A turn for the worse triggers cuts in staff, programs at St. Johns.

Officials at St. John's Health Center, citing difficulty in competing financially against UCLA Medical Center and Cedars-Sinai Medical Center, will close six programs and lay off 200 employees, more than 10 percent of the work force.

Employees at the well-regarded 223-bed hospital in Santa Monica were informed of the decision on Dec. 11 and already many of the workers have left, though some are staying on until all programs are phased out over the next few weeks.

Hospital officials said the layoffs were unavoidable after operating income dwindled due to higher labor costs, cuts in Medicare reimbursements and expensive technological advances. After making money for years, the hospital is barely breaking even halfway through the current fiscal year.

"The (financial) trends for the organization had been unfavorable. We had been trying to reverse those trends but have not been successful," said Bruce Lamoureux, St. John's chief executive, who estimated the cutbacks should save the hospital about $10 million annually.

A major culprit: surging nursing costs. In early 2002, St. Johns management successfully defeated a unionization drive by promising its nurses the highest pay in the market.

Both UCLA in Westwood and Cedars-Sinai in West Los Angeles have much deeper pockets than St. John's, a community hospital that's a member of the Sisters of Charity of Leavenworth Health System, a 10-hospital Catholic system based in Lenexa, Kansas.

While the overall chain has reported strong earnings this year, the hospitals are only loosely affiliated and not able to tap into a corporate pool of money during lean financial times.

"UCLA and Cedars are wonderful institutions and formidable competitors in our micro market, but they are multiple times larger in terms of scale," Lamoureux said.

St. John's officials said the cost of wages and benefits rose to $114 million in the 20022003 fiscal year from $105 million in the prior fiscal year. After wage increases totaling about 20 percent, nurses at St. John's make between $27.50 and $40.43 per hour.

Attorney Carl McKinzie, chairman of the hospital's board, said the wage pledge was necessary to retain nurses. He said the alternative, hiring more expensive temporary staffers, would have cost just as much.

"It costs more (up front) to be at the top of the market, but I think there are economies in doing that," he said. "We have one of the lowest vacancy factors (4 percent) of any hospital around."

Industry problems

St. John's is not the only hospital in the area that's had to contend with cutbacks and closures.

Troubled Tenet Healthcare Corp. is walking away from its lease at Century City Hospital, while the larger UCLA hospital system is in the process of cutting nearly 500 jobs over three years.

Like other hospitals, St. John's faces financial challenges large and small. The growing cost of high-tech medical devices, for example, and dropping reimbursements from both Medicare and commercial health plans, each had had a major impact along with nurses' rising wages.

"(Cutbacks) are happening in our industry, but every time you hear about these things you pay attention. There is a dynamic at play here that could be contagious," said Jim Lott, executive vice president of the Healthcare Association of Southern California, a regional hospital industry trade group.

St. John's is closing a number of outpatient programs, including physical therapy, cardiac rehabilitation, parent education and personal health care. It is also closing its inpatient and outpatient occupational therapy program, and a Medicare-funded home health agency: (It is working out an agreement to transfer ownership of the agency to another provider.)

St. John's officials said they targeted programs that were least essential to providing quality inpatient care.

(The company will continue with its $315 million construction of a new hospital building, Lamoureux said. Money being used for those purposes has already been set aside.)

Barely breaking even

Chief Financial Officer Alan Strauss said the hospital posted net income of $7.4 million in its latest fiscal year ended May 31, up from $3.8 million in the prior year. But in the first five months of this fiscal year its position had been deteriorating.

The hospital earned $5.8 million through Oct. 31, but all but $400,000 of that was from investment earnings, due to the recent market rally. By comparison, it earned $1.5 million for the like period a year ago, despite $5 million in investment losses, he said.

"Practically all of our income this year has come from investment income, not from operations," Strauss said.

At the same time, the hospital has seen growing losses from its Medicare program--its largest source of hospital revenue--partially as a result of a government crackdown prompted by the Tenet scandal.

St. John's lost $13.1 million on the Medicare patients it treated in its 2002-2002 fiscal year, topping the $7.5 million it lost the prior year. About $4 million of those additional losses stem from cutbacks in program's "outlier" payments, Strauss said.

Hospitals earn Medicare outliers for treating particularly difficult cases, but the government changed its formula for distributing them following disclosure last year that Tenet was exploiting a loophole in the program to earn big profits.

St. John's has also seen the profitability of its cardiac program shrink as new cholesterol-reducing drugs and surgical devices have reduced the number of bypass surgeries, historically a money maker.

Lamoureux blamed some of St. John's problems on its "unique" status as a community hospital that competes against some of the top hospitals in the nation--Cedars-Sinai and UCLA. Thus it offers top-flight oncology and orthopedic programs not always found in similar hospitals, giving it a superior reputation but larger costs.