Firm Accepts Terms to Buy 2 Daniel Freeman Hospitals
A giant hospital chain agreed Tuesday to conditions set by the state for its purchase of Daniel Freeman hospitals in Inglewood and Marina del Rey.
The decision ends a drawn-out debate over the fate of Daniel Freeman Hospitals Inc., a nonprofit corporation so burdened with debt that it could not even repay $5 million borrowed from retirement funds of the nuns who own it.
But, for some, the sale also increases concern about the future of nonprofit hospitals in California.
The $55-million deal gives Tenet Healthcare Corp., a Santa Barbara-based corporation that owns 114 for-profit hospitals, 17% of the hospital market in Los Angeles and Orange counties, including the two hospitals nearest the Daniel Freeman medical centers.
Similar scenarios are being played out from California to Connecticut: Nonprofit hospitals, drowning in debt, are being sold to for-profit chains that promise to keep them alive.
In the case of Daniel Freeman, like many others, the proposed sales have generated vigorous debate over whether for-profit white knights will provide the same level of service that the surrounding communities have come to rely on.
“We are placing our community hospitals at great risk,” said the Rev. Michael D. Place, president and chief executive of the Catholic Health Assn. of the United States, whose members operate nonprofit hospitals. “As a country, we do not realize the vulnerability of health care delivery.”
In California, 227 nonprofit hospitals provide the bulk of the state’s pediatric, emergency and trauma care--and twice the level of charity care as their for-profit competitors.
But they are hemorrhaging money, losing $306 million in 1999, according to the Statewide Office of Health Planning and Development. By comparison, for-profits made $256 million that year.
More and more, operators of nonprofit hospitals face the same dilemma: Sell out or close.
Two weeks ago, the only hospital in the Santa Clarita Valley--and the lone high-level trauma center between the San Fernando Valley and Fresno--filed for bankruptcy protection.
That the Daniel Freeman deal was consummated marks a victory for California Atty. Gen. Bill Lockyer, who by law has authority over deals that turn nonprofit hospitals into for-profit facilities. On Friday he said the sale could go through only if Tenet agreed to 21 conditions designed to force it to provide some of the services that nonprofits typically offer.
At that time, Tenet officials signaled that they might drop the deal, calling the conditions onerous. But Tuesday the company decided to accept Lockyer’s conditions. Spokesman Harry Anderson said the deal would probably close Monday.
“This has been a very long, arduous and political process,” he said. “But at the end of the day, we had to make a decision. We’re not happy with the conditions, but we believe we can still make a difference there.”
Lockyer’s Terms Too Weak, Activists Say
Community groups and consumer advocates also criticized the conditions, saying Lockyer had not asked enough of the profitable company.
Tenet has agreed to keep the emergency room at Daniel Freeman’s 364-bed Inglewood facility open at least five years, but some critics worry that the company intends to close or sell the hospital after that. Tenet already owns Centinela Hospital Medical Center, just a mile away, which is making money.
The company has also agreed to provide $2 million a year in charity care based not on the retail price of the care, but on the cost to provide it. Tenet would not have to set up a charitable foundation, required in most sales of this type, because Daniel Freeman’s $97 million in debt far exceeds the purchase price.
Because Tenet promised Daniel Freeman’s former owners, the Sisters of St. Joseph of Carondolet, that it would not provide tubal ligations, abortions or other family planning services, those services must be made available at Centinela, Lockyer said.
The company has not committed to keeping open the 169-bed Daniel Freeman Marina Hospital, which sits atop valuable real estate.
A closure or cut in services would leave the community in a bind, residents and community groups argue.
Over the years, said retired teacher and community activist Oreatha Ensley, small hospitals that once served the Inglewood area shut down, leaving Daniel Freeman to provide free prenatal classes and vaccinations for children.
Daniel Freeman Hospitals provided $18 million in charity care--recorded as market value rather than actual cost--at its two medical centers in 1999, according to the Office of Statewide Healthcare Planning and Development.
“We need vaccinations for our children, and our seniors need emergency care,” Ensley said.
The experience at Centinela, bought by Tenet in 1997, suggests that a takeover by the company can indeed improve a hospital, some say.
“We were pretty much on our last legs when we went looking for a buyer,” said Dr. Thomas Cooper, a pathologist at the hospital. Now, Centinela is thriving.
“The quality of services has improved quite a bit under Tenet,” he said. “They don’t go spending money just for kicks, but you can make a case for what you need and why you need it.”
The company has actually boosted charity care at Centinela, where the nonprofit administrators reported that they had provided none in 1995 and 1996.
Since taking over 416-bed Queen of Angels-Hollywood Presbyterian Medical Center in 1997, Tenet has increased charity care from about a market value of $15 million in 1996 to $25 million each year since then, according to state figures.
At Daniel Freeman Hospitals, the decision to sell was agonizing, coming after a management shake-up and years of support from the Sisters of St. Joseph of Carondolet, said the nonprofit group’s president, Cathy Fickes.
The corporation first sought an operator of Catholic hospitals as a buyer, she said. Then, when none emerged, officials looked for another nonprofit suitor. Tenet, one of three for-profit companies that expressed interest, was the only one with the financial resources to keep the operation going, Fickes said.
Financial Woes Leave Their Scars
Years of financial troubles have left their scars on the once-proud Inglewood hospital, built in 1951. The cardiology department, formerly one of the best on the West Coast, is hurting for equipment. Two units, representing one-sixth of the hospital’s beds, were recently closed.
Eric Tuckman, Tenet’s vice president for acquisition and development, would not commit to keeping the Marina medical center open, but said the company plans to shore up the Inglewood hospital. With its decline, he said, patients have gone instead to hospitals outside the community.
Upgrading it enough to bring those patients back, he said, would make money for Tenet and at the same time improve medical care in the neighborhood.
In particular, he said, improved maternity services would attract patients who are currently having their babies at more prestigious Westside and downtown hospitals.
The company would also save money, he said, because of its dominant position in the marketplace. Tenet would be able to negotiate favorable deals with health plans, pharmacies, suppliers and others.
The company also has an in-house collection agency that aggressively seeks payment from government assistance programs such as Medi-Cal, as well as non-charity patients.
A look at stock market reports and the company’s financial statements shows that Tenet shores up what it considers to be its core services in hospitals: cardiology, orthopedics, neurology and oncology.
Those, along with maternity services, are the money-makers in health care. In addition, Tenet tends to introduce a culture of efficiency. Since 1999, for example, the company has shaved its labor costs about 15% and improved collections by 65%, according to an October report by Salomon Smith Barney.
It is the services that don’t bring in much money that community activists fear will be lost: emergency and trauma care and pediatrics, for example. Those are expensive--and they are not well reimbursed by either the public sector or the private marketplace.
“The fundamental problem is that the Catholic sisters can’t be expected to continue to operate a failing enterprise,” Lockyer said. “They needed some form of partner, and the one that stepped forward was Tenet.”
