Providence Health & Services officials see the $89 million they agreed to spend last week to acquire one of Tenet Healthcare Corp.'s last remaining Los Angeles County hospitals as a bargain.

With Tarzana Regional Medical Center, Providence acquires an acute care hospital and emergency room that not only expands its San Fernando Valley franchise but avoids a closure that would have led to further strains on the region's overburdened health care safety net. Three hospitals in the Valley, two with emergency rooms, have closed in the past five years.

"The first thing we thought when the Tenet hospitals went up for sale is: How can we help stabilize this situation?" said Arnie Shaffer, chief executive of Catholic-affiliated Providence Health & Services of California.

The hospital has 245 beds and 1,200 employees. Providence plans no service cuts or layoffs and has asked hospital administrator Dale Surowitz to stay on.

Providence, which operates 25 hospitals in five states, owns Providence Saint Joseph Medical Center in Burbank and Providence Holy Cross Medical Center in Mission Hills, plus two other hospitals in the South Bay and several specialty facilities. It intends to invest millions of dollars in modernizing the Tarzana facility, including pricey state-mandated earthquake retrofits. The retrofits were among the reasons Tenet needed to sell off the property.

Most of Dallas-based Tenet's other Los Angeles-area divestments went relatively smoothly. But disposition of the Encino Tarzana Regional Medical Center turned into a four-year problem because neither building was owned outright by Tenet.

After settling with the co-owner of the Encino property, Tenet struggled a few more years before striking a deal with Long Beach-based real estate investment trust HCP Inc., which owned the Tarzana facility and several other hospitals around the country that Tenet also operates.

Tenet initially hoped to sell both campuses to the same entity, but eventually ended up making a split. Last month Tenet announced the sale of Encino and two other Southern California hospitals to Victorville-based for-profit Prime Healthcare Management Inc.

The day before announcing the Providence deal, Tenet closed the sale of San Dimas Community Hospital and Garden Grove Hospital to Prime for $41 million. The Encino sale closed earlier.

Tenet Sunsets

The Tarzana sale to Providence leaves Tenet once California's largest hospital operator at 41 facilities with just 15 hospitals in the state. Up to four of those are slated to be handed off to new owners by next year.

Tenet signed a letter of intent in April with the University of Southern California to sell two hospitals once considered among the crown jewels of Tenet's network: USC University Hospital and USC Norris Cancer Hospital.

USC filed a lawsuit in August 2006 to terminate the school's relationship with Tenet, which has struggled since it was enveloped in a Medicare reimbursement scandal in 2002.

In addition, Tenet said last week that as part of the deal it struck with HCP to clear up the title to the Tarzana hospital, it also intends to end its leases on Irvine Regional Hospital and Medical Center in Orange County, and Community Hospital of Los Gatos in Northern California.

The combined divestitures will leave Tenet with two Los Angeles hospitals Los Alamitos Medical Center and Lakewood Regional Medical Center two hospitals in Orange County, two in Palm Springs and five in Northern and Central California.

State Sues Prime

Prime Healthcare, the purchaser of three Tenet hospitals, now finds itself in trouble with state regulators who contend it's illegal for the company to bill insured patients for unpaid medical services their insurers won't cover.

Prime often cancels private insurance contracts when it acquires a hospital because the reimbursement rates the previous owners settled for often didn't cover the cost of
providing the service, let alone provide any profit, according to Prime's founder, Dr. Prem Reddy.

In the case of its three latest acquisitions, Prime has said it doesn't intend to cancel contracts already in place at San Dimas and Garden Grove because reimbursement rates at those facilities are in line with costs. No such promise has been made in regards to Encino Hospital Medical Center.

Under Tenet's management, Encino Tarzana Regional Medical Center hospital lost $10 million during fiscal year 2007, while the Garden Grove and San Dimas facilities' financial performances that year were "marginal," Prime noted.

The California Department of Managed Health Care, in a lawsuit filed last month in Orange County Superior Court, seeks to bar Prime from what's called "balance billing," contending that it's wrong to put patients in the middle of a fee dispute between their insurance company and their health care providers.

Staff reporter Deborah Crowe can be reached dcrowe@labusinessjournal.com or at (323) 549-5225, ext. 232.

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