Closures Put Big Hospital Chains Under Microscope
When Tenet Healthcare Corp. sought to close Daniel Freeman Marina Hospital shortly after buying it from a Catholic order of nuns, the giant hospital company never imagined the firestorm that would ensue over such a small, underused facility.
Protests flared from Marina del Rey residents, labor unions, consumer groups and politicians in Sacramento and Washington. The California attorney general accused Tenet of breaking promises it made in December when buying Daniel Freeman. And a Superior Court judge not only thwarted Tenet’s plan to shutter the 166-bed hospital this month but also ordered the company to resume admitting elective patients.
Tenet says the two-story hospital, jammed against a car dealership along a busy thoroughfare, is too small to compete and would require too much money to fix up. “The problem is that smaller community hospitals are losing out in markets where you have major competitors that are larger, have more doctors, better equipment and more services,” Tenet spokesman Harry Anderson said.
But some say that what is happening in Marina del Rey is a reflection of the pressures from consumers and regulators that are building against big hospital chains. As Tenet, HCA Inc., Sutter Health and others have bought more struggling hospitals in recent years, they have amassed market power and raised their rates.
Health-care costs are projected to jump more than 12% this year, half of that from spending at hospitals, and employers and consumers are paying significantly more for medical coverage.
Although hospitals have been changing hands and closing for some years, federal regulators are stepping up their examination of past hospital mergers and acquisitions for their effect on prices and consumers. Michael Cowie, assistant director in charge of enforcement for the Federal Trade Commission, said there is a growing body of academic research that suggests big hospital mergers have not been good for patients. He said that when hospital companies buy facilities and later close them, it also can create antitrust problems.
“When they eliminate competitors, that could lead to higher prices,” Cowie said, although he declined to comment about specific companies.
FTC attempts to block hospital mergers often have been overturned in courts, which is why the agency is studying the competitive effects of completed mergers to see whether a case can be made that consumers have been harmed.
Tenet, chastened by the surprising turn of events in Marina del Rey, said it will comply with the judge’s order and take other steps, including getting the community involved in the closing process, which the company had promised to do.
Most likely, the Santa Barbara-based company still will be able to shut down the hospital fairly soon. But its strained effort at Marina del Rey has proved costly for the nation’s No. 2 hospital chain. Besides hefty legal fees and expenses to restaff the hospital, the damage to Tenet’s public image and its relations with the state attorney general’s office probably will make future acquisitions tougher.
“It’s going to get a lot more scrutiny than it would otherwise because I don’t trust them to keep their promise,” said Atty. Gen. Bill Lockyer, referring to Tenet’s negotiations to buy the Kenneth Norris Jr. Cancer Hospital in Los Angeles.
Tenet is eyeing other hospitals in California and elsewhere, but its missteps at the Marina del Rey facility have made it more vulnerable to critics of the company’s strategy of buying distressed hospitals and sometimes disposing of them.
Since 1995, the company’s holdings have grown from about 50 hospitals to 115, including 40 in California, the most of any hospital operator in the state. Tenet’s revenue, profit and stock have surged.
But along the way, Tenet also has closed hospitals, including facilities in Philadelphia, St. Louis and New Orleans. In California, the company shuttered at least five hospitals and was involved in the closure of three others from 1995 to 2000, according to a study by UC Berkeley’s School of Public Health. In the spring, Tenet closed St. Luke Medical Center, a 165-bed hospital in Pasadena.
Complaints Rising
Tenet representatives make no apologies for the company’s record, saying it has invested in and revived many facilities while giving up on some that do not fit in its network or have potential for succeeding. “We’re not ashamed of the closures,” Anderson said.
In most cases, the company hasn’t met with such vociferous opposition. But more recently, Tenet has felt more heat from community groups.
This summer Tenet and a partner lost a bid to acquire five hospitals operated by Baptist Health System of San Antonio. Although executives of Baptist Health said only that they had a better offer elsewhere, a Latino advocacy group had lobbied against the Tenet deal, as did a local doctors group that expressed worries about a cut in services.
Tenet is making a pitch to take over Slidell Memorial, a struggling 180-bed hospital about 25 miles north of New Orleans. Tenet already owns a hospital nearby, NorthShore Regional Medical Center.
Al Hamauei, chairman of Slidell Memorial’s board, said his hospital would consider Tenet’s bid, along with those from HCA and others. But he expressed concern that a purchase by Tenet would give the company a monopoly in the area. “I am not going to do anything that will cause health-care problems for the community, whether it is increased cost or less service,” he said.
Even some health-care analysts on Wall Street are becoming wary of the shifting sentiment on large hospital companies. This month Kenneth Weakley of UBS Warburg lowered his outlook for hospital stocks, including Tenet’s, predicting an industry backlash as consumers and policymakers react to burgeoning health costs and the profits of hospital companies. Tenet’s latest quarterly profit more than doubled from a year before to $261 million on revenue of $3.7 billion.
“There’s increased noise over rising health-care costs,” said Adam Feinstein of Lehman Bros., although he hasn’t changed his bright forecast for the hospital industry. If there is antagonism toward big hospital companies, Feinstein said, it is because many people still have trouble accepting the notion of for-profit health care, of which Tenet is among the most successful providers.
“They try to buy hospitals that are beaten up and hospitals that are mismanaged and try to turn them around,” Feinstein said. “It’s not the crux of their strategy to close down hospitals.”
But with Daniel Freeman Marina, many people would argue that was the plan all along.
Attractive Real Estate
Tenet bought the hospital in December along with the bigger, 365-bed Daniel Freeman Memorial Hospital in nearby Inglewood. For both hospitals, Tenet paid $55 million to the Sisters of St. Joseph of Carondelet, who were desperate to find a buyer.
Sister Regina Clare Salazar said she and others tried to keep the pair of Freeman hospitals going, especially Marina. Except for emergencies, residents in the affluent community went mostly to bigger, full-service hospitals such as UCLA Medical Center. So the sisters added psychiatric and chemical dependency units, which Salazar said helped the Marina hospital survive for a number of years.
But in the late 1990s, the federal government reduced Medicare reimbursements and the sisters had little clout to negotiate better payments from powerful managed-care companies. Losses at the two Freeman hospitals mounted, from $5 million in 1998 to more than $38 million in fiscal 2001. “We had no alternative,” Salazar said.
For Tenet, the Freeman hospitals were attractive. The seven-acre parcel that the Marina del Rey hospital sits on was appraised last year at $22 million. The company also already owned two larger hospitals not far away--Brotman Medical Center in Culver City and Centinela Hospital Medical Center in Inglewood. The Freeman hospitals meant more control of the market in the Los Angeles International Airport area and the ability to shift patients and resources within its network.
Despite some objections, Atty. Gen. Lockyer, who by law must approve a takeover of a nonprofit hospital by an investor-owned company, approved the transaction with certain conditions. Tenet agreed to maintain charitable work and to keep Daniel Freeman Memorial open for at least five years.
Though it made no such commitment regarding Marina, the company pledged to develop a “comprehensive planning process” and consult with the hospital’s governing board and community leaders and get input from the public before deciding to close Marina, according to Tenet’s purchase agreement.
Tenet’s arrival had an immediate effect on Marina’s bottom line. The hospital’s first-quarter filing with the state showed significantly higher Medicare patient revenue and a narrowing of operating losses, to $387,000 in the January-to-March period.
But in January, Tenet already was giving hints that it would close Marina. And it did not wait long. On May 29, more than a month before its consultant completed a report assessing the Marina del Rey hospital’s market, hospital officials passed out a memo to the medical staff: The hospital would stop taking new elective admissions the next day, the memo said, and begin the process of closing immediately, with only the emergency room remaining open through August.
By mid-June, Tenet had closed Marina’s rehabilitation ward and put the hospital buildings and land up for sale. Its broker began marketing the property as an excellent investment or development opportunity.
Critics complained that Tenet did not want a competitor to buy it. The company denies that.
Tenet also insists that it did get community input, listing in a letter to Lockyer more than 50 instances of discussions about the possible hospital closure with mostly unidentified doctors.
Tenet also says hospital officials consulted with the governing board about the closure. Dr. Mukesh Bhatia, an internist who is on that board, said that never happened. “Tenet just expected to waltz in and announce to the board and everyone that we’re closing and that we’ll say, ‘Too bad,’ and go on with our lives.” Bhatia said.
Many didn’t. Julie Inouye, a singer and actress whose husband gave up his Beverly Hills practice years ago to work as an ER physician at Marina, was so upset by Tenet’s actions that she launched a community revolt. She elicited the help of neighborhood associations, the medical staff at Marina and groups such as Consumers Union, the Community Health Councils and the Service Employees International Union. The coalition set up a Web site, lobbied politicians and collected petitions from residents, who came out of the woodwork by the hundreds.
Earthquake Issues
Camden Group, the El Segundo health industry consultant that prepared the market assessment for Tenet, concluded that though thousands used Marina’s emergency room each year, the hospital was not financially tenable, given its limited services, population projections and the surrounding competition.
Tenet also was looking at major seismic retrofitting expenses for the 33-year-old wood-frame building, estimated by a state seismic engineer at $2 million to $6 million.
“This is a situation that’s going to face the whole state of California,” said Steven Valentine, president of Camden Group, noting that more communities in California will be wrestling with the possibility of losing their local hospital. In Marina del Rey’s case, Valentine said, there are enough other hospitals to serve the community’s emergency room needs.
The Los Angeles County Emergency Medical Services Agency has not yet issued a report on the effect of the Marina hospital closure.
But many doctors and residents of the Marina del Rey area say it will be huge, with emergency rooms at many larger medical centers already straining from too many patients and the dwindling number of hospital beds. They contend that Tenet can afford to upgrade Marina and make the hospital successful.
“Tenet may not make enough money on it to justify their rate of growth,” said Bhatia, who has been at the Marina hospital for 20 years. “They may not become filthy rich, but I doubt they will lose money.”
