Alta Healthcare System LLC is an anomaly in the hospital business.
Although chains like Tenet Healthcare Corp. and Catholic Healthcare West are leading a wave of industry consolidation, they have swept up plum properties usually large hospitals that are making a profit.
But newcomer Alta recently spent $37 million to buy eight small community hospitals in L.A. and Orange counties, most of which are losing money, according to the Office of Statewide Health Planning and Development in Sacramento.
Alta Chief Executive David Topper says he plans to acquire more small hospitals.
“I believe that health care is local, and we will be successful by focusing on the local market,” said Topper. “These facilities needed more local attention. We have done that and already have seen a 10 percent improvement in contracts with physician groups.”
Topper, who has 22 years of experience working in the health care industry, was formerly in charge of the L.A. operations of Paracelsus Healthcare Corp., before it merged with Houston-based Champion Healthcare Corp. in 1996. At that time, Paracelsus moved its Pasadena operations to Houston and Topper left the company to form Alta.
The next two years were spent trying to raise the capital to buy Paracelsus’ L.A. and Orange county hospitals. In July, Brentwood-based investment bank Kline Hawkes California LP launched two private equity funds and opted to back Topper.
The small facilities Alta acquired from Paracelsus in September include 100-bed Hollywood Community Hospital of Hollywood; 60-bed Hollywood Community Hospital of Van Nuys; 145-bed Los Angeles Community Hospital; 50-bed Los Angeles Community Hospital of Norwalk; 85-bed Bellwood General Hospital in Bellflower; and 49-bed Monrovia Community Hospital.
Some of the hospitals are turning a profit, but as a group, they’re losing more money than they’re bringing in.
The Hollywood Community hospitals, which co-report revenues to the Office of Statewide Health Planning and Development, had net income of $42,703 in 1997. The Los Angeles Community Hospitals co-reported a $2.1 million loss and the Bellwood hospital, which co-reports with Alta’s Orange County Community Hospital in Buena Park, reported a combined loss of $2.9 million. The only significant profit maker was Monrovia, with $3.4 million in net income.
Steve Valentine, president of the Camden Group, an El Segundo-based health care consulting firm, said venturing into the small-hospital market is risky.
“It is not impossible to be successful, but extremely difficult,” Valentine said. “Alta has to attract back the doctors that might have left the hospital under Paracelsus. Paracelsus had a problem making it in the market, because of the size of the hospitals in such a large market. It will be a challenge.”
Deborah Frankovich, senior vice president of Paracelsus, said the hospitals were sold precisely because of the difficulties they faced in Los Angeles.
“Most of our hospitals are in medium-sized markets and most have strong managed care relationships,” she said. “These did not. Los Angeles is a huge market where you have to have a huge managed care critical mass.”
The inability to negotiate good contracts with health maintenance organizations has been a major problem for smaller hospitals. Many managed care companies pay more to larger hospitals that attract more members to the health plan.
But Topper is convinced his hospitals will be profitable. He said he will focus intensely on building relationships in the community, setting up contracts with physicians and acquiring more hospitals, and possibly dialysis centers, in the future.
“There is still a lot of money to be made in health care if you know how to capitalize on the market,” he said.
