Ailing Hospitals : Uncertainty Over Reform, Growth of HMOs Put Squeeze on Many Local Facilities

The local clergy could hardly believe it when Valley Presbyterian Hospital laid off its full-time chaplain last fall. The elimination of the $40,000 job, which had been around since the Van Nuys facility opened 35 years ago, indicates just how tough things are for hospitals these days.

Uncertainty about health care reform under the Clinton Administration and efforts by big corporations to slow their soaring medical costs--mainly by driving employees toward health maintenance organizations--have caused turmoil in the hospital industry.

Squeezed by meager reimbursements from Medicare and severe pressures from HMOs, local hospitals are fighting for their lives. It is largely a losing battle in the San Fernando, Santa Clarita and Antelope valley areas. Of 29 acute-care hospitals there, 16 are losing money, according to their most recent annual reports.

“Some hospitals are going to have to close because there’s just not a need for them all,” says Michael Weinstein, a former administrator of the Medical Center of North Hollywood and a consultant in Encino. The most imperiled are small hospitals, especially those without any deep-pocket owners, such as Panorama Community Hospital.

After Panorama Community lost $2.7 million in 1991, its former owner shut the 96-bed hospital in January, 1992. But it reopened in October, 1992 after a nonprofit organization bought it for a mere $3 million.

“This opportunity came along and at the right price,” said David Green, the hospital’s chief executive officer. Despite outsiders who doubt that the hospital can make it financially, Green thinks the hospital will survive by providing basic services without spending a lot of money for fancy equipment. “We don’t want to get caught up in a frenzy of the latest technology,” he said.

In one sense, hospitals are struggling because there are simply too many of them--bed occupancy is running at just 40% locally, half that of a decade ago. Layoffs at General Motors, Lockheed and other major Valley employers have trimmed the number of insured patients. But the biggest pinch is coming from HMOs, which have negotiated huge discounts for hospital services. That, plus popular managed-care insurance programs with a select list of hospitals and doctors who screen patients before they visit specialists, have pared the number of days spent in hospitals. So Valley hospitals are furiously slashing costs, consolidating, merging and racing to secure more managed-care contracts.

The recession has also meant more uninsured people who cannot pay their hospital bills. Northridge Hospital Medical Center’s provisions for bad debts, for instance, nearly doubled in 1992 to $12.2 million. Also, reimbursements from Medicare, which account for a third of most hospitals’ revenue, continue to lag rising costs for medical care.

Doug Drumwright, a turnaround specialist who took over management of two Valley hospitals last fall, concedes that West Valley Hospital in Canoga Park may not survive. The 139-bed facility has heavy debts and only a 25% occupancy rate and is losing customers. Drumwright says there are still ways to help build business at the hospital. “But the question is, can we do it fast enough?”

The upheaval has threatened jobs at nonprofit and for-profit hospitals, both small and large:

* St. Joseph Medical Center in Burbank, the region’s largest with 658 beds, lost more than $10 million in 1992. Last year the nonprofit hospital cut 195 jobs, expanded its neonatal center and hired a new chief executive, Michael Madden. Madden said the hospital probably lost another $3 million in 1993. “We plan to continue the cost-containment efforts,” he said.

* Triad Healthcare Inc., owner of Sherman Oaks Hospital and West Valley Hospital in Canoga Park, last year defaulted on a $167-million state-guaranteed bond after the two facilities lost more than $10 million in 1992. But Sherman Oaks Hospital operates the region’s only burn center, which now accounts for 25% of its patients, so that hospital is expected to survive.

* Glendale Adventist Medical Center, with 454 beds, reported an operating loss of $5.6 million in 1992. To break even last year, the hospital cut 49 jobs, including electricians and plumbers, and then told its remaining 1,700 employees to choose between a 5% wage cut or fewer work hours.

* Palmdale Hospital Medical Center, an independent business owned by a partnership, lost $1.7 million for the 12 months ended April 30. Part of the reason is the hospital took in a surge of patients from Medi-Cal, the state program for the needy, which pays even less than Medicare.

Anne Perry, an economist at the Hospital Council of Southern California, said that most of the council’s 219 member hospitals lost money in 1992. A decade ago, 80% of them were profitable, with some earning 20 cents for every $1 in revenue. Now, she said, “we expect 20% to 30% of them to close over the next three to five years.”

Amid all the turmoil, a few Valley hospitals are doing well.

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Kaiser Permanente, the state’s biggest HMO, operates a 212-bed hospital in Woodland Hills and one with 364 beds in Panorama City. The two hospitals serve more than 320,000 HMO members, about one-fifth of the insured patient population in the Valley. The occupancy rate is about 50% at Kaiser’s Panorama City facility and nearly 70% in Woodland Hills. While Kaiser said it does not break down financial results by hospital, analysts say both are profitable.

A very successful for-profit hospital in the Valley is West Hills Regional Medical Center, a 236-bed hospital that earned $8 million for its fiscal year ended Aug. 31, up 33% from the previous year. The success comes despite having had four owners in the last two years. West Hills is now owned by Columbia/HCA, a Louisville, Ky.-based chain of 190 hospitals.

Why is West Hills doing so well? The hospital’s main market includes upscale Calabasas, Agoura Hills and Woodland Hills, so fewer of its patients are likely to be uninsured. In fact, less than 1% of the hospital’s revenue comes from Medi-Cal, contrasted with 26% for the average hospital in Los Angeles County. It also helps that the hospital is owned by a big corporation, which has greater negotiating clout when buying supplies. Dan Brothman, West Hill’s chief executive, says he gets discounts of up to 20% for drugs, prosthetics, implants and other medical equipment.

But West Hills has boosted its market share by aggressively securing managed-care contracts, which now account for 40% of the hospital’s revenue. By forging ties with organizations such as the Community Medical Group of the West Valley, which has 35 physicians and serves 40,000 members, the hospital was able to get a share of those managed-care customers.

“In the old days, a hospital put up billboards and drove a lot of business,” Brothman said. Today, hospital officials target employers during open enrollment; the rest of the time they wine and dine medical groups and people like Nick Demko.

Demko is director of hospital contracting at Blue Cross of California, the huge Woodland Hills-based insurer. A decade ago, Demko’s job didn’t even exist. Back then all Blue Cross members had traditional coverage: They went to the hospitals their doctors chose, the hospitals billed Blue Cross and the insurer reimbursed them in full.

But now most of Blue Cross’ 2 million-plus customers belong to a Blue Cross HMO or other managed-care group. So for a hospital to get the business of these Blue Cross-insured members, it has to get a contract with Blue Cross.

Demko says Blue Cross currently contracts with most of the hospitals in the Valley, but the number of hospital its picks under managed care will shrink. Blue Cross and other insurers are putting together a cost analysis on hospitals that is likely to lead to bigger discounts for hospital services. HMOs mostly pay hospitals on a per-diem basis for patients, and discounts run up to 30% for certain hospital procedures. That leaves inefficient and even some well-run hospitals with losses.

“Our payments don’t contribute to a hospital’s demise,” Demko insists. “It’s enough for them to continue to operate--maybe not enough to keep adding services.” Yet Demko said Blue Cross isn’t likely to contract with hospitals that don’t provide major services.

For instance, Demko says Blue Cross doesn’t contract with small facilities such as Panorama Community Hospital. “It’s not in our interest to do business with them,” he said.

That makes it tough for Panorama Community Hospital, whose nonprofit owner also operates the 69-bed San Fernando Community facility in San Fernando. The two hospitals lost a combined $5 million in the year ended last June 30.

But Green, chief executive of both facilities, said Panorama Community recently formed a medical group to try to land some HMO contracts. And it has opened a diabetic center for the hospital’s large Latino community--which has a higher incidence of diabetes--to try and draw more patients.

K. D. Justyn, administrator of Westlake Medical Center in Westlake Village, worries as others do that underpayments from HMOs will create “understaffed and under-equipped hospitals.” Earnings at her 96-bed hospital sank to $55,000 in 1992 from $4 million a year earlier because major employers, such as Amgen Inc. and GTE, encouraged more of their employees to join HMOs or managed-care networks, which cut into the hospital’s revenue stream, she said.

Without the backing of its big parent firm--Universal Health Services of Pennsylvania--Justyn said that the hospital would not have been able last year to expand its outpatient surgery facilities, in keeping with a national trend. Justyn said her hospital showed a small profit last year.

Like Westlake Medical Center, other hospitals in the region are expanding, adding services and buying more modern equipment to get a competitive edge. Last year, for example, Northridge Hospital opened an $11.5-million outpatient cancer center.

Jeff Flocken, chief executive at the 427-bed Northridge Hospital, admits “there’s too much bricks and mortar around.” But he says hospitals need to offer full services because that’s what managed-care providers and doctors want. Northridge can afford to expand. Flocken says it made $4.5 million in its last fiscal year ended Oct. 31.

It helps that Northridge Hospital is owned by Unihealth, a $3-billion nonprofit outfit in Burbank. Unihealth also owns Chatsworth-based CareAmerica HMO, a dozen hospitals--including Valley Hospital Medical Center in Van Nuys--and is a major stockholder in PacifiCare, another big HMO, based in Cypress and serving 100,000 members in the Valley.

As such, Northridge Hospital and Valley Hospital can count on patients being sent to them from HMOs like CareAmerica and PacifiCare. On the other hand, Unihealth’s rival hospitals find it hard to get these same contracts.

It’s no surprise that Valley Presbyterian Hospital in Van Nuys, which is only a mile from Unihealth’s Valley Hospital, does limited work with CareAmerica and has no PacifiCare contract. Valley Presbyterian has tried to establish its own links. The hospital recently set up an alliance with the renowned Cedars-Sinai Medical Center in Los Angeles, under which perinatal specialists from Cedars visit Valley Presbyterian twice a week.

In addition, Valley Presbyterian last year cut almost 100 jobs, including the chaplain’s position, which was turned over to volunteers. By slashing costs, the 362-bed hospital rebounded from five straight years of losses, earning $2.9 million for the 12 months ended last June 30.

But despite having turned a profit, Chairman David Fleming says the hospital still needs a partner to cope with all the unknowns that lie ahead.