Hospital profit margins narrow as HMOs demand concessions.

Economically challenged.

That's how many L.A. County hospitals are feeling these days, as managed care providers put the squeeze on them to offer better concessions at lower and lower prices.

Most of the challenges are coming on two fronts:

First and foremost, hospitals throughout the county are struggling just to keep their bottom lines in positive territory amid declining revenues.

Second, industry officials worry that the quality of care might be slipping at many institutions, as they cut corners and put off new investment in the battle to make ends meet.

Of the hospital officials interviewed for this article, all reported that between 30 and 50 percent of their business currently comes from managed care contracts. The number jumps even higher - up to 90 percent for many hospitals - when Medicare and MediCal business is added in.

Hospitals began contracting with managed care companies as early as 1983, when the State of California first legalized such arrangements. The number of managed care contracts has grown significantly in the 1990s, and most major hospitals in L.A. County currently have more than 100 contracts with various managed care providers.

A managed care provider is a health insurance company that gives hospitals a fixed sum of money each year to care for their members, regardless of whether members make one trip or 100 trips to the hospital.

By comparison, more traditional fee-for-service insurers only reimburse hospitals for actual services provided to their enrollees.

Under the managed care system, hospitals have been forced to significantly increase their annual revenue write-offs, according to Bob Carmen, president of the Glendale Adventist Medical Center in Glendale.

Carmen explained that the discrepancy between what hospitals bill and the amount of money they actually collect has widened dramatically.

As managed care companies gain clout and demand better rates for their members, they are forcing hospitals to accept lower payments for each patient - thus making hospitals provide the same services for less money.

As a result, the hospital currently operates at a profit margin of 1.5 percent, a figure derived by dividing net income by net revenue. By comparison, Glendale Adventist was operating at profit margins in the 6 percent to 8 percent range 10 years ago, according to Carmen.

"We're still profitable, but we could see some substantial losses" in the event of a major medical disaster, he said.

Nearly all hospital officials reported cutting back their operations in order to stay in the black.

One area being cut as revenues decline is purchasing of new, higher-end equipment.

"When you don't make money, you can't go out and make new purchases," said Alan Strauss, CEO of St. John's Hospital and Health Center in Santa Monica.

Along similar lines, many hospitals are cutting back on higher-end medical services to save money, according to Tom Wright, vice president of managed care for Memorial Health Services of Long Beach, which operates the Long Beach Memorial Hospital and three other hospitals in Orange County.

"One of the challenges for organizations like mine is that we have fairly complex hospitals with fairly complex services that attract fairly complex problems," he said.

Under managed care, reimbursement schemes may be insufficient to cover the cost of some services, particularly the more complex ones, Wright added.

He said surgical departments in particular could be areas for cuts because of high operating expenses. Specifically, he noted that smaller hospitals could cut back in their neurology, orthopedics and cardiology departments as part of a cost-saving effort.

Few hospital officials believe that quality has declined at their own facilities - but they acknowledged that care in the industry as a whole may be slipping.

"Hospitals have begun to send the message, 'We believe we're getting close to the point where we're reducing the quality of the care we're giving patients,'" said William Parente, director and CEO of Santa Monica-UCLA Medical Center in Santa Monica. "So far there aren't any concrete signs that quality is falling, but there's just a sense that we're very close to the line."