HOSPITAL FACING FISCAL CRISIS FINANCIAL WOES BLAMED ON BLUE CROSS PACT.

Byline: Jason Takenouchi Staff Writer

SANTA CLARITA - A sweetheart deal gone sour is threatening to bankrupt the Santa Clarita Valley's only community hospital and reduce medical access for thousands of area residents.

The crisis stems from a 1996 contract that Henry Mayo Newhall Memorial Hospital officials signed with Blue Cross of California, the state's largest health insurer. The contract - negotiated by former hospital chief executive Duffy Watson - was designed to undermine the hospital's only competitor for outpatient surgery services in the valley, according to interviews with doctors and hospital officials.

But instead of eliminating the competition, the pact with Blue Cross undermined Newhall Memorial. Hospital officials say they began taking heavy financial losses on their Blue Cross patients after 1996, and they now say they would rather cancel the contract on April 7 than continue losing money on it.

In an open letter to valley residents last week, newly-appointed hospital CEO James T. Yoshioka and W. Bryan George, chairman of the hospital's board, said they want a contract that ``at the very minimum,'' will allow the hospital to break even on Blue Cross patients.

Blue Cross spokesman Michael Chee countered that his company is willing to negotiate, but is not willing to be ``held responsible for the hospital's entire financial losses.''

DEADLINE LOOMING

Negotiations between the two sides are continuing. If they do not reach an agreement by Friday, most valley residents with Blue Cross coverage will not be covered for non-emergency medical care at Newhall Memorial.

Santa Clarita teacher Brooke Bambrick, a Blue Cross customer, said she is stunned by the potential loss of local hospital access.

``It's the only hospital in the area,'' she said. ``It's not like we can go out and have a thousand choices.''

Blue Cross and 217-bed Newhall Memorial are no strangers to hardball tactics.

According to doctors and hospital officials, former Newhall Memorial CEO Watson fought for a Blue Cross contract in 1996 that would require the insurer to cancel its contract with the Valencia Surgical Center, the hospital's only competitor for outpatient surgery in the valley. At the time, about one-third of Valencia Surgical's customers had Blue Cross coverage.

In 1997, Blue Cross ended its contract with Valencia Surgical without explanation. Dave Morris, a Century City lawyer representing the surgical center, said Blue Cross never asked the center to match Newhall Memorial's reimbursement rates or otherwise compete to maintain its Blue Cross contract.

Morris said the Blue Cross decision left him perplexed. ``What advantage would there be for Blue Cross in that situation?'' Morris said. ``What did they get from the hospital for this exclusivity that they wouldn't have gotten without it?''

Health care analysts say insurers such as Blue Cross usually sign exclusive contracts in exchange for lower reimbursement rates.

EXCLUSIVE CONTRACT BACKFIRED

Valencia Surgical - founded by a group of physicians in 1991 - survived despite the loss of its Blue Cross customers. But low Blue Cross reimbursement rates at the hospital have led to mounting financial losses in the last couple of years, according to Newhall Memorial spokeswoman Janice Newbold.

Health care finance expert Glenn Melnick said Newhall Memorial's Blue Cross losses are especially unusual because outpatient surgery is a highly profitable line of business.

``I find it kind of surprising that they would have been able to negotiate an exclusive contract for all outpatient surgery and still lose money,'' said Melnick, a professor of health care finance at USC.

Newbold defended the Blue Cross contract, calling it a ``common negotiating matter'' and ``an astute business practice.''

But the mounting Blue Cross losses are clearly compounding a financial crisis at the 25-year-old facility. In recent years Newhall Memorial has spent millions of dollars on required earthquake retrofitting, and cuts in reimbursements from the federal Medicare program have stripped the facility of millions of dollars in revenue. A heavy debt load has also scared off potential buyers.

OTHER CONTRACTS CANCELED

If Newhall Memorial cancels its Blue Cross contract this week, it will not be the only facility to spurn the insurance giant. Good Samaritan Hospital in Los Angeles and a hospital group in Santa Barbara also have canceled their contracts with Blue Cross this year.

And low reimbursements from Blue Cross are hurting almost every other hospital in the state, according to Jim Lott, executive vice president of the Healthcare Association of Southern California, a hospital trade group.

``There isn't a hospital in California that is getting a good price from Blue Cross that they can live with,'' Lott said. ``We're hearing from more and more hospitals that intend to turn down Blue Cross unless they end their predatory pricing practices.''

Blue Cross - the state's largest health plan, with about 5 million members - has been able to extract deep discounts in what it pays hospitals for its customers' medical care, analysts say. Independent hospitals such as Newhall Memorial have been particularly vulnerable because they do not have the bargaining power of the larger hospital chains.

But Lott said the insurer's hard-line strategy could cost it dearly if it loses its contract with the only community hospital in the Santa Clarita Valley.

``Blue Cross is going to be put in an awkward position in the Santa Clarita Valley if all of their members have to go to the San Fernando Valley for health care,'' he said. ``Blue Cross is going to run into a serious, serious consumer relations problem.''

Some doctors say they are already routing Blue Cross patients away from Newhall Memorial and to other Southland hospitals that accept Blue Cross insurance, including Providence Holy Cross Medical Center in Mission Hills.

``I've already scheduled one case for Holy Cross,'' said John Kaufman, a doctor who has practiced in the Santa Clarita Valley for a quarter century.

Kaufman - who also performs surgeries at Valencia Surgical - said he will face longer drives and will be away from his Santa Clarita practice more often if the hospital cancels the Blue Cross contract this week. He said it would also force patients to drive longer after surgery ``when they're coming home and are in pain and want to rest as soon as possible.''

The problem would be less severe, Kaufman said, if Blue Cross had maintained its contract with Valencia Surgical.

``Unfortunately, patients do not have the option of the Valencia Surgical Center, which I think is a real disgrace to this community,'' he said.