Hospitals’ Tobacco Fund War Escalates

Ventura County’s $225-million tobacco settlement has stirred up a nasty fight between public and private health care providers that is characterized by name-calling, threats of lawsuits and plots and counter-plots aimed at persuading voters to support one side or the other.

But health care experts say what is really driving Community Memorial Hospital’s effort to take the settlement away from the county isn’t greed. Nor is it the long-standing rivalry between the private hospital and its public competitor, Ventura County Medical Center.

Instead, they say, it’s desperation. Driven by ever-shrinking insurance payments, rising health care costs and costly earthquake-related construction mandates, hospitals are being forced to look for money anywhere they can find it.

Community Memorial’s outlook over the next several years is “guarded, at best,” said Michael Bakst, the hospital’s executive director. Federal reductions in Medicare payments alone have drained $2.5 million a year from the hospital since 1997, he said.

Meanwhile, the number of underinsured patients is increasing. Two years ago the hospital held nearly $5 million in bills it could not collect, according to the state. While Community Memorial is still in the black, its operating margin dipped to 0.54% in 1998, according to the California Healthcare Assn.

“I want to see the fine work my hospital does continue to exist,” Bakst said. “Our operating margin has fallen precipitously over the last three to five years.”

At stake in the conflict is the county’s share of the nationwide, $246 billion that tobacco companies have agreed to pay the states to settle claims. While the county was planning how to use the money, Bakst unveiled a plan 10 days ago to put a measure on the November ballot that asks voters to give the money to private health care providers.

But while Bakst says his and other private hospitals should be given the money to help keep their doors open, county officials say the money was never intended to fund private health care.

Supervisor Frank Schillo, who has called Bakst “Mr. Black Heart,” said if private hospitals are in such a bind they should go before supervisors and make a pitch for help.

Supervisor John Flynn went further, saying it’s not the county’s job to bail out private businesses.

“A private hospital is a private business,” Flynn said. “They’re a sensitive business, but it’s really not the role of the public sector to bail out the private sector. That’s not a role a small county government could handle.”

Some of those most closely involved with obtaining the massive settlements agree. Mississippi Atty. Gen. Mike Moore, who filed the first statewide lawsuit against tobacco companies in 1994, called the initiative maneuver “dangerous.”

“I think it’s appropriate to improve public health for the indigent and others,” he said. “[However] these are predominantly tax dollars we recovered. It really wasn’t to reimburse private entities. The counties and the state filed lawsuits, not private hospitals.”

Mistrust between the county and Bakst goes deeper than the current conflict. In 1996, when the county planned to add a wing at the Medical Center, at a cost of $51 million, Bakst mounted a successful initiative campaign to block the project. One reason the two hospitals are rivals is because they are less than two blocks apart, and compete for the same patients.

Hospital Problems Have Escalated

Jealousies and competition aside, hospital financial problems in Ventura County are real, according to experts. The proposed initiative shows how desperate the institutions have become.

“It’s not a question of taking money and going to Las Vegas for the weekend,” said James Lott, executive vice president of the Healthcare Assn. of Southern California. “There may be one or two hospitals [in Ventura County] that wouldn’t be around in the next five years or so if there isn’t a significant turnabout in the financial infrastructure.”

Lott and others say what is playing out in many of Ventura County’s seven private hospitals is a microcosm of an industry-wide panic. While hospitals have been suffering declining profits for years, the problems escalated recently due to cutbacks in government reimbursements. And while reimbursements from health maintenance organizations and even Medicare have been shrinking, the number of uninsured or underinsured patients is growing.

“Commercial insurers are paying hospitals less than cost; they’ve been getting less than cost for the last four years,” Lott said. “Volume is what produces the margin. And we’re getting to the point where that doesn’t even work anymore.”

One in six people admitted to Ventura County emergency rooms has no insurance, compared with one in eight in the early 1990s, Lott said. Meanwhile, hospital costs are rising at twice the rate of inflation.

Two of the seven private hospitals have shown negative budget margins, according to a California Healthcare Assn. analysis of data collected by the state. In 1997, Santa Paula reported a negative 1.89% margin in operating expenses. In 1998, Simi Valley reported a negative 8.04% margin.

But not all county hospitals are on the ropes. St. John’s Regional Medical Center posted a strong operating margin of 16.76% in 1998. Los Robles listed a 13.43% margin that year. Ojai and Pleasant Valley also made more than they were spending.

Throughout Southern California, however, 60% of hospitals are operating in the red, Lott said.

And as far as asking for help, Bakst said a hospital lawyer contacted Chief Administrative Officer Harry Hufford a few weeks ago to discuss the possibility of getting help from the county. “Mr. Hufford indicated we were not even a blip on his radar screen,” Bakst said.

On top of the other problems, hospitals in California are facing earthquake retrofits in the tens of millions of dollars. Many can’t begin to afford the improvements as a 2008 deadline looms.

Hospitals Hurting for Retrofit Funds

According to 1998 estimates, Community Memorial is looking at spending at least $35 million to strengthen its facilities, Simi Valley perhaps $26 million and Los Robles as much as $8 million. Ojai Valley will have to spend more than $3 million, and Santa Paula $2 million. St. John’s Regional Medical Center in Oxnard needs no retrofit, but its Pleasant Valley hospital could need $18 million in improvements.

“My guess is, these hospitals are looking at this [the initiative] because there’s no other source for the funds,” said Rick Wade, a spokesman for the American Hospital Assn. “In this kind of financial environment, where’s the money to come from?”

Bakst’s proposal has not been approved by the six other private hospitals. Their boards of directors are expected to consider the measure in coming weeks.

Bakst’s initiative also comes at a time when Ventura County is only now emerging from a fiscal crisis that leaves the county with an estimated $5-million budget shortfall to shave by July, and ongoing belt-tightening after that.

The budget problems were caused by a bungled mental health merger and an improper Medicare billing fiasco that together will cost the county at least $25 million. Filling a shortage of housing for the mentally ill could an additional $4 million.

The county’s public hospital also needs earthquake fortifications and is pushing for a new wing to house a lab, as well as cafeteria and clinic services now run from trailers.

Bakst said his plan guarantees the money would be spent on health care. If left to elected officials, he says, the money could be diverted to finance debt, or build roads.

Of the $11.7 million in tobacco money now in the county’s coffers, $3.1 million has been used to begin paying off the Medicare settlement. The rest is tied up as a place-holder in next year’s budget, until the county gets its finances back on track.

Hospitals Would Divvy Up $9 Million

Under Bakst’s ballot initiative, the settlement payments--an estimated $9 million annually--would be distributed to private hospitals and health care providers in the following fashion:

About $6 million would be shared among the hospitals to reimburse the costs of care they could not collect from patients or insurance. Los Robles Regional Medical Center in Thousand Oaks would receive the most money--$1.8 million. Community Memorial would draw $1.2 million, St. John’s Regional Medical Center in Oxnard and its smaller sister hospital in Pleasant Valley would get between $1.2 million and $1.8 million, combined.

Simi Valley Hospital would get $670,000, while Santa Paula Memorial would receive $125,000. Based on the amount of in-patient care it now provides, Ojai Valley Community Hospital would get nothing.

The remainder of the pool would subsidize private home-nursing companies, pay salary bonuses to doctors and provide nursing scholarships. Any leftovers would go to teen smoking prevention programs.

County officials dispute the private hospital’s claim that caring for the uninsured has affected the bottom line. They cite a 1997 study by the county that showed the Medical Center treated 83% of indigent patients countywide. The study also showed St. John’s, which is operating in the black, treated 9%.

Community Memorial cared for less than 1%, according to the study.

Finally, county officials say, the tobacco settlement is intended to repay government for costs the county already incurred by treating sick smokers--money that could otherwise have gone to roads, schools or other public needs.

With the exception of a similar ballot initiative effort in Orange County, experts said they knew of no local government precedent for the move underway in Ventura County.

Part of the reason may be California’s unusual settlement agreement, which dedicates a portion of the settlement directly to counties. If hospitals in other parts of the country were able to attempt such a raid on their counties, many would be trying, said Wade of the American Hospital Assn.

Orange County is considering entering into a deal with a financial house to block attempts to raid its settlement. Such a move would allow the county to secure a reduced pot of the settlement dollars up front.

Ventura County officials have expressed some interest in such a move, but supervisors have yet to debate the issue.

‘A Bizarre Strain of Activities’

Nationally, lawyers who helped states secure the tobacco settlement reacted with bemusement to Bakst’s plan.

“It’s just another twist and turn in a bizarre strain of activities that have occurred since we’ve recovered this money,” said Steve Yerrid, a Tampa-based lawyer who served on the “Dream Team” of lawyers who negotiated Florida’s settlement.

Yerrid and Bob Montgomery, a prominent West Palm Beach lawyer who also served on the Florida team, said the initiative is the wrong way to go. But the two disagree on whether private hospitals should have a right to the money.

Montgomery says the funds should “absolutely not” be diverted to private hospitals.

Yerrid, who worked briefly for the American Hospital Assn. in the 1970s, said the county should be willing to listen if Bakst makes an appeal that doesn’t cut out the county.

His reasoning: Residents rely on private hospitals, and the overall health of county residents will be well served if private hospitals stay afloat.

“This is great evidence that the private sector is in dire need of funds,” Yerrid said. “I don’t believe exclusion is good under any circumstance.”

Of course, all the squabbling assumes the settlement payouts will continue. A class-action lawsuit in Florida poses a significant enough threat to tobacco companies that some states fear cigarette makers could seek bankruptcy protection, jeopardizing the entire $246 billion.