Hospital giant Columbia/HCA Healthcare Corp.'s entry into California is sparking fears that medical care for the poor may be shortchanged as the nation's largest for-profit hospital chain swallows up financially struggling not-for-profit hospitals.
Columbia/HCA, a Nashville-based firm with an insatiable appetite for expansion and a reputation as a fierce competitor, had paid scant attention to California's huge health-care market until recently. In the last several months, however, the company has quickly established beachheads in San Jose and San Diego by inking deals with major health-care companies.
As has happened in other parts of the country where Columbia/HCA has gone, controversy has followed.
On Wednesday, California Atty. Gen. Dan Lungren's office disclosed that the state will begin an investigation of recent significant financial losses at San Jose-based Good Samaritan Health System, a major health-care provider in Santa Clara County. Columbia/HCA is buying the not-for-profit Good Samaritan system for $165 million in a transaction expected to close in early 1996.
Lungren's office said the investigation will examine the "financial affairs and activities" of Good Samaritan to determine if any mismanagement reduced the funds available for a public health-care charity to be created in the Columbia/HCA deal. Good Samaritan suffered a $42-million loss in the 12-month period ended June 30.
The $42 million "represents roughly half of the corporate equity," said Deputy Atty. Gen. James R. Schwartz. "We're concerned whenever we have losses that substantial."
"We're cooperating fully with the attorney general," said Brad Smith, board chairman of Good Samaritan. "They can look at anything they want, and we're very confident they will find everything in order."
The attorney general lacks authority to block the deal, Schwartz said, but he is reviewing the transaction because of a state law that requires any organization whose ownership switches from not-for-profit to for-profit status to compensate the public for the time it operated as a tax-exempt entity.
That law is most commonly satisfied by not-for-profit organizations' forming a charitable foundation based on the total value of their assets.
Consumer advocates and state legislators, meanwhile, say the recent Columbia/HCA deals illustrate the need for tighter regulations governing the sale of not-for-profit hospitals to for-profit organizations. The last year has brought a flurry of such sales in the hospital industry, as many financially weak not-for-profit hospitals have sought bailouts from cash-rich for-profit chains.
Assemblyman Phillip Isenberg (D-Sacramento) has introduced legislation that would more closely monitor the sales of nonprofit hospitals to for-profit corporations. Isenberg has said closer scrutiny is needed to ensure that the public isn't cheated out of millions of dollars that could go to meet the medical needs of the poor.
"What's happening is reminiscent of the early days when the United States gave away valuable land to the railroads just because they wanted land," said Harry Snyder, co-director of Consumers Union's San Francisco office. "These are public trust assets, and we should be very careful with this."
These concerns come after years of controversy over similar deals involving managed health-care firms. Most recently, Blue Cross of California was required by state regulators to establish charities with a total endowment of more than $3 billion when it decided to switch to for-profit status.
Columbia/HCA now has 13 hospitals in California. Overall, the Nashville firm operates 335 hospitals and 125 surgical centers in the United States and Europe.
Last month, Columbia/HCA struck a deal to acquire 50% of Sharp Healthcare, a nationally prominent health-care organization in San Diego. Under the proposed deal, four of Sharp's nonprofit hospitals would convert to for-profit status and two others would remain nonprofit entities.
Columbia/HCA management has argued that many not-for-profit hospitals provide scant charity care to the community. They also argue that many for-profit hospitals not only provide charity care but also contribute tax revenue to their communities.
Columbia/HCA executives could not be reached for comment Wednesday.
In the Good Samaritan deal, Columbia/HCA proposes to use money from the sale to create a charitable foundation with an endowment of roughly $50 million. Columbia/HCA has also agreed to provide, for three years, the same level of medical care for poor and uninsured patients now provided by Good Samaritan.
According to Schwartz, the attorney general's investigation will focus on whether the losses at Good Samaritan are from a "breach of trust" by the hospital's board, which could result in legal action against the hospital's management and a court order blocking the deal.
Or, he said, it may be simply a case of bad business judgments that seemed reasonable at the time they were made.
"The test is whether there was due diligence and reasonable inquiry by the board before the judgment was made," Schwartz said.