Strength in Numbers?

Five years ago, Burbank-based UniHealth was winning wide praise as an innovative model of health care’s future.

Mostly through acquisitions, UniHealth assembled a collection of health-care businesses--physician groups, hospitals and managed-care insurers--throughout Southern California. In the jargon of the industry, this is called an “integrated delivery system.”

Then and now, experts have touted this integrated approach--similar to the way Kaiser Permanente created its health-care empire--as a way to reduce costs and improve quality. This strategy also is seen as key to attracting patients (read: market share) and enhancing prospects for survival in a hotly competitive and consolidating market.

But UniHealth’s plan unraveled along the way. Now it serves as an example of what can go wrong with this approach.

It’s widely known that UniHealth has been struggling for years. Its eight hospitals in Southern California--including Glendale Memorial and Northridge Hospital--collectively lost more than $6 million in their most recent fiscal years.

Now UniHealth is negotiating a possible merger with Catholic Healthcare West that would involve some or all of UniHealth’s Southern California hospitals. CHW is a not-for-profit chain of 37 hospitals--nearly all in California--and an aggressive buyer of health-care facilities.

The talks are in an early stage, say both organizations. “We’re just really getting to know each other,” explains Debbie Cantu, a spokeswoman for San Francisco-based CHW.

CHW operates five hospitals in Southern California--including St. Vincent Medical Center in downtown Los Angeles and St. Mary Medical Center in Long Beach--and has been expanding here. Its principal competitor in the hospital-buying business in Southern California has been Tenet Healthcare, a for-profit chain based in Santa Barbara.

CHW and UniHealth, notes Cantu, have a “commonality of mission and values.” Like CHW, UniHealth is a nonprofit company with religious roots, tracing its origins to the former Lutheran Hospital Society. Both organizations “have a commitment to care for all people, including the poor,” Cantu says.

In a statement, UniHealth said a merger of its hospital unit “will better enable these hospitals to respond to dynamic changes in the health-care marketplace.” Industry observers speculate that any deal involving UniHealth hospitals would probably involve some of the firm’s 10 physician groups. With about 7,000 affiliated doctors, those groups include the Huntington Provider, Harriman Jones, Beaver and Facey medical organizations.

While the financially strong CHW group has rapidly expanded its hospital holdings over the last two years, UniHealth has been shedding operations. It has sold about a third of its hospitals and this year sold CareAmerica, a mid-size HMO, to Blue Shield of California for $195 million. UniHealth also sold its majority interest in PacifiCare Health Systems, one of the nation’s largest HMOs, headquartered in Orange County.

Observers say UniHealth’s hospitals--including those in low-income neighborhoods with large indigent populations, such as California Hospital Medical Center in downtown Los Angeles--have had problems coping with cost-reduction pressures from managed-care insurers. Skimpier payments from government health programs such as Medi-Cal haven’t helped.

“As a nonprofit, unless you generate a lot of cash from operations, you don’t have a lot of options” to finance growth, notes Steve Valentine, an industry consultant in El Segundo. Publicly held, for-profit firms such as Tenet, of course, can tap financial markets to underwrite growth.

Also, UniHealth, which had revenue of $1.5 billion in fiscal 1996, acquired a number of financially troubled physician groups, including the large Huntington Provider Group based in Pasadena. “UniHealth paid a premium for some of these medical groups and it cost them dearly,” says John Edelston, a managed-care consultant in Woodland Hills.

Several years ago, UniHealth was moving toward creation of a Kaiser-like system that brought medical groups, hospitals and insurers under one roof. But the firm’s inability to execute that strategy doesn’t mean the idea was a bad one.

“I think there is still a lot of merit in integrated systems,” Edelston says. “You will see more of them.”

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Times staff writer David Olmos can be reached by e-mail at david.olmos @latimes.com or by fax at (213) 237-7837.