2 Hospitals Combine Functions to Cut Costs : Medicine: Partnership between Encino Hospital, Tarzana Regional Medical Center will result in loss of about 125 jobs.

Faced with excess beds and declining profits, Encino Hospital and Tarzana Regional Medical Center have formed a joint venture, hoping to draw on each other’s strengths, reduce duplication and lower costs through consolidation.

The teaming up of the two small hospitals, Encino with 181 beds and Tarzana with 210, creates the third-largest hospital center in the San Fernando Valley. But in the long run the joint venture is expected to eliminate a total of 50 to 60 beds from one or both of the hospitals, with a corresponding loss of about 125 jobs.

The partnership reflects a growing trend among U.S. hospitals as they try to stay afloat amid reduced medical reimbursements from the government and pressure to lower costs from managed-care providers.

Under the joint venture, which officially began Jan. 1, both hospitals will remain open but will share billing and other administrative functions, and will be run by a single management team made up of both hospitals. Also, medical departments that exist at both hospitals--including oncology, orthopedics and general surgery--will be consolidated at one of the two campuses of the new Encino-Tarzana Regional Medical Center.

Encino Hospital is owned by Healthtrust Inc. of Nashville, Tenn., which operates 81 hospitals throughout the United States. Tarzana Medical Center’s owner is American Medical Holdings Inc., a Dallas-based firm that runs 34 hospitals, including the 163-bed Medical Center of North Hollywood.

In their latest fiscal years, the larger Tarzana hospital was profitable while the Encino hospital was not, so American Medical Holdings was designated managing partner, with 75% control of the joint Encino-Tarzana venture.

“Clinically and financially, this makes sense,” said Roger Drue, head of the Tarzana hospital since 1989 and chief executive of the joint venture.

Executives at the two hospitals and outside observers believe the venture is a good marriage of two complementary medical centers. Since opening in 1973, the Tarzana hospital has developed strong maternal and pediatrics units; Encino Hospital has neither. The Encino facility, established in 1954, is well known for open-heart surgeries, which are not performed at Tarzana. The two hospitals are also only a couple of miles from each other.

Employment at the Encino and Tarzana hospitals currently stands at about 1,000. Drue said the joint venture will eliminate about 125, and about 25 jobs have already been cut. One post that was trimmed included that of the former chief executive of the Encino Hospital, Jeffrey Winter, who was transferred to a Healthtrust hospital in Florida.

Like most of the 20 hospitals in the Valley, the Encino and Tarzana hospitals have been grappling with shrinking income because of reduced government reimbursements for Medicaid and Medicare patients, and pressure from health maintenance organizations and other managed-care providers for lower costs.

In its latest annual report filed with the state, Encino Hospital reported a net loss of $4.5 million on gross revenue of $90 million for the 12 months ended Aug. 31. The Tarzana hospital posted revenue of $160 million and net income of $2.7 million for its fiscal year ended March 31, 1992, but its net income was 65% below the $7.6 million it reported in the similar period a year earlier, according to the Office of Statewide Health Planning and Development.

In an interview, Drue said that for all of 1992 the Encino and Tarzana hospitals had a combined pretax income of $1.5 million, and he noted that revenue last year was up at both hospitals from 1991. Nonetheless, he conceded that net income was declining for both facilities, and that both suffered from an overcapacity of beds, caused by an increase in outpatient services and pressure from providers to reduce hospital stays.

The average occupancy rate for the 127 hospitals in Los Angeles County, including those in the Valley, is about 50%, meaning that on any given night one out of two beds is empty, according to David Langness, a spokesman for the Hospital Council of Southern California, which has 230 member hospitals.

Because it costs tens of thousands of dollars a year to maintain and staff each bed, the overcapacity has hurt hospitals statewide. Three out of five hospitals in California lost money last year, said Langness, and 20 hospitals in Southern California have closed in the last five years, including Panorama Community Hospital, a 96-bed facility that shut down a year ago. Others have been cutting staff.

“A significant number of hospitals in the Valley have had layoffs in the last 12 months,” said Hal Wurtzel, vice president of corporate development at Valley Presbyterian Hospital, a 363-bed facility in Van Nuys. Wurtzel said Valley Presbyterian Hospital employs about 1,050 people, which is down about 10% from a year ago.

Like many other hospitals, Valley Presbyterian last year formed an alliance with Cedars-Sinai Medical Center in Los Angeles to share educational programs and provide access to each other’s staff and facilities.

“You’re probably going to see more cooperation and collaboration,” said Jeff Flocken, president and chief executive officer of Northridge Hospital Medical Center, the region’s second largest hospital with 427 beds. The largest is St. Joseph Medical Center in Burbank, which has 658 beds.

While Flocken and other Valley hospital executives see the new Encino-Tarzana hospital as having little effect on them, analysts say it could hurt nearby competition because its bigger size would give it greater negotiating power with managed-care providers and medical groups.

Still, analysts say its success will depend on how well the joint venture merges two independent operations. One question has to do with the consolidation of facilities. While management is still studying the issue, Drue said the cardiac center will probably be moved to Tarzana because it is a better fit with that hospital’s facilities.

But if that happens, the Encino campus will lose its mainstay, leading some to speculate that Encino Hospital may be shut down or bought outright by American Medical Holdings. Three years ago American Medical holdings merged its Tarzana hospital with its Rancho-Encino Hospital in Encino, but it later closed Rancho-Encino and sold the building.

Mike Murdock, vice president and treasurer of American Medical Holdings in Dallas, said there were no such plans at the moment. “We each like that market,” he said of his company and Healthtrust, “and it made sense to remain there.”

Healthtrust officials declined to comment.

For their part, doctors at the Encino and Tarzana hospitals say the joint venture will be far easier than most corporate mergers because physicians know both facilities well.

Dr. Avrum Bluming, the Tarzana hospital’s chief of staff, said 80% of the doctors previously had appointments at both hospitals. “We’re very supportive of it.”

Dr. Gerald Green, chief of staff at the Encino campus, said: “The immediate response to the joint venture was one of concern, worry and suspicion. But the logic of it has become more and more evident. Now that the two facilities are combined, we can provide comprehensive medical care.”