When L.A. County's Martin Luther King Jr./Drew Medical Center closed in 2007 it left thousands of residents without a hospital, but the crisis seemed mostly confined to South Los Angeles.

Then over the past year, three private hospitals including one in tony Century City that closed sought bankruptcy protection leaving thousands more uncertain about where they could seek care.

After decades of inadequate government funding, battles with insurers and struggles to serve the nation's largest population of uninsured patients, the hospital industry crisis is starting to hit close to home, much closer.

How bad is it?

The past year marked one of the worst in a decade that saw14 hospitals with emergency rooms close, leaving fewer than 100 hospitals to serve nearly 10 million people spread across 4,000 square miles. That's far fewer hospitals than many other cities on a per capita basis. And it's only expected to get worse.

Last year, 98 hospitals in the county that reported financial data to the state had a combined net loss from operations of $1.16 billion, a bigger loss than 2006. The loss is expected to widen this year and there is little hope for improvement in 2009.

"People in this state should be a lot more concerned," said Steve Valentine, who as chief executive of El Segundo industry consultancy Camden Group has examined the books of many of the region's sickest hospitals. "Hospitals...are very wobbly."

Indeed, it's no longer the other guy's problem.

Get into an accident on a San Fernando Valley street and some ambulance drivers will drive all the way to Long Beach Memorial Hospital, a hospital known for an unusually well staffed and efficient emergency room.

Sounds crazy, but even with heavy freeway traffic, drivers know they can unload patients and be back on the road sooner than if they had to wait three hours or more at one of the Valley's busier emergency rooms.

How can most hospitals be so busy? A few years ago the overloaded and underfunded Los Angeles County-USC Medical Center stopped accepting transfers of indigent patients being treated at private hospitals, leaving facilities countywide with patients unable to pay their bills. It's the same reason some hospitals have found themselves sucked into controversy after discharging homeless patients on Skid Row. They often have no place else to take them.

At the beginning of the decade, Jim Lott, vice president of the Hospital Association of Southern California trade group, would use the phrase "Band-Aid on an open wound" to describe the ineffectiveness of government efforts to shore up the hospital system. And that's before 12 of the hospitals had closed.

"We have a health care nonsystem in this country and the effects are most clearly seen in Los Angeles," said Lott. "Fifty-seven percent of the hospitals do well if you consider a positive bottom line that exceeds 3 percent doing well. And then you have 43 percent of the hospitals with negative margins approaching 5 percent, many them for going on two years. That's unsustainable."

Lott said he won't be surprised if at least two more facilities file for either Chapter 7 liquidation or Chapter 11 reorganization by the end of the year.

Heavier load

To get a feel for how the industry turmoil is played out every day, consider Ken Strople, chief executive at 508-bed Downey Regional Medical Center in the southeast county. Its busy emergency room treats about 140 patients each day on average.

Strople, who's run the non-profit community hospital for five years, kept a partially completed set of Chapter 11 forms in a desk drawer through most of the summer. The state budget stalemate prevented hospitals from receiving crucial Medi-Cal reimbursements for two months before they finally came through. Medi-Cal is the state's version of the federal Medicaid program that pays for care for qualifying low-income patients.

Some of Downey's financial travails were of its own making, Strople admits. Previous management had become lax in monitoring costs, billing insurers and keeping track of who actually paid. But he blames much of the problems on the closure of surrounding private and public hospitals.

Downey has been particularly hurt by the closure of Martin Luther King Jr. hospital, a county facility that was engulfed in scandal after repeated patient deaths and other care problems. Federal inspectors finally pulled the funding plug and the hospital shut its doors in August 2007. Its 537 licensed beds largely served patients without any insurance or those who qualify for Medi-Cal, which pays hospitals less than private insurance for care.

The county did agree to provide Downey and some of the other hospitals closest to MLK a stipend to help make up for the increased load of Medi-Cal patients, but it hasn't been enough.

Downey loses roughly $1,000 each day for every bed occupied by a Medi-Cal patient. The hospital has been able to get by over the past decade by drawing down on a $100 million investment fund. And it has improved its billing, cost containment and other management procedures. However, MLK's closure boosted Downey's Medi-Cal patient load, and the hospital now expects to rack up $4 million in additional annual losses.

"Let me put it this way: New Orleans lost two-thirds of their hospital beds in Katrina and they still have three beds for every 1,000 people we're lucky to have 1-bed-per in the L.A. Basin," said Strople.

Losing leverage

Los Angeles and California hospitals also must deal with burdens that hospitals in other states don't face.

Hospitals are under looming deadlines to retrofit or replace their main patient care buildings to withstand a major earthquake. Many facilities have spent up to $100 million or more on new buildings, though state legislators recently relaxed the deadlines for the work to be completed. But that's a capital expense that many hospitals have funded with long-term debt or capital drives. Day-to-day there's an even bigger problem.

The 2000 U.S. census pegged the number of uninsured residents in the county at 2.7 million, the largest in the nation by far and a figure boosted by the high number of illegal immigrants. But on top of the huge number of indigent patients who can't pay their bills, the hospitals even take a hit for treating Medical patients; the state pays out the lowest such benefits in the nation.

A study by the Kaiser Family Foundation found that on average in 2005 the state paid out $2,701 per Medical beneficiary for all care provided by doctors and hospitals, compared with a national average of $4,662. That's a disparity not caused by California patients being any less sick, but rather efforts to balance the state budget since the program requires state matching funds.

Moreover, Southern California hospitals typically get 15 percent less than their northern counterparts based on a formula that was created years ago when local hospitals were less unionized and thus had sharply lower labor costs than those in the north. That is less the case after big hospital organizing drives by the Service Employees International Union and other unions over the past decade.

Then there's the issue of private insurance, which can account for 40 percent to 70 percent of gross revenues. L.A. is a fragmented hospital market, with roughly 60 different ownership entities. That gives hospitals less leverage in contract negotiations than the larger hospital groups up north.

That wasn't always the case. Earlier this decade, Tenet Healthcare Corp. was the largest hospital chain in the county. Tenet at one time owned 17 hospitals, giving it a near monopoly on providing acute care in certain communities. That monopoly gave the company muscle when it negotiated reimbursement rates from private insurers. The insurers needed Tenet's hospitals as places to send their members more than Tenet needed additional patients.

The company reported net income as high at $1.1 billion for its 2002 fiscal year. But that year a Medican billing scandal nearly took the company down. Ultimately, Tenet paid the federal government back nearly $1 billion, and sold off one-third of its hospitals, including 14 in the county.

Most of the local facilities were sold to wealthy physicians or physician investor groups, which thought they could make a go of it but soon found their pockets weren't deep enough as operational costs rose and reimbursement rates shrank.

All three of the most recent hospital bankruptcies were former Tenet facilities. That includes Brotman Medical Center in Culver City, Community Hospital of Huntington Park and the now-shuttered Century City Doctors Hospital.

Chris Ohman, chief executive of the California Association of Health Plans, an insurer trade group, dispute the notion that low reimbursements are the cause of hospital problems. He claims the biggest problem are the hospitals inability to control their own costs.

"Health care costs, with hospitals costs at the forefront, are growing at an unsustainable rate of two-to-three times the rate of inflation," he said.

Indeed, the most successful operator of former Tenet facilities has been Victorville-based Prime Healthcare Services, a brutal cost cutter which bought most of its six local hospitals second-hand from struggling doctors groups.

Prime has been a success, but only because it's broken the traditional rules of the hospital game. It sometimes lays off staff when it takes over, but Prime also has been aggressive in cancelling unprofitable managed care contracts. That has left some patients without access to a nearby community hospital unless their insurer is willing to pay the higher out-of-network rate.

Von Crockett, chief executive of Centinela Hospital Medical Center in Inglewood, said his hospital would be closed if Prime hadn't stepped in last year and bought the facility from a doctor-led investors group.

"We were in severe financial distress," Crockett said. "And just a few months ago, Centinela moved into the black."

Universal coverage

But few industry officials think Prime's approach is a model for the industry. So now many in the industry are banking on government assistance. But they doubt help is on the way from Sacramento after last year's pitch by Gov. Arnold Schwarzenegger for a universal health care plan fell apart.

One element of the plan would have required hospitals to pay into a fund that would subsidize insurance coverage for low-income patients. Industry leaders figured hospitals would come out ahead because the plan would qualify the state for higher federal Medicare payments and reduce the number of patients who couldn't pay their bills. However, it all unraveled when both Republicans and some Democrats became convinced it wouldn't pay for itself.

Hospitals are taking some heart in a movement to reopen MLK, which incoming L.A. County Supervisor Mark Ridley-Thomas has made a priority. But that's only a partial solution.

Many have their eyes are on Washington, D.C., where the big question is whether the Obama administration can forge a universal coverage compromise with Republicans that will benefit hospitals by reducing the number of indigent patients.

For now, even relatively stable hospitals such as Boyle Heights' White Memorial Medical Center have concerns.

White is less than a mile away from the new County-USC Medical Center that is opening this month; it's 350 beds smaller than the Depression-era structure it left behind. The county is aware of the bed shortage and has been implementing programs to streamline treatment and shorten stays so it can still treat the same number of low-income patients.

But White staff isn't so sure. It already has seen more indigent and Medi-Cal patients since the closure of MLK more than 16 miles away.

It's a bottom line issue that also is one of life and death.

"The system is not adequate on a day-to-day basis to meet the needs of the public," said Dr. Brian Johnson, chairman of the emergency department, during a recent lull before the department's weekend rush. "When paramedics can't unload their patients quick enough to get back on the street, then people are going to die."


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