Pathologist Jacob Terner could easily spend his days hunting quail, adding to his rare coin collection or prowling galleries with wife Sandra to add to their modern art collection. Instead, the 72-year-old doctor puts in a full schedule serving as chief executive of Prospect Medical Holdings Inc. Prospect handles the managed care business of various local independent practice associations (doctors who maintain individual offices but are affiliated). Then last year, the company joined other investors to acquire Brotman Medical Center, where Terner had been head of pathology earlier in his career. Terner's goal is turn the aging Culver City hospital into a more efficient operation that can make money in a health care marketplace in which Medicare health maintenance organizations are becoming significant payors. Prior to founding Prospect, Terner served as chairman and chief executive of Century Medi-Corp, a company he built into a regional HMO. Century was acquired in 1992 by Foundation Health Corp., a predecessor of Health Net Inc.

Question: You took a few years off after selling Century Medi-Corp, but you didn't stay retired. Did you get bored?

Answer: I sure did. I was only around 60. My wife and I moved from Beverly Hills, bought a house in Pacific Palisades and took time renovating it. And I spent more time on my hobbies. I liked to collect coins. I like to hunt. I collect art. We go to the opera. My wife is on the board of Los Angeles County Museum of Art and the L.A. Opera. But I found when my part-time hobbies became my full-time activity, they became cloying. So I decided to go back to work and started Prospect, raising money from myself, my friends and people who had invested with me before.

Q: Why did you decide on a physician management company?

A: At the time, companies in the independent practice association business, like FPA, Phycor and MedPartners, were hot. I thought I could do a better job managing the IPA side of managed care than they were. They went bankrupt and we're still here.

Q: Is that one of the reasons you have stayed a regional player, when the other companies went national to grow?

A: They tried to grow like a malignant tumor, jumping around, rather than a benign growth that grows slowly like a mushroom. There's no reason for Prospect to grow outside this region yet, there's still plenty of low-hanging fruit. One thing I think we do right is that we take the time to consolidate an acquisition before we move on. Other public physician management groups that failed sacrificed prudent management for the sake of growing rapidly.

Q: What led you to take Prospect public?

A: There was a very early deal in 1997 in which the company we acquired had earlier been rolled into a public shell. We could have gotten rid of it but decided that one day it might be useful, so we cleaned it up and rolled Prospect into it. We didn't have to report to the Securities and Exchange Commission at the time because we were on the Pink Sheets, and to report was an added expense and the company was too small to be of any note. But all of a sudden, two and a half years ago, there were three acquisitions that we had to make all at once which required more money than I had, so we went to the capital markets (and eventually joined the American Stock Exchange).

Q: Prospect's stock is trading around $5.70 now. As a regional player in your industry, do you think the company is fairly valued?

A: That depends on how you value us. We're valued at 10.5 times earnings. I think we should be valued at 15 times earnings, but 10 isn't unfair. But if you value us based on EBITDA (earnings before interest, taxes, debt and amortization) we're only selling at four times EBITDA, and that's very low. You could barely buy a private company for that. Even so, we have some small cap funds that know that we are undervalued and they have made significant investments in us. They're here to buy and hold.

Q: Do you get pressured to take steps to increase shareholder value?

A: My board, which was in town recently, had brought in this guy to talk about increasing shareholder value. I said, listen guys, you got to be patient I'm 72 and I'm patient, and you're all a lot younger than I am. We had a great first quarter this year, 36 percent above a year ago. I tell my board, work the company and the stock will take care of itself. If you have good value, someone's going to find you.

Q: What led Prospect to take an ownership stake in Brotman?

A: The HMO that is doing the best job at targeting the senior Medicare market is (Long Beach-based) SCAN Health Plan Inc. They were willing to sign a contract with us, but only if we had a hospital that would take a capitated rate (accept a flat fee per member). There are very few hospitals on the Westside that are willing to do that anymore. When Tenet put Brotman on the market that was our opportunity.

Q: Why is the senior Medicare market so important to a company like yours?

A: Here in California you have HMO enrollment dropping because HMOs are competing with these cheap PPO plans with high-deductibles that are cheaper to the employer per employee, but more expensive for the employee. But in the Medicare arena, HMOs are on the upswing.

Q: How would you compare the state of the health care delivery system in Los Angeles compared to what it was when you first moved here in the 1960s?

A: The current system devalues the physician. The physician is being pushed down from the upper middle class to the middle class, and that perception about the compensation makes it a less desirable profession for the brightest and the best. That in the long run will have a negative impact on the quality of care. Of course, even with all the complaints, it's still the best health care system in the world. But everyone wants more and more care, and they don't realize how that contributes to rising costs.

Q: How do reimbursement practices contribute to the problem?

A: Medicare, for example, pays a set amount for hospitalization based on what's determined to be the optimal number of days, whether a patient is in there two days or seven. Well if the hospital has good controls over their emergency room and can get the patient in and out in two days, they make money; but by seven days they lose money. Medicare penalizes the hospital if a patient stays too long, but they don't penalize the doctor. Every day the doctor sees the patient in the hospital he can bill Medicare, so he has no incentive for getting the patient out of the hospital. The doctor and the hospital aren't on the same page.

Q: You're a native New Yorker, and after you got your medical degree you were on track for a promising academic career at Columbia University. How did you end up in Southern California?

A: In the mid-1960s, I was doing research in Ob/Gyn pathology and was associate director of the Sloan Center for Women at Columbia University's Presbyterian Medical Center. Then I was drafted. I didn't go to Vietnam, but I taught Army veterinarians how to perform autopsies on goats. The Army was using the goats to study the effects of various munitions they would shoot into them. After I got out, a couple of things queered me about going back to Columbia, among them what they wanted to pay me considering I was trying to raise a family. I also had lost my taste for the academic politics. My wife had a cousin out here (in Los Angeles) who had a little hospital and he wanted me to come out.

Q: How did you get into health care management?

A: Six months after I came to Los Angeles, a guy I met in the army referred me to another hospital, Gardenia Memorial, which was getting rid of their pathologist. So I got my first contract doing pathology for them in 1968. And David Brotman owned Gardenia Memorial at the time, and when he got rid of Brotman Hospital's pathologist in 1973 I also got that contact in partnership with another pathologist. That was a good contract because it was 400 beds and full all the time. Our practice, Memorial Pathology grew and grew so that by the end of the 1970s we had 15 pathologists and 10 hospital contracts. I eventually I was doing less and less pathology and more and more administration.

Q: How did you end up in managed care?

A: When some of the smaller hospitals would get into financial difficulties and were looking for investors, I would invest the group's money and as part of the quid pro quo, I'd ask for the pathology practice. The last deal I did like that was in 1978 with East Los Angeles Doctors Hospital, where I became head of the management company for that hospital, L.A. Medical Management.

Q: What does that have to do with running an HMO?

A: We did pretty well the first four years because it was still the age of cost reimbursement (which provides physicians with payment for each specific service performed.) But by 1983, the reimbursement changed and MediCal went from cost reimbursement to a per diem. We ran a pretty efficient hospital but it was a pretty awful per diem. First we tried buying up small independent clinics that not only would provide revenue, but refer patients to the hospital. But that only worked for a time. So we bought an HMO, Century MediCorp that was largely based in the San Fernando Valley.

Q: That obviously turned out well, given you were bought out by Foundation.

A: We were fortunate enough to catch the HMO growth swing in the 1980s, so by the time we sold it to Foundation in 1992, MediCorp, which had 12,000 members when we bought it, had grown to more than 160,000. Then I took a couple of years off.

Q: Anything you want to say about your management philosophy?

A: When I went out to build my pathology department, I went out and got Victor Rosen and I didn't care that he was a better anatomic pathologist than me. Then I got Carol Bell, who was a great blood (analyst). I went out and built this crown with these beautiful stones in it. When people look at it they see the crown, not the individual stones, and you get the credit.

Q: What would say have been the toughest choices you've had to make over the years?

A: I have a restless mind, so there really haven't been any tough choices. I get up in the morning and I work hard. My parents were immigrants, and they worked hard. They died when I was in medical school, so I had to get a scholarship to finish. But I had a very fortunate life. After I went to medical school and found my direction in life. It's been relatively easy. I've made my mistakes, usually through hubris.

Q: You also have several pieces of abstract art next to those bookcases, but you also collected 19th Century paintings for many years. Why the switch?

A: Because we switched houses. After Century Medi-Corp., I wanted to renovate our home in Beverly Hills with some of the money from the sale, but my wife surprises me by saying that she never liked the place, or cared for my 19th Century paintings or my antique furniture. After 25 years in that house she says this. Fortunately, she still thinks I'm all right. So she looked around and found this house overlooking Santa Monica Bay that was sort of a Bauhaus thing. Abstract and modern art works better there. Whenever I find something that I like but she's not all that excited about, I take it to the office.

Dr. Jacob Terner

Title: Chairman and chief executive

Company: Prospect Medical Holdings Inc.

Born: 1934, New York City

Education: B.A. with high honors, University of Rochester; M.D. with honors, University of Buffalo

Career Turning Point: Being drafted in the U.S. Army in 1966, which interrupted his academic career as an obstetric and gynecologic pathologist
at Columbia University

Most Influential People: His parents, who taught him the value of hard work; a University of Buffalo professor, Dr. George Clark, who said a
person should always have as many options as

Personal: Lives in Pacific Palisades with wife Sandra; has two grown children and four grandchildren

Hobbies: Collecting art and rare coins, bird hunting, attending the opera and gallery openings

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