Hospital Closing Prompts Statewide Probe of Nonprofits

Prompted by the closure of a small Long Beach medical center, California Atty. Gen. Bill Lockyer has launched an unprecedented statewide investigation into whether a giant nonprofit hospital chain has violated laws governing charities and anti-competitive behavior, his aides said Tuesday.

The probe of San Francisco-based Catholic Healthcare West, California’s largest hospital operator, signals what experts say could be a new period of scrutiny for the state’s nonprofit medical centers.

The investigation comes at a time when more than 60% of the state’s hospitals--both for-profit and charity--are losing money and face intense pressures to use tough bottom-line tactics, including consolidations and closings.

Critics--including unions that have been strong political supporters of Lockyer--say that many nonprofit hospitals have begun to act like their for-profit counterparts--slashing budgets and care without regard to community need.

At the urging of those unions, the attorney general’s staff has spent recent months scrutinizing two cases in which Catholic Healthcare West has moved to close facilities: the 278-bed Long Beach Community Medical Center, and another hospital in Morgan Hill, near San Jose.

State law gives the attorney general broad power to regulate charities, including nonprofit hospitals. And Lockyer aides indicated Tuesday that the probe might go beyond Catholic Healthcare West into the practices of other nonprofit hospital companies. “That’s just where we’re starting,” said spokeswoman Sandra Michioku.

Peter Boland, a health care consultant in Berkeley who has been following the issue, said: “This is uncharted territory. Ultimately, the attorney general will look at what nonprofit status means today, given the corporatization of nonprofit medicine.

“So this sends a message to hospitals: We are looking at you.”

The probe is in its early stages; no subpoenas have been issued. A Catholic Healthcare West vice president, Lori Aldrete, said Tuesday that the chain had been meeting with Lockyer’s office to explain the Long Beach closing but that “officially, no one has notified us” about a wider investigation.

“It would be impossible for me to comment on it,” she said.

While the probe has broad implications, it may well turn on the minutiae of laws that govern charitable trusts. Lockyer, who is personally supervising the investigators from his 20-member charitable trust unit, has not firmly set the parameters of the investigation. But it is likely to focus on two large areas, say officials.

The first is asset diversion. Most nonprofits, as charities, have assets that come with restrictions on their use. As a chain, Catholic Healthcare West’s practice of moving equipment or cash between the nonprofit hospitals it owns promises to be the focus of investigators, according to a lawyer involved in the probe.

The second is consolidation and closing of hospitals. The attorney general will look at whether they violate the nonprofits’ duties to aid the public and whether such closings so damage health care competition that they run afoul of anti-trust laws, officials said.

“In light of projections that between 50 to 70 hospitals will close in the next six years in California, the attorney general wants to know how nonprofit hospitals are being operated,” Michioku said.

Founded in 1986 by two orders of nuns in Northern California, Catholic Healthcare West now operates 48 hospitals in the West--44 of them in California. That represents 10% of all hospitals in the state.

But its acquisition spree has boosted its debt and reductions in reimbursements by insurance companies and government programs have cut into revenues.

The large chain also has been hurt by community protests. In Morgan Hill, the chain left the town without a hospital after purchasing a facility in nearby Gilroy and consolidating all its services there.

In east Long Beach, it bought Community Medical Center in 1998, promising to expand operations, only to announce its closing this fall, citing heavy financial losses. The chain planned to move most of Community’s equipment and staff to St. Mary Medical Center across town.

But the backlash from local residents, Community Medical Center doctors, public officials and unions was so fierce that the attorney general took notice. The strongest pressure came from the Service Employees International Union, which is in a bitter fight to organize Catholic Healthcare West workers across the state. Its Sacramento lobbyist has repeatedly pushed Lockyer to use Long Beach to launch a full investigation.

“This is what we wanted,” said Maura Kealey, state health coordinator for the union. “Long Beach has changed the political geography. . . . I think this is the beginning of a new age of accountability for corporate hospital chains.”

After being urged by the union, Lockyer called a public meeting in Long Beach last Wednesday. After hearing testimony from Community doctors and union members, he signaled his strong desire to take action against Catholic Healthcare West. His office had engaged in talks with Catholic Healthcare lawyers, but they broke down Monday, both sides said.

Word of the investigation raised eyebrows across the health care industry Tuesday.

Jim Lott, executive vice president of Healthcare Assn. of Southern California, a hospital trade group, said: “We’ve heard rumblings of it, but we have no idea where the attorney general is going with this. We’re a little bit flabbergasted.”

In Long Beach, a coalition of citizens trying to save Community Medical Center said its members were heartened by the news, but worried that the pressure of investigation would not be enough to prevent closing of the hospital Monday.

They had wanted the attorney general to seek a temporary restraining order barring the closing, but a Lockyer spokeswoman said that had been ruled out.

Five bidders, including the citizens coalition, have submitted requests to reopen and operate Community.

Tuesday, coalition leaders Dr. Robert Pugach and real estate agent Betty Keller stood in front of Community Hospital and asked local residents to give $4 million over the next 10 days to help save the hospital. The coalition says it needs $18 million to reopen Community, but has raised only $14 million.

“We clearly have helped create a big headache for nonprofit hospitals and a big issue for the state,” Keller said. “The question is whether we’ll be able to save this small hospital in the process.”