Doctor’s Orders

or hospitals, bigger has not equaled better in the past, but a new round of consolidation may prove different for the major industry players in the Valley region. During the last round of acquisitions and mergers in the 1990s, hospital groups formed primarily to better access capital in the debt markets, but it didn’t much affect the running of individual hospitals. Today, a looming national health care reform law, which has major provisions going into effect Jan. 1, and mounting economic pressure from the insurance companies and government agencies that pay the bulk of hospital bills, means that strategic deals are designed to streamline operations, save costs and expand market share on the ground. In the greater Valley, recent examples include USC Health’s purchase of Verdugo Hills Hospital in Glendale from the foundation formed to manage it for an undisclosed sum; Providence Health & Services’ assumption of assets pertaining to Saint John’s Hospital in Santa Monica; UCLA Health’s agreement to manage operations for the Motion Picture Television Fund in Woodland Hills; and Providence’s partnership with City of Hope in Duarte. Martin Gallegos, vice president at the Hospital Association of Southern California in Los Angeles, said the number of deals has increased as reform approaches. “We are just beginning to see the tip of the iceberg with mergers and affiliations,” Gallegos said. “We thought we would see this as we get closer to the rollout of the Affordable Care Act. It’s simply a sign of the times.” A study released earlier this year by financial consulting firm Deloitte found that hospitals acquired in 2007-2008 showed more financial and operational performance improvement than non-acquired hospitals. “Expansion of (patient) volume via payer contracts and physician referrals is likely to be critical to value creation,” the report stated. Greg Facktor, owner of hospital consultancy Greg Facktor & Associates LLC in Hancock Park, said the driver behind this wave of consolidation is economies of scale. But in addition to the usual efficiencies of volume procurement, labor, information systems and access to capital, it’s also about developing systems to attract and maintain large populations of patients. “Under the Affordable Care Act, hospitals want points of access to feed patients into their ecosystem,” he said. “They are buying other hospitals, clinics and medical practices for a vertical integration. And when they discharge a patient, they want to own a clinic within a few miles of that patient’s home. Again, the hospital becomes a feeding system for the clinics.” Feeder hospitals Prior to its acquisition by USC, Verdugo Hills Hospital struggled financially for years. It tried a variety of approaches to make up its deficits, from loans to luncheon fundraisers. In its official announcement of the acquisition, USC stated that “the challenges created by health care reform played a role in the decision to partner, as smaller organizations such as Verdugo Hills Hospital face rising costs and the demand by payers to do more with less.” Tom Jackiewicz, chief executive of USC Health, said that Verdugo Hills talked to other potential buyers, but they were mostly other small community hospitals that would have merged together for the sake of bigness. In contrast, he feels USC was a vertical integration and a better fit for the market. “When we looked at acquisition candidates, we wanted a clinical expansion into the community,” Jackiewicz said. “We wanted to partner with community doctors and clinics to bring great care to patients. Verdugo had an emergency room and an OB-GYN clinic, so this was a great alignment for us.” Also Jackiewicz noted that academic hospitals are extremely expensive compared to regular hospitals, so USC needed a lower-cost operation to bring down the average cost per patient. “With the changes in health care, we needed a hospital affiliation where we would provide high-quality care at lower cost,” he said. “Verdugo Hills brings a low-cost structure.” As part of the acquisition, USC agreed to invest $30 million to upgrade the hospital. Still in the planning stages, the project would include an expansion of the emergency room, a new cardiac catheter lab, an integrated medical records system and seismic retrofit. Debbie Walsh, chief executive at USC Verdugo Hills Hospital, said the facility needed upgrades to compete with nearby hospitals, and as a standalone it simply didn’t have the necessary resources. “Information technology is a perfect example – we are using an electronic medical records system at USC Keck and are going to install it at Verdugo Hills in the next six to nine months,” she said. “That’s an investment they couldn’t make on their own. A lot of small community hospitals are facing the same situation.” Laura Jacobs, executive vice-president at health care consulting firm Camden Group in El Segundo, said that academic hospitals traditionally have relied on referrals from smaller general hospitals and specialist doctors. But with consolidation, those sources will try to keep patients within their own organizations, which is another reason USC wanted to establish a feeder system of its own by purchasing Verdugo Hills Hospital. “They need a broad and loyal base,” Jacobs said. “That’s why UCLA has expanded its reach and USC is looking to expand further.” Providential ‘sponsorship’ Providence Health & Services, a Catholic non-profit based in Renton, Wash. that owns three hospitals in the Valley, has participated in two recent consolidations. In September, Providence assumed sponsorship of the 234-bed Saint John’s Medical Center in Santa Monica from the Sisters of Charity of Leavenworth. “Assuming sponsorship” is the Catholic non-profit version of an acquisition, since technically a non-profit cannot be purchased. Before the Providence takeover, Saint John’s suffered a management purge when the Sisters of Leavenworth fired the top executives and dismissed 15 of 17 board members in November 2012. After that an extended bidding war ensued, which Providence won. Other bidders included Catholic hospital chain Dignity Health in San Francisco, UCLA Health System in partnership with another Catholic chain, and L.A. billionaire Patrick Soon-Shiong in partnership with the Archdiocese of Los Angeles. Michael Hunn, chief executive of the Southern California region for Providence, said the organization wanted Saint John’s because it filled a hole on the map. “Whenever we grow, we look at contiguous growth,” Hunn said. “We have hospitals in the Valley and in the South Bay, and Saint John’s is right in between. It makes sense from a health care network perspective.” Jacobs, the consultant at Camden Group, said coverage of the West Los Angeles area gives Providence more leverage in dealing with regional insurance plans and will bring more traffic to Saint John’s. “Santa Monica was a gap they needed to fill to have a connected system,” she said. “It makes them more attractive for payers. If you have a system, the payers ask ‘Do we need Providence to offer an attractive package in the marketplace?’ If it’s a standalone hospital, the payer could say ‘I can get along without it.’” Hunn cited statistics that Providence is the second-largest hospital chain in Los Angeles County with 7.4 percent of acute discharge patients, following the leader Kaiser Permanente with 11.4 percent. (See page 14 for the story on Kaiser’s expansion strategy.) “We can’t ignore that Kaiser has many access points and that it makes it very attractive to employers,” Hunn said. “Now we have a broad geographic distribution from the North Valley to the South Bay.” Also, Providence has signed a letter of intent with City of Hope, the cancer center, to provide cancer care to Providence patients. The goal of the agreement is to bring City of Hope cancer expertise to Providence’s three valley hospitals: Providence Saint Joseph Medical Center in Burbank, Providence Holy Cross Medical Center in Mission Hills and Providence Tarzana Medical Center. Hunn said details of the agreement are still in negotiation. But he added City of Hope to a growing list of services Providence offers through its hospitals, including hospice, palliative care, tattoo removal and a sexual assault recovery team. “We have to preserve every health care dollar we can,” he said. “We can’t be wasteful.” UCLA deal In addition to USC, UCLA has made inroads to the Valley market this year. In February it opened a clinic in Thousand Oaks. In the next two years, UCLA – which has traditionally served the Westside and Santa Monica – plans to double the number of its doctors in the greater San Fernando Valley area by opening clinics in Porter Ranch, Santa Clarita and Calabasas. And in October, UCLA signed an agreement to take over the leases and operations at six clinics run by the Motion Picture & Television Fund. For years, the fund ran annual deficits in the $10 million range, propped up by big-money donations from Hollywood’s top names. In 2012 the fund launched a $350 million fundraising campaign to build its endowment and provide care to entertainment industry veterans. Last week, Sumner Redstone donated $20 million, bringing the campaign’s total to $300 million. Under the UCLA agreement, the 43 doctors at the fund’s clinics will join the UCLA Faculty Practice Group, and many will become faculty members at the university’s school of medicine. For the fund, cost-savings appeared the main motive for the deal. The fund did not make an executive available for interview, but in a statement, Chief Executive Bob Beitcher said the new arrangement will allow the organization to continue serving entertainment industry workers. “We couldn’t have found a better partner than UCLA Health System to future-proof the provision of high-quality health care for our entertainment industry community,” he said in the statement. Gallegos at the hospital association expects merger and acquisition activity will increase in the future because Los Angeles County has lots of standalone hospitals, and eventually they will have to decide to serve a specific niche or join a larger group. “There will be those who have the resources to withstand the change, but others won’t,” he said. “We even expect hospital closures.” Jacobs, from Camden Group, said the Los Angeles market, including the greater Valley, is still much more fragmented than other parts of California. “Los Angeles still has a lot of individual hospitals and physicians in private practice,” she said. “So in a sense, the pace of consolidation is just catching up to the rest of the state.” The Deloitte study predicted that increased regulation under health care reform will diminish the profit gains from hospital consolidation in the future. Although the new law will bring more insured people into the health care system, it structures Medicare payments to discourage sending patients to hospitals, traditionally the most expensive site for medical treatment. At the same time, the law requires electronic medical records, metrics on care quality and certain services that will increase costs for hospitals. “Many acquisitors appear to have successfully managed expenses post-deal; this may become more difficult in future transactions due to regulatory changes and cost pressures,” the Deloitte study predicted. In response, Gallegos said hospitals are expanding their services beyond inpatient care to include chronic care, disease prevention and hospice, while still offering surgeries and acute care that people expect. “Knowing that the focus is away from inpatient care, hospitals are adjusting to find their place in this new paradigm,” he said. “But there will be a need, with an aging population that will need care.” Download the 2013 VALLEY’S LARGEST HOSPITALS list (pdf)