Cost-Cutting Propels Health Reform : Medicine: Even before the Administration comes up with a plan, the recession and employers are forcing medical managers to act.

With or without Washington, health care is being reformed.

Many companies in the health care industry, including insurers, drug makers, hospitals and other providers, say they are troubled by the uncertainty that clouds the health care system as the Clinton Administration prepares its blueprint for reform.

And yet, most of their attention is focused on the marketplace, where powerful forces--some of the very forces driving the political call for reform--are already reshaping the industry and their companies. So far, the changes primarily have been dictated by the recession and private sector employers who have been paying bills for health care.

While health care companies hope that their “voluntary” changes will blunt some of the harsher edges of proposed federal reforms, they may just be whistling in the dark. Critics say the changes are not reform enough, or fast enough, and question the industry’s motive and commitment.

Yet, no sector in the health care industry has been spared by the evolving demands for change.

The move to managed care systems may be unstoppable; hospitals, laboratories, physicians and mental health professionals are finding it extremely difficult to survive without being a member of a health maintenance organization or managed care network. Managed care programs control costs through a system of discounted fees and strict review of covered treatments, referrals and procedures.

In California, where nearly 32% of the population is insured through HMOs, doctors often participate in dozens of affiliated groups of physicians that contract with insurers, managed care networks and HMOs.

Dr. Melvin Kirschner, a family practitioner in Van Nuys, belongs to so many networks and contract groups that he has lost count (40 to 50, he said), and they cover only 30% of his patients. He said he recently “had 175 patients taken out of my care--patients that I had bonded with--by an insurance company because it had made a better deal” with a different physicians’ group, and Kirschner wasn’t a member of that group.

Dr. Steven Nishibayashi, who has a solo practice in pediatrics in Glendale, said he recently dropped out of one such affiliation because he thought the reimbursement levels were too low, and the restrictions on patient care too high. Still, nearly 70% of his patients come to him through such networks and group affiliations.

Just as these large employers--and now pools of smaller businesses--are using their buying power to pressure insurers to hold down premium costs, insurance companies are pressuring doctors and hospitals to reduce their fees, primarily by restrictions that favor shorter, less intensive and less costly treatments.

Hospitals have tried to make up for the lost income by adding more outpatient and specialized services, such as birthing centers. But still, nearly two-thirds of all hospitals in California, for instance, were in the red in 1992, according to projections made by the Hospital Council of Southern California.

And hospital bed occupancy has dipped to its lowest level in history, said David Lingness, spokesman for the hospital council. In Southern California, the hospital occupancy rate last year averaged 42%; in Los Angeles County, which treats more uninsured patients than surrounding areas, occupancy was 48%.

If health care reform extends basic coverage to the 37 million uninsured Americans, some of those beds might be filled, but hospitals can’t afford to wait.

The red ink, the empty beds and the search for increased leverage in contracts with HMOs and managed care networks has led to an unprecedented wave of mergers and formal affiliations between hospitals.

Last week, two southeastern companies--Columbia Healthcare Corp. and Galen Health Care Inc.--agreed to merge, forming the second-largest hospital management company in the United States.

In Southern California, said Lingness, “every hospital is trying to find ways to go steady with, move in with or marry another hospital. . . . We’re in the peak of merger fever.”

In some mergers, one hospital is shut down and the resources and staffs are combined. Such was the case in 1989 when historic Queen of Angels Hospital was closed after its merger with Hollywood Presbyterian.

But in other affiliations, such as last year’s joining of Huntington Memorial Hospital in Pasadena and Methodist Hospital of Southern California in Arcadia, both hospitals remain separate and open but cut costs through shared financial services. Perhaps more important, together they have more weight in negotiations for equipment purchases or contracts with insurers.

In the San Fernando Valley, a number of hospitals and physicians’ groups have formed a loose federation that enables them to cover a broad regional area, thus having greater clout with employers and insurance companies. One of the hospitals in that group, Valley Presbyterian, recently formed an alliance with Cedars Sinai that will give Valley’s patients easier access to Cedars’ specialized treatments and procedures and Cedars better access to the area’s growing population.

“It has been very difficult for health care executives to plan for the future,” said John Hindelong, a securities analyst at Donaldson Lufkin & Jenrette in New York. “One day the Administration is intent upon dramatically expanding coverage to the 37 million Americans now uninsured; the next day, the Administration is determined to slash costs of health care. Depending on which day, health care companies must plan for either contraction or expansion.”

Few hospital companies have been whipsawed quite that much, despite their intense interest in the reform proposals.

Hospitals “have been restructuring for some time,” said Jon Ross, spokesman for the American Hospital Assn., a Washington-based trade group, and most are confident that health care reform will accelerate--not reverse--steps they are taking toward managed care.

Beverly Enterprises--the Fort Smith, Ark., company that is the nation’s largest operator of nursing home facilities--has responded to the shift away from insurance coverage that had favored long-term hospitalization by opening 20 “sub-acute care” units, with as many more on the drawing board. While the bulk of Beverly’s business remains long-term care, these new sub-acute units are designed for patients that may not need the level of care provided at acute care hospitals but are not yet well enough to return home.

As part of the restructuring, some health care providers have become skittish about hiring or expanding, a situation that clearly irritates analyst Hindelong. “This industry is perhaps the only industry currently creating high-quality, high-paying jobs and one of the only industries in this country that has clear international leadership. . . . Now, the Administration on certain days seems determined to stop this,” he fussed.

For large pharmaceutical makers, the restructuring is coming in response to heated competition from generics, customers’ demands for volume discounts and criticism of their pricing policies.

Whether through actual cutbacks, retirement incentives or attrition, most drug makers are becoming leaner in all areas of their businesses except research and development.

Many have moved resources into the competitive battle with generic manufacturers and mail-order houses. Just last month, Marion Merrell Dow said it was acquiring the generic drug business of Rugby-Darby Group Cos., the country’s largest generic drug maker.

Deborah Wardwell, securities analyst in the Seattle office of Dain Bosworth, said the downsizing and restructuring of drug companies are the first stages of a “likely consolidation (that) health care reform will accelerate.”

In the past few years, many drug makers have scaled back annual price increases in the wake of criticism of the industry’s pricing policies--criticism that intensified in the early weeks of the Clinton Administration and has led to fears of federal price controls.

Merck, one of the largest makers of pharmaceuticals, in April took the lead in the industry’s efforts to forestall such price controls when it proposed a voluntary price restraint system backed by contractual assurances to the federal government.

Despite all the restructuring throughout the health care industry, its critics are wary of reform that relies on voluntary compliance. Nettie Hoge, a health policy consultant to California Insurance Commissioner John Garamendi, said businesses are devoted to their bottom lines, not to the public interest.

She said insurance companies are “right now in full-court press in Sacramento trying to gut reforms” enacted last year.

“I’m not willing to believe in their good will, given the record,” she said. “And even with the best of intentions, private concerns can’t get (health care costs) under control because each has control of only a little piece.”