Scrambling to survive in an industry where big is not only better, it’s critical, Los Angeles-area hospitals are merging and partnering more than ever before.
Of the 124 hospitals in L.A. County, more than half are owned by just 10 entities and the local industry is increasingly being dominated by just two giants, Tenet Healthcare Corp. and Catholic Healthcare West.
Those two companies have acquired a combined 21 L.A.-area facilities in the past year alone.
Driving the accelerating consolidation, of course, is managed care. By partnering with competitors or merging, hospitals can reduce their operating costs and bolster their bottom lines, which have been hit by reduced premiums from HMOs, lower government reimbursements for Medi-Cal and Medicare, and a shift of patients to outpatient care.
“The why to all of this is survival,” said David Langness, director of Health Sciences Communication for UCLA Medical Center. “Frankly, the HMOs have merged and grown so that there are really only five or six major payers, and those major payers can control prices. If they demand certain room rates, we have to give it to them.”
Hospitals unwilling or unable to find partners are being forced to close their doors. Between 1997 and 1998, eight local hospitals have been shuttered, including North Hollywood Medical Center, Woodruff Community Hospital in Long Beach and South Bay Medical Center in Redondo Beach.
“In numbers there is strength,” said Jim Lott, executive vice president of the Healthcare Association of Southern California. “As hospitals partner up and merge, they use it as leverage. It is all about leverage. It is a buyers’ market. In order for the seller (the hospital) to get back some of the market, they have to merge and strengthen themselves. Those who are not developing relationships are going under.”
Among those that have successfully established partnerships is UCLA Medical Center. In 1995, it acquired the struggling Santa Monica Community Hospital to beef up its reach and market share. It is now in the process of developing a partnership with Orthopedic Hospital in downtown Los Angeles, which next year will move its entire inpatient operation to Santa Monica.
Cedars-Sinai Medical Center in Los Angeles, near Beverly Hills, has applied to the California Department of Corporations to set up a limited Knox-Keene license with Daniel Freeman Medical Center and St. Johns Hospital and Health Center in Santa Monica. The license would enable the hospitals to negotiate with HMOs as a group, thereby having more clout in pushing for higher reimbursements.
In another move aimed at gaining clout, Catholic Healthcare West, which owns five hospitals in Los Angeles County, recently announced it would acquire Unihealth’s eight local hospitals. Once that deal closes, which is expected to occur within 30 days, the chain will be the second largest in Los Angeles.
“It all stems from the cost of health care,” said Dr. Brian Johnston, chair-elect of the Los Angeles Medical Association board of trustees. “Everyone is trying to shift the cost burden to someone else. Hospitals are in severe financial distress. They are scrambling to achieve economies of scale. They want to be more competitive.”
Big chains like Tenet and CHW have succeeded in negotiating higher reimbursements from HMOs because they control so many hospitals in the HMO network. In addition to having more leverage to raise revenues, big chains can bolster their bottom lines by operating more efficiently than independent community hospitals.
“It puts the hospitals in a stronger position,” said Lange Ignon, a spokesman for Tenet, which owns 21 hospitals in Los Angeles County, including the recently acquired Queen of Angels-Hollywood Presbyterian Medical Center in East Hollywood. “We can bring, as a company, enormous savings through group purchasing, regional marketing and consolidating administrative costs. A stand-alone hospital cannot do that.”
Actually, the trend toward consolidation has been going on for years. Everything started to change in the early ’70s, after the government changed its reimbursement policy.
Before then, Medi-Cal and Medicare reimbursements were “cost-based,” meaning the government would reimburse an amount equal to the cost of a treatment. Then the regulatory rules changed, with the government setting specific reimbursement amounts based on estimates of what certain procedures should cost to perform.
“It was a real awakening for hospitals,” said Darc Keller, chief executive of the Los Angeles County Medical Association.
At the same time, indemnity coverage was giving way to managed care. Insurance companies no longer wanted to pay hospitals on a fee-for-service basis and began moving into what is known as capitation essentially paying the hospital a set fee for each procedure performed on each patient.
Steady cash flows generated under the fee-for-service system evaporated. Suddenly hospitals were put in the position of having to negotiate with powerful HMOs. In exchange for access to their burgeoning patient bases, HMOs demanded huge discounts on the fees hospitals charge for their services. Many hospitals did not have the clout to stand up to the HMOs. Once cut off from HMOs’ patient base, hospitals started losing money.
Lower reimbursement from HMOs and the government was not the only problem. During the ’80s, technological advances brought sharp reductions in the amount of time needed for procedures and hospital stays. Five years ago, the average hospital patient spent a full day in the hospital, whereas today it’s only one-fifth of a day, according to Richard Sinaiko, chief executive of the Healthcare Practice Enhancement Network, a consulting firm in Los Angeles whose clients include Cedars-Sinai, Childrens Hospital and St. Johns.
“Many procedures can now be performed on an outpatient basis,” said Sinaiko. “Ten years ago, you would spend weeks in the hospital for a gall-bladder surgery. Now it can be done on an outpatient basis. Hospitals have had to change their role. Those who don’t will be in trouble.”
This shift to outpatient care, shorter hospital stays and the battle for reimbursement dollars does not bode well for patients, says Jamie Court, director of Consumers for Quality Care, a patient advocacy group.
“It is bad news for consumers,” said Court. “It means the community hospital is a vanishing species, and it is only going to get worse.”
Industry analysts agree that smaller community hospitals that stay independent will have a hard time gaining any market share, or even keeping their pre-existing share. Many smaller community hospitals Granada Hills Community Hospital, Tri-City Regional Medical Center in Hawaiian Gardens, Shriners Hospital in Los Angeles, and others are losing money and will have a hard time surviving, analysts said.
“There are significant issues at stake here,” said Johnston. “The new company (acquiring the community hospital) may be unwilling to take on the large portion of uninsured patients the hospital was serving or limit the doctor-patient relationship. It may deteriorate the hospital’s relationship with the surrounding community.”
The diminishing number of community hospitals is only part of the problem of large organizations dominating the hospital industry, said Charles Idelson, spokesman for the California Nurses Association.
“What happens if one of these big companies goes under or has financial trouble?” said Idelson.
The notion is not far-fetched. Kaiser Permenente, for example, is losing many millions of dollars on operations. Higher costs, lower government reimbursements and a nursing shortage have all combined to devastate the company’s bottom line. The nursing shortage has been particularly hard on Kaiser, forcing it to send many of its patients to other hospitals for care, doubling costs.
Spokesman Jim Andersen said there is no danger of the company closing any of its hospitals. Still, Kaiser’s Southern California hospital operations lost a combined $42 million in 1997.
Regardless of the problems associated with hospital consolidation, experts say there is no end in sight to the trend. Forty-seven hospitals in Los Angeles County reported a combined 1997 net loss of more than $100 million to the Statewide Office of Health Planning and Development. No business can run at a loss indefinitely, meaning more closures are likely in the months ahead.
“The reason is that there isn’t the demand for so many hospitals,” said Andy Demetriou, a partner at the law firm Jones, Day, Reavis & Pogue in downtown L.A., who has worked on mergers and acquisitions for UCLA Medical Center. “There will be less and less independent hospitals. The days of a hospital on every corner are over.”