Hopes were high for both Brotman Medical Center in Culver City and Midway Hospital Medical Center near L.A.'s Miracle Mile district when groups led by physicians bought them from struggling Tenet Healthcare Systems nearly four years ago.
Brotman, acquired by an investor group led by Los Angeles-based Prospect Medical Holdings, was to be transformed into a cornerstone of a managed-care empire. Midway, renamed Olympia Medical Center, was to cater to a more upscale patient base.
But since then, the hospitals have taken widely divergent paths. Olympia has successfully turned itself around from a multimillion-dollar loss in 2003 and recorded a $3.8 million profit in 2007. But Brotman, unable to control costs and quickly raise revenues, filed Chapter 11 bankruptcy in 2007 and is trying to reorganize by early next year.
How each hospital has fared provides a roadmap for how some hospitals can still thrive in this era of cost-conscious health insurers, overloaded emergency rooms and mounting numbers of uninsured patients.
"Overall, hospital revenues have doubled in the last six years. But some have not made it. They've not been able to control their costs and grow their revenues," said Glenn Melnick, health economist at Rand Corp. in Santa Monica and director of the USC Center for Health Policy and Management.
Administrators at the two hospitals and industry experts cite several reasons for the differing performance. For starters, Olympia has successfully kept costs in check, while Brotman was unable to do so until very recently. For example:
- Olympia quickly renegotiated vendor contracts, while Brotman only got around to renegotiating some of its contracts after filing for bankruptcy;
- Both hospitals focused on reducing the length of patient stays, though Brotman's push came later;
- Brotman had to deal with more high-cost union contracts, which took time to renegotiate;
- As a larger, older facility, Brotman had to spend more on deferred maintenance.
Meanwhile, on the revenue side of the ledger, they point to:
- Olympia's ability to renegotiate contracts with insurers to obtain higher reimbursement rates and the inability of Brotman to do so until it was too late;
- Olympia's push to provide more specialty services, including wound care, geriatric health and sports medicine, while Brotman stayed mostly with Medicare and managed care patients until only recently;
- Olympia's successful recruitment of physicians with more prestigious practices.
Many of the advantages that Olympia has enjoyed are the result of its smaller size it has about half the beds of Brotman and the comparatively better condition of the hospital when Tenet sold the facility in early 2005. It was bought for $12 million by a group of physicians led by Shahram Ravan.
"Olympia's smaller size gives it much more flexibility," said Laura Jacobs, senior vice president of the Camden Group, a Los Angeles-based health care consulting firm.
Camden had evaluated both hospitals for various bidders after Tenet's 2002 announcement that it planned to divest them. Jacobs noted Olympia has less fixed overhead costs than Brotman.
Brotman struggles mount
Tenet for years had neglected updating contracts and the physical plant at Brotman, knowing that the hospital would eventually be sold off, according to Stan Otake, Brotman's current chief executive. But he also noted that physicians and staff at the hospital were slow to change.
"After Tenet sold the hospital, Brotman didn't act quickly enough to address some of the complex problems, which all centered on the fact that the cost structure was not in tune with the revenues coming in," Otake said. "Some of these changes could have been made a lot earlier, but there was a working assumption that the top-line revenues could be grown and the measures wouldn't be necessary."
Yet Brotman found it much more difficult to grow revenues being close to top-notch UCLA Medical Center and Cedars-Sinai Medical Center, which routinely attract top talent and affluent patients. Brotman also had a reputation for being the cheaper alternative, partly by design of the hospital's new ownership. Prospect Medical founder Jacob Terner envisioned Brotman as a low-cost cornerstone of a managed-care empire.
As a result of all these forces, Brotman's losses mounted, reaching $24 million last year. In October 2007, Brotman filed for Chapter 11 bankruptcy. Terner stepped down as chairman of Prospect in March.
Meanwhile, the new owners at Olympia Medical Center moved quickly to rein in costs and boost revenues. While the hospital they inherited was not as bad off as Brotman, it still lost $9 million in the last half of 2003 and suffered from years of little investment under Tenet.
Ravan, now president at Olympia, said that the ownership group immediately began investing money in upgrading the facility, spending $10 million over the last three years on everything from new computers to magnetic resonance imaging equipment.
On the cost-cutting side, the new management team renegotiated contracts with insurers, vendors and pharmaceutical companies, and cut whatever waste they could find. "I looked over every major check that was sent out," Ravan said.
The owners also brought in new groups of specialists and signed contracts with UCLA Medical Center for pathology services and with Emergent Medical Associates for emergency services.
The immediate goal, according to Chief Executive John Calderone, was to improve patient care so that the hospital could begin to compete with UCLA and Cedars.
Olympia also broadened its patient mix, adding more managed care patients to its primarily Medicare base. All of these steps cost a significant amount of money up front, which meant that Olympia posted a loss in its first year under the new management. But by 2006, the hospital went into the black, where it has remained.
Calderone said Olympia's next goals are to bring in even more top-notch physicians through independent physician associations and to improve customer service. "Then we will finally win back all the customers we lost during and immediately before the Tenet years."
Meanwhile at Brotman, Otake said the hospital had planned to submit its bankruptcy reorganization plan to the court late last week, with confirmation expected in mid-January.
A chief component is an agreement with the Jewish Home for the Aging to establish a 250-bed senior-living facility on part of the Brotman campus. The $23 million deal, which must still be confirmed by the bankruptcy court judge, would initially be in the form of a loan; the Jewish Home for the Aging would have an option to buy the land at a later date.
Assuming Brotman successfully emerges from bankruptcy early next year, Otake said that the next goal will be to recruit top-quality physicians from places like the recently closed Century City Doctors Hospital. It also wants to grow some of its specialty programs, including its own wound care center and the Tommy Lasorda Heart Institute.
But Brotman has a long road ahead in one of the region's toughest marketplaces.
"The key will be to find new revenue sources, and not from simply renegotiating insurance contracts, which everybody is trying to do," said the Camden Group's Jacobs. "They are going to have to generate more patients and completely new revenue streams."
TALE OF TWO HOSPITALS
Brotman Medical Center and Olympia Medical Center have taken widely divergent paths since Tenet sold them:
Brotman Medical Center
City: Culver City
Year Founded: 1924
Year Sold by Tenet: 2005
Current Ownership: Investor Group Led by Prospect Medical Holdings
Available Beds: 240
Net Patient Revenue: $86.8 million
Net From Operations: ($24.9 million)
Olympia Medical Center
City: Los Angeles
Year Founded: 1948
Year Sold by Tenet: 2004
Current Ownership: Olympia Healthcare LLC, a physician-led investor group
Available Beds" 114
Net Patient Revenue: $89.6 million
Net From Operations: $1.2 million
Sources: California Office of Statewide Health Planning and Development, Hospital Association of Southern California
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