THE CHANGING HEALTH CARE INDUSTRY : Appetite for Expansion : Hospitals: Big for-profit companies such as Columbia/HCA Healthcare have their eyes on California’s nonprofit facilities.

As many of California’s 366 nonprofit hospitals fight for survival in a cutthroat health care market, the prospect of a deep-pocketed partner coming to their financial rescue is enticing.

When the would-be rescuer is a for-profit enterprise, however, many of the people who run nonprofit hospitals think the white knight is wearing a black hat.

“Not-for-profit hospitals have a long tradition of service to the community for the sake of service, and they don’t want to give that up by selling their souls to the corporate world,” says David Langness, spokesman for the Healthcare Assn. of Southern California, an industry trade group.

Now the biggest rescuer of troubled (and not-so-troubled) hospitals around the nation may be preparing a major move into Southern California.

Industry sources say Columbia/HCA Healthcare Corp., the giant health care company that has bulked up on 137 hospital acquisitions in just the past year, has been in merger discussions with Sharp Health Care, a nonprofit medical organization that runs five hospitals in San Diego.

Officials of Sharp and Columbia declined to comment on talks between the two companies.

Until now, Columbia/HCA’s voracious expansion had focused mostly in the South and East. It had barely touched the difficult Southern California market. But by acquiring Sharp, Columbia would capture in one swoop more than 20% of managed-health care membership in the nation’s sixth-largest city.

Other for-profit chains also are poised to flex their muscles in the region. Santa Monica-based National Medical Enterprises’ soon-to-be-completed merger with American Medical International of Dallas will give it 14 hospitals in Southern California. Ornda Healthcorp, of Nashville, is another force in the region with 14 hospitals.

Executives of all three hospital chains say they hope to expand in California to build market share and improve their cost efficiency. Their most attractive targets: nonprofit hospitals.

“They (nonprofits) are where the big opportunities are going forward,” says Richard L. Scott, Columbia’s founder, who confirms that Columbia is also talking with some Catholic-owned hospitals in California, although he won’t name them.

For one thing, there are a lot more nonprofits out there: About two-thirds of the state’s 500 general hospitals are nonprofit. Also, the vast majority of the state’s leading academic, research and major tertiary-care hospitals--where the most complicated surgical procedures, such as organ transplants, are performed--are nonprofit institutions.

Many in the nonprofit world view Scott’s growing influence with considerable unease. They worry that any investor-owned company’s primary goal is boosting profits and that patient care may come second.

In Chicago, that point was driven home recently by Cardinal Joseph Bernardin, the influential Roman Catholic cleric, who told the 20 hospitals in his archdiocese that they would lose church recognition if they sold out to a for-profit company.

Bernardin, speaking to the Harvard Business School Club in Chicago, warned that the nation’s health care system “is rapidly commercializing itself, and in the process is abandoning core values that should always be at the heart” of medicine.

In California, no religious hospital organizations have taken such a public stand, although some voice similar views.

“Our goal is clearly to serve the community, not shareholders,” says Michael Madden, chief executive of St. Joseph Medical Center in Burbank. The Catholic hospital has not received any merger offers from for-profit firms, he said. “But if they did call, I’d say no.”

Like it or not, a growing number of nonprofit hospitals are being driven into the arms of for-profit chains in their fight for survival. Nationally, for-profit companies have acquired nearly 50 nonprofit hospitals in the past year.

“We have some hospitals that are on the brink of financial disaster,” said Bud Lee, executive director of the California Assn. of Catholic Hospitals, a trade group representing 44 Catholic institutions.

For Columbia--or any other for-profit chain--to be a significant force in Southern California, hospital executives say, these companies need to strike a deal with one of the region’s major tertiary-care hospitals, whose reputations make them popular with patients and managed-care companies.

Such hospitals include Huntington Memorial Hospital in Pasadena, Long Beach Memorial Medical Center, Cedars-Sinai Medical Center in Los Angeles, St. John’s Hospital and Health Center in Santa Monica, Hoag Memorial in Newport Beach and St. Joseph Medical Center in Burbank.

Tom Collins, chief executive of Long Beach Memorial, one of Southern California’s largest nonprofit hospitals, says Columbia representatives have come calling several times during the past year.

“They (Columbia officials) have said, ‘Do you see any opportunities?’ And I’ve said, ‘Thank you, but no thanks,’ ” Collins says.

Even so, the hospital executive says he wouldn’t rule out a deal with a for-profit company “that makes sense for the community.”

Long Beach Memorial faces the problems--a glut of hospital beds, cutthroat competition and a high level of uncompensated care--that have put many California nonprofit hospitals under vise-like pressure to merge.

In California, institutions are scrambling to pair up to better compete. Until now, most nonprofits have either chosen to merge with one another or form looser “affiliations” that don’t involve a change in ownership.

As economic pressures mount, however, more nonprofit hospitals will take a closer look at offers from for-profit chains, whose access to capital, information management systems and bargaining clout may offer the only road to survival, according to industry executives.

NME, which will become the nation’s second-largest hospital chain when it completes its $3.3-billion acquisition of Dallas-based American Medical, has begun beating the bushes for deals with nonprofit companies.

Recently, executives from NME’s Santa Monica headquarters made an informal overture to St. John’s Hospital, a prominent Westside institution that was heavily damaged in last year’s Northridge earthquake. According to St. John’s officials, NME suggested that it could use its bulk purchasing power to help the Catholic hospital cut costs for hospital supplies.

“It didn’t go beyond their saying they would like to work with St. John’s, that perhaps we could achieve some economies of scale,” says Sister Marie Madeleine Shonka, hospital president.

Shonka says St. John’s would be unlikely to merge with a for-profit company. “Our first inclination would be to merge or affiliate with a Catholic not-for-profit, then a non-Catholic not-for-profit,” she says.

That NME approached St. John’s at all illustrates the remarkable turn of events for the company, which for several years has been tainted by allegations of patient abuse and fraud.

Last year, NME settled a massive federal criminal-fraud investigation by pleading guilty to six counts of paying kickbacks to win referrals of Medicare patients and one count of conspiracy to make illegal payments. The fraud charges involved the company’s psychiatric hospitals, which the firm was forced to sell as part of the government agreement.

The investigation left NME’s general acute-care hospitals intact, including its flagship institutions, Century City Hospital and USC University Hospital in Los Angeles.

“Over the last couple years we’ve been a little gun shy about trying to deal with some of those (merger-related) issues,” says Thomas Mackey, an NME executive vice president and a former administrator at UC San Diego Medical Center. But the company now sees nonprofit hospitals as a “tremendous opportunity” for growth.

One advantage for NME in its efforts to strike deals with nonprofits will be the role of American Medical Chairman Robert W. O’Leary, a former chief administrator for the St. Joseph Health System, a Catholic hospital group based in Orange.

The for-profit chains’ ability to win community support will be crucial to their success at acquiring nonprofit hospitals. As part of its marketing efforts, Columbia this year began airing television advertisements in certain U.S. markets--including San Diego--that feature chief executive Scott. Surrounded by green-smocked workers in a hospital setting, Scott pledges to reduce medical costs “not a little, but a lot.”

Scott has also been outspoken in questioning whether the nation’s nonprofit hospitals--he sometimes refers to them as “non-taxpaying hospitals”--are adequately meeting their obligation to provide uncompensated care for the poor and other community services. Nonprofits, in exchange for caring for the needy, are exempt from most state and local taxes and can raise money by selling tax-exempt bonds.

“I’ve not gone out and said that every tax-exempt hospital ought to pay taxes,” Scott says. But he argues that nonprofits, when bidding for business with employers and managed care companies, often cite their charitable work as a reason why they deserve contracts.

Scott says some of Columbia’s hospitals in metropolitan areas provide as much charity care and community service as nonprofits. And the local taxes his company pays help support the communities where it operates.

If Columbia does actually acquire nonprofit Sharp Health Care in San Diego, it would probably raise some eyebrows because of Sharp’s role as the city’s largest provider of charity care for the poor.

“The question has got to be: Will (Sharp’s) level of charitable contribution continue in the community?” says Jim Lott, president of the Hospital Council of San Diego and Imperial Counties.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

California’s Hospitals

Although investor-owned hospitals make up less than 12% of all acute-care facilities in California, their numbers are expected to grow as for-profit hospital companies acquire more nonprofit facilities. Ownership of California hospitals: Nonprofits (not religion-affiliated): 43.0% Nonprofits (religion affiliated): 16.0% County hospitals: 11.8% For-profit, investor-owned: 10.2% Veterans Administration: 6.8% University hospitals: 4.2% Others: 8.0%

Source: California Assn. of Hospitals and Health Systems

Major For-Profit Hospital Chains in Southern California

With the soon-to-be completed mega-mergers of Columbia/HCA Healthcare Corp. and HealthTrust Inc., and National Medical Enterprises and American Medical International, three investor-owned hospital chains will have the greatest influence in Southern California. The third chain is Nashville-based Ornda Healthcorp. A look at their Southland hospitals:

Columbia-HCA / HealthTrust Huntington Beach Medical Center Las Encinas Hospital, Pasadena Los Robles Regional Medical Center, Thousand Oaks Mission Bay Memorial Hospital, San Diego West Anaheim Medical Center West Hills Regional Medical Center Westlake Medical Center, Westlake Village* Westside Hospital, Los Angeles

* acquisition pending

National Medical / American Medical Alvarado Hospital Medical Center, San Diego Century City Hospital Encino-Tarzana Regional Medical Center Garden Grove Hospital & Medical Center Garfield Medical Center, Monterey Park Irvine Medical Center John F. Kennedy Memorial Hospital, Indio Lakewood Regional Medical Center Los Alamitos Medical Center Placentia Linda Hospital, Placentia Medical Center of North Hollywood San Dimas Community Hospital South Bay Hospital, Redondo Beach USC University Hospital, Boyle Heights

Ornda Healthcorp Brotman Medical Center, Culver City Chapman General Hospital, Orange Coastal Communities Hospital, Santa Ana Community & Mission Hospitals of Huntington Park Doctors Hospital of Santa Ana Greater El Monte Community Hospital Harbor View Medical Center, San Diego Midway Hospital Medical Center, Los Angeles Monterey Park Hospital St. Luke Medical Center, Pasadena Santa Ana Hospital Medical Center Suburban Medical Center, Paramount Whittier Hospital Medical Center Woodruff Community Hospital, Long Beach