marketing agent is the freeway.”

American Medical International

Business: A for-profit company that owns and operates Irvine Medical Center and 36 other acute care hospitals and one psychiatric hospital in 12 states, mostly concentrated in California, Texas and Florida.

Founded: In 1956 in Los Angeles by Uranus J. (Bob) Appel

Chairman and Chief Executive: Robert W. O’Leary, who was president and CEO of St. Joseph Health Systems, Orange, 1983-1989.

Went Public: In 1960 and became the nation’s first publicly held hospital chain. Currently trades on the American Stock Exchange.

Peak of operations: In 1984 the company owned 125 acute care hospitals as well as other health care facilities and ancillary services in 10 countries.

Sale: A 1989 leveraged buyout was led by an investor group called Harry Gray, Mel Klein & Partners. It was followed by a streamlining of the company, including the divestiture of about $1 billion of assets, including 16 U.S. hospitals and 20 hospitals overseas. The same year the company’s headquarters moved to Dallas.

Employees: 34,000

Revenues: $1.95 billion (nine months ended May 31).

Loss: $25.4 million (nine months).

Competing for Market Share As it celebrates its first anniversary, Irvine Medical Center is struggling to bolster its share of the fiercly competitive hospital market in central and South Orange County. The hospital has the lowest occupancy rate of the seven regional hospitals and minimal Medicare/Medi-Cal business, leaving it last in patient revenue, based on the most recent figures available. Sources: Office of Statewide Health Planning and Development; Orange County Business Journal; Hospital Council of Southern California; Arthur Anderson & Co.