Health care restructuring to accelerate during 1994; HMOs expected to keep reaping benefits of reforms.

Much like 1993, the year ahead is expected to be another of restructuring for the health care industry in Los Angeles, industry sources said. In the face of pending health care reform, hospitals, physicians and managed care providers will likely step up the pace of restructuring to meet the changing health care environment.

The forecast for the industry is mixed. The changing system is expected to further benefit local health maintenance organizations, but will also likely increase the problems faced by Los Angeles hospitals and physicians.

Health care experts pointed out, however, that the shift toward managed care and low occupancy rates in hospitals are not solely a result of the health care reform package being drawn up in the nation's capital. Rather, most of the restructuring relates to long-term trends in the health care industry that have been accelerated due to the pending reforms.

According to Jim Barber, executive vice president of the Hospital Council of Southern California, President Clinton's health care agenda is following, rather than leading, the reforms that are taking place in California. "Health care reform on the national scale is using California as a model," said Barber. In managed care, for example, California leads the way.

As a result of the state's leading-edge position, local health maintenance organizations had a banner year in 1993 and expect more of the same in the year ahead.

Nationally, HMOs experienced a collective growth rate exceeding 10 percent in 1993. Local HMOs also expanded respectably. For California Care, Blue Cross of California's HMO, enrollment grew by 27.3 percent between September 1992 and September 1993, according to Blue Cross spokeswoman Cam Freedlund. Many said they expect 1994 to be an even better year for local HMOs than 1993.

"I think that 1994 will see even more rapid growth for the industry because of broader recognition (of managed care systems)," said Dr. Arthur Southam, chief executive officer of Chatsworth-based CareAmerica Health Plans. The President's proposal on national health care reform, explained Southam, has made more employers aware of managed health care and that has been good for the industry as a whole.

Besides national health care reform, another factor that will likely significantly affect local HMOs in 1994, according to Southam, will be the extent to which the local economy recovers. When the Los Angeles economy begins improving, enrollment in HMOs may increase even further, sources said.

"The employment situation in Southern California has been difficult for the HMOs because people get their coverage through their employers," said Southam.

Southam also predicted that, as competition increases locally among HMOs, charges for enrollment will decrease, news that should be well received by employers. As a result, he said, profit margins may be smaller next year.

The coming year will also likely see a continuation of the wave of mergers that swept through 1993 with separate mergers announced by two local HMOs, Burbank-based UniHealth America and Woodland Hills-based Health Net.

Spurring the HMO merger trend are actual and anticipated changes in the health care delivery system, according to Tom Geiser, corporate counsel for Woodland Hills-based WellPoint Health Networks Inc. "Whatever legislation comes out will have the characteristics of increasing access and leveling the playing field in terms of products and the pricing of products," he said.

Increased competition is likely to give rise to an emphasis on quality medical care, said Geiser. As the HMOs compete for enrollees, and prices for enrollment flatten out, the quality of medical service offered will become more of an issue. Well Point has begun rating the medical groups in its alliance on the quality of services they provide.

Changes that have sent shock waves through local hospitals in recent years are also expected to continue in 1994, industry sources said. Since 1991, no fewer than 30 Southern California hospitals have reduced staff size through attrition and layoffs. In the past 10 years, 33 hospitals in Los Angeles County have closed. Additionally, hospital occupancy rates remain low, and no one believes the situation will change any time soon, sources said.

The health care delivery system is changing from hospitals focusing on acute-care needs to primary-care physicians administering preventive care.

"The idea is that, in an ideal future, hospitals will be used less because we will be doing a better job of preventing disease and illness and injury," said Barber of the Hospital Council of Southern California. "We will always have hospitals for acute care, but many hospitals are 50 percent occupied because of that now."

Hospitals are responding in various ways to these changes. Layoffs and hospital closings have been common in recent years. Many other hospitals are converting inpatient-care centers to outpatient and diagnostic centers, said Barber. Also, he predicted Southern California will witness more hospital consolidations in 1994 and beyond.

"There will be fewer independent, free-standing community hospitals with their own boards and their own medical staffs," predicted Barber. Instead, more hospitals will develop interrelated medical staffs and, through consolidations, be able to serve a wider geographic area, he said.

That scenario is similar to the Kaiser system of hospitals that already exists in California. One of Kaiser's selling points to employers is that it can provide coverage to employees all over the state.

Nevertheless, the trend toward downsizing of the hospital system will likely continue. "The decline in the number of occupied hospital beds and the number of hospitals will accelerate with reform and with the general trend," said Barber.

Large hospitals, which historically have been home to specialists, are going to have to do major restructuring, said Tom Weinberger, an investment banker with the Los Angeles office of Oppenheimer & Co. Inc.

The trend toward a managed care environment is also having an impact on local physicians. And, according to Dr. Ben Shwachman, president of the Los Angeles County Medical Association, local doctors are none too happy about the situation. "Incomes for physicians are fixed and falling," said Shwachman. "They are falling because expenses continue to increase."

As incomes decline, doctors are abandoning private practices to join health maintenance organizations so their salaries will be fixed according to contracts negotiated between the medical groups and HMOs.

Shwachman said the best aspect of health care reforms for doctors is that the reforms will likely increase access to medical care. As a result, physicians could make up lost revenues through treating a greater number of patients. But he said he would not be surprised to see many California physicians leaving the state in the year to come. The managed care system in California is more advanced than in other states and the cost of malpractice insurance is extremely high. Moving to other states gives physicians the opportunity to practice privately for a few more years before the national reforms kick in and make some decent profits.