Doctors hope ownership will heal ailing hospitals: groups buy nine tenet facilities in L.A. area.

The doctors are back.

After selling off hospital ownerships more than a decade ago, doctors are involved in the purchase of all nine of the hospitals Tenet Healthcare Corp. has so far unloaded in Los Angeles County.

The transactions mark another rapid shift in the structure of the hospital industry, both locally and nationally, as doctors, disillusioned with corporate ownership, dive back into a business that only recently was considered too complicated for them.

"It's a new paradigm shift in the way health care is going to be run," said Dr. Shahram Ravan, president of Physicians of Midway Inc., a doctors group that acquired Midway Hospital Medical Center this month. "People are realizing that (the existing) system of corporate ownership did not work."

Along with Midway, Santa Barbara-based Tenet last month sold three Westside hospitals to a group with doctor investors, and in July it sold four San Gabriel Valley area hospitals to a company owned by a local physician. Century City Hospital is also being re-opened by a doctors' surgery group, and Tenet is expected to shortly announce that Brotman Medical Center will be sold to another such group.

All told, Tenet has plans to divest 14 hospitals in Los Angeles County, out of 27 nationwide.

Unlike in past attempts at hospital ownership, these new groups generally are hiring professional administrators to manage the facilities on a day-to-day basis, although doctors will be heavily involved in policymaking.

"It has been a steadily building wave, and it will continue to grow," said Ted Schwab, a partner in Sokolov Sokolov Burgess, a health care consulting firm.

Deep roots

Doctors owning hospitals is nothing new, and in some cases dates back to the early 20th century. Among the noteworthy hospitals nationwide owned or started by doctors is the Mayo Clinic in Rochester, Minn.

Closer to home, doctors have owned and operated hospitals throughout Los Angeles County, including three on the Westside that were eventually closed. Currently only a handful of hospitals, including Pacific Alliance Medical Center in Chinatown, are owned and operated by doctors.

Many of these hospitals were started after the Medicare Act was passed by Congress in 1964 to treat an expected wave of elderly patients, who now account for about 40 percent of hospital revenue nationwide.

However, many doctors got out of the business in the 1980s when the government tightened up and changed the Medicare reimbursement system from one in which hospitals received their costs plus a certain margin, to one in which they received flat fees. At the same time, managed care was making big inroads.

"Up until the early 1980s, it did not take a rocket scientist to run hospitals. You got reimbursement dollar for dollar. You didn't have to worry about a hospital being put out of business," said Ron Yukelson, director of business development for St. Vincent Medical Center and a former Tenet executive.

But doctors have long complained that the large corporations formed in response to these changes were more interested in the bottom line than patients, making it frustrating for them professionally.

However, as investors, doctors have a profit motive that can conflict with patient-care goals.

Many doctors who invest say they want a greater say in staffing and other decisions. At Midway, Ravan expects the hospital will beef up staffing and increase purchases of diagnostic and other equipment that Tenet refused to buy--even to the point where patients remained longer than necessary because some services were not available then.

"We think we should have further equipment and manpower for certain areas of the hospital," he said.

Additional expenditures by the hospitals will come directly out of the pockets of the doctors themselves.

Steve Valentine, a health care consultant with the Camden Group, which is advising four of the local purchasing groups, said doctors can each make $100,000 or more a year as owners of a hospital, depending on its size, the number of investors, and how successful they are in bringing patients to the facility.

"There are just a lot of factors that go into it," he said, adding that initially the local hospitals probably won't throw off that much cash given the need for capital investment.

The Midway group is composed of Ravan and six other doctors on staff at the Fairfax district hospital. They purchased the hospital for $10 million, with personal investments and financing from a bank loan, he said.

Meanwhile, Salus Surgical Group, a Beverly Hills-based orthopedic practice that is opening outpatient surgical centers nationwide, is lead investor for Century City Hospital. Tenet walked away from that hospital this year when its lease expired. Salus plans to reopen the hospital before year-end.

AHMC Inc., a privately held corporation owned by San Gabriel Valley physician Dr. Jonathan Wu, bought Garfield Medical Center, Monterey Park Hospital, Greater El Monte Community Hospital and Whittier Hospital Medical Center for $100 million in July. It was already operating Alhambra Hospital Medical Center and another hospital in Montclair.

And last month, a group lead by a local businessman and two former Tenet hospital executives with financial backing from a private equity firm took over Centinela Hospital Medical Center, Daniel Freeman Memorial Hospital and Daniel Freeman Marina Hospital for an undisclosed sum.

Doctors are expected to have at least a 17 percent stake once the group is opened up to syndication, said G. Michael Finnigan, a former Hollywood Park executive who is chairman of the new Centinela Freeman HealthSystem.

Professional help

The local groups, and others across the nation, are not relying on doctors to manage the hospitals.

The chief executives at Centinela and Daniel Freeman Memorial will be running the Westside group, while Midway is retaining its current Tenet executive team and Salus has brought in a former Century City executive.

"I know how to run a surgery center but there are far fewer regulations than in running a hospital," said Dr. Randy Rosen, chief executive of Salus. "You need a seasoned hospital executive to run a hospital."

Tenet may have had no choice but to sell the hospitals to the doctors.

Cerberus Capital Management, a vulture investment firm, was considering buying all of Tenet's Southern California assets being divested, but ultimately passed, as did other large corporate health systems. Analysts said they were scared off by California regulations, which are requiring hospitals to undergo substantial seismic upgrades and meet strict nurse staffing requirements. Tenet denied the sales were last-ditch efforts.

"We would not be making deals with doctors' groups if we did not have a level of comfort they could continue to operate them as full-service acute-care hospitals," said Harry Anderson, Tenet's senior vice president of corporate communications.