Doctors’ Hospital Bids Raise Ethical Worries

As many as 15 doctor groups are vying for stakes in some of the California hospitals that Tenet Healthcare Corp. plans to sell, raising concerns that the physicians’ financial motives may conflict with patient care.

Tenet, the nation’s second-largest hospital chain, has been battered by scandal, multiple federal investigations over its business practices and soaring losses. To cut costs and focus on its most profitable hospitals, the company is selling 26 of its weakest facilities, including 18 in California.

One on the block is Daniel Freeman Marina Hospital in Marina del Rey. A local investment group, which includes some doctors, is trying to line up financing and hopes to meet Tenet’s qualifications to bid on the 166-bed facility. The group would operate it as a nonprofit.

Julie Inouye, who led the community revolt two years ago that prevented Santa Barbara-based Tenet from closing the hospital’s doors, is director of the group, called Community Action for Healthcare Reform and Education.

It fears that if Daniel Freeman Marina is sold to a for-profit company, the hospital, which sits on valuable real estate, may once again be in jeopardy.

“After saving the hospital, the community is very well informed as to who we are, and they are backing us 100%,” Inouye said. “We want to take this hospital back.”

Another team of investors, which includes doctors and hospital administrators, is considering whether to bid on the Marina del Rey facility as well as Tenet’s larger Daniel Freeman Memorial Hospital and Centinela Hospital Medical Center, both in Inglewood.

If this group succeeds, the doctors’ financial stake would not be “significant enough in ownership to affect the direction of the hospitals,” said Michael Finnigan, a Centinela Hospital board member who is leading the effort.

“That’s not a group from whom you look for a majority of your investment capital,” said Finnigan, former chief financial officer of Hollywood Park. “But we are interested in having [the doctors] feel like they are a part of the enterprise where they practice.”

Doctor-owned hospitals have all but disappeared nationally since the Medicare Act in 1965 prompted many to sell out to for-profit operators. And the interest by doctors in the high-profile Tenet sell-off is likely to renew the debate over whether the benefits of doctor-owned hospitals are worth the potential conflicts of interest.

Federal laws prohibit a doctor from being paid for referrals and in most cases from referring Medicare and Medicaid patients to healthcare providers and services in which the physician has a financial interest. The laws were intended to prevent a doctor’s personal financial concerns from influencing where and how a patient was treated. But the laws have an exemption that allows a doctor to refer patients to hospitals where the physician is a part-owner.

Tenet paid $54 million to settle a federal investigation of allegations of hundreds of unnecessary heart surgeries at its Redding, Calif., hospital, and it still faces scores of related lawsuits. Tenet also faces a government probe of cardiac procedures at some of the Los Angeles-area hospitals up for sale as well as a chainwide investigation of the company’s financial relationships with doctors.

The allegations in the Redding case raise the question of whether it makes sense for a physician’s income to be tied to a hospital’s revenue, said Princeton University economics professor Uwe E. Reinhardt.

“There is something a bit disconcerting when you go in to a cardiologist and he is part-owner of, say, ‘Mercy Hospital,’ and he recommends you have heart surgery and refers you to a colleague who is also a part-owner,” Reinhardt said. “Do we want to run medical practices the way [auto] body shops are?”

Other critics worry that doctors, in order to make a profit, might turn all-purpose hospitals into specialized orthopedic surgery or cardiac care boutiques.

“The concern is that they will close the trauma centers and emergency rooms and turn these hospitals into specialty clinics where they can be assured very lucrative treatments,” said Jerry Flanagan, a spokesman for the Foundation for Taxpayer and Consumer Rights.

Most of the California hospitals Tenet has earmarked for sale need major seismic upgrades. The company expects to get only about $300 million for all 26 facilities, plus $300 million in tax breaks.

Tenet said it had already qualified 92 bidders for the hospitals and had at least one offer for each facility. Tenet has pledged to find buyers committed to keeping all the hospitals open as general-care centers. The company declined to add details and has required bidders to keep negotiations secret.

Interest is coming from hospital chains as well as physician groups, according to sources close to the negotiations. In some cases the doctor groups are competing against one another and are partnering with for-profit companies to buy the hospitals.

“We’re treating all prospective buyers equally as they enter into the qualification process,” said Tenet spokesman Steven Campanini.

Proponents of doctor-owned hospitals said there was no evidence that hospital ownership would prompt good doctors to make bad decisions about patient care.

Hospital ownership could allow doctors to better serve patients and to reduce costs, said California Medical Assn. Chief Executive Dr. Jack Lewin. No major California hospitals today are doctor-owned, and the idea carries some risk, Lewin conceded. But given rising healthcare costs, he said, it’s worth a try.

“The economic forces don’t align very well when hospitals, physicians, health plans, pharmacies and laboratories are all competing,” he said.

Half of the Tenet hospitals for sale in California were unprofitable in the fourth quarter, according to unaudited, pretax figures the company provided the state.

Given the poor returns, bidders may be suffering from what one consultant called “buyer’s syndrome,” convinced that they can get better results than the seller.

“If you are buying a Tenet hospital and think you are going to run it at a better margin than Tenet, then you are dreaming,” said Joshua A. Nemzoff, a New Hope, Pa., healthcare consultant who doesn’t represent any bidders for the Tenet properties. “There are not too many hospital chains that can run a hospital better than Tenet, and by better I mean at a higher margin.”

On the other hand, new owners may be able to negotiate better rates with health maintenance organizations and insurers whose relationships with Tenet soured after the chain ratcheted up its charges. Doctors also might be able to increase revenue by bringing patients with them.

“Doctors could own a hospital and move their outpatient volume from a surgery center to the hospital,” said Steve Valentine, an El Segundo healthcare consultant representing several groups bidding for Tenet hospitals.