Hospital sale outlook is optimistic.

When Tenet Healthcare Corp. recently put 19 hospitals in California up for sale, it cited the expense of state-mandated earthquake repairs and low prospects for future profits--leading to questions about whether any buyers will be found.

But data compiled by the Business Journal shows that as recently as the third quarter of 2002, the 14 Tenet hospitals in Los Angeles County earned nearly $71 million for the nation's second-largest hospital chain. All but two showed a profit.

The results were no doubt spiked by Santa Barbara-based Tenet apparently gaming the federal Medicare system, an issue that's the subject of current U.S. investigations. By the third quarter of 2003, those same 14 hospitals lost nearly $12 million.

But the figures, along with a closer look at the hospitals and the outlook for seismic costs, suggest that many of the facilities are indeed capable of providing a return for a buyer. At the least, the prospects now seem more ambiguous than first believed in some industry circles.

"Many of them, with the right management team, can end up as nice and profitable hospitals," said Andreas Dirnagl, an analyst with Harris Nesbitt.

While it's early in the process, it's possible to see where some of the potential buying interest could come from.

Daniel Freeman's prospects

One is Catholic Healthcare West, which already operates five hospitals in Los Angeles County, including Northridge Hospital Medical Center. That facility is near the two campuses of Tenet's Encino-Tarzana Regional Medical Center. A spokesman for San Francisco Catholic Healthcare would only say CHW is "always interested in exploring options."

Dr. Stephen Newman, chief executive of Tenet's California operations, told a state Assembly Health Committee hearing in Van Nuys last week that Tenet was also prepared to work with community groups to sell hospitals that larger buyers may not want.

Daniel Freeman Marina Hospital is among the likeliest to fall into that category. Tenet sought to shut down the hospital two years ago until a community outcry halted those plans. Now the community group that led the fight is ready to talk.

"If Tenet really wants the best for these hospitals then they have a very valuable partner here in the Marina," said Julie Inouye, a community activist and executive director of Community Action for Healthcare Reform and Education.

While it's unlikely that the hospitals could repeat what was essentially a rigged performance through Tenet's milking of the Medicare cash cow, Dirnagl said a good owner could overcome other problems.

Any newly negotiated managed care contracts, for example, would likely be better than what Tenet gets now, Dirnagl said "Anyone who buys one of these facilities will do so because they think it will give them leverage," he said.

One strategy could involve clustering.

A Tenet cluster of three Westside hospitals, Brotman Medical Center in Culver City, Centinela Hospital Medical Center and Daniel Freeman in Inglewood, are likely to attract interest. Together, the three earned nearly $30 million in the third quarter of 2002, although they lost over $9 million in the like period the following year.

Tenet viewed the cluster as being able to efficiently provide services by focusing on individual strengths. Brotman has an important burn unit, and Centinela is strong in orthopedics, for example. The hospitals' geographic proximity helps give them negotiating strength with commercial health plans.

But other groups might be trimmed back.

On the east side of Los Angeles, Tenet owns five community hospitals. Some, such as Whittier Medical Center and Garfield Medical Center in Monterey Park remain highly profitable.

But Greater El Monte Community Hospital has never been much of a moneymaker. It could end up odd-man-out in a regional purchase--as could Midway Hospital Medical Center or Daniel Freeman Marina on the Westside.

"The hospital business is a tough business, and if it weren't Tenet wouldn't be talking about divesting of assets," said Glenn Melnick, a professor of health care finance at the University of Southern California.

Indeed, HCA Inc., the nation's largest for-profit hospital chain, appears to have little interest in the Encino-Tarzana campus, despite the fact that it owns a 25 percent share of the facilities, which historically have been profitable.

"We are primarily interested in facilities that would enhance our position where we already have a solid presence, or something that might put us in a leading position," said HCA spokesman Jeff Prescott.

Seismic overhauls

A big question in the sales is the cost of earthquake retrofitting.

Tenet has backed away from expensive upgrades, partially because its credit rating was lowered to junk status by the credit agencies. And the company has refused to break out the $1.6 billion total projected cost.

But at Century City Hospital, where Tenet walked away from a lease, the retrofit is costing half as much as first anticipated, said the building's owner, David Wilstein.

Wilstein was successful in attracting Salus Surgical Group, a Beverly Hills-based doctors group that specializes in orthopedic outpatient surgery, to the 100-bed hospital. "It's a very real problem," Wilstein said of the seismic issues, "but we have something that is an elegant design."

Some of the other hospitals in Tenet's portfolio, such as two-story Midway, may need little work. And even among the potential buyers of community hospitals that require reconstruction. there could be some relief. While on its own a local group or a doctors' partnership could have a hard time financing the improvements, which can run into the tens of millions of dollars, these groups have access to capital funds through a special state program established to assist non-profit hospitals. There is also the possibility that local governments could help float bonds.

In addition, while the law requires hospitals to retrofit by 2008, many of Tenet's facilities have been granted extensions until 2013.

Century City, where Salus Surgical is likely to take over in the next few months, will be an early test of how new ownership structures can operate. This will be the group's first shot at running a general acute-care hospital, and it plans to open up equity interests to the doctors who actively practice there, Wilstein said.

"I think they expect to expand their market share. There will be a far deeper interest in the hospital and its operations," he said.

Officials of Salus Surgical declined comment, but in an e-mail, they said they expect the hospital to be a financial success despite Tenet's record there.

Other hospitals with physician ownership interest are Garfield Medical Center and Monterey Park Hospital, both located in the primarily Asian city of Monterey Park, where there is a lightly bound physician community. But this strategy has its critics.

"I am not particularly wild about this idea. It's coming full circle to the 1950s when doctors were the CEOs and upper management," Melnick said. "Doctors are notoriously bad businessmen."

Newman cautioned that a snapshot of an individual hospital's finances can be misleading but said that the cumulative figures accurately reflect Tenet's problems. "They do show a trend," he said.

Among the reasons for the losses are changes in Tenet's Medicare pricing that have substantially reduced government payments, less lucrative renegotiated contracts with health insurers, and a decision to write off a host of bad debt, including losses from patients without insurance.

Even so, Newman contended that Tenet believes that every single hospital can find a buyer. "We have high hopes for these hospitals," he said.

Critical Care Ward

Profits at local Tenet hospitals now up for sale took a turn for the
worse in the past year.

                          3Q02              3Q03
                        Operating        Operating
                        revenues/         revenues/
Name                   Net profit        Net profit

Brotman Medical      $28.5 million/    $26.1 million/
Center               5.6 million       ($22,000)

Centinela Hospital   $61 million/      $52.8 million/
Medical Center       $18.2 million     ($522,000)

Community and        $9.8 million/     $10.7 million/
Mission Hospitals    $482,000          ($691,000)
of Huntington Park

Daniel Freeman       $9 million/       $8 million/
Marina Hospital      ($760,000)        ($2.4 million)

Daniel Freeman       $31.2 million/    $21.1 million/
Memorial Hospital    $5.9 million      ($8.6 million)

Encino-Tarzana       $17.1 million/    $13.5 million/
Regional Medical     $3.5 million      ($209,000)
Center -- Encino

Encino-Tarzana       $49.6 million/    $34.6 million/
Regional Medical     $8.5 million      ($3.3 million)
Center -- Tarzana

Garfield Medical     $40.7 million/    $33.3 million/
Center               $14.8 million     $5.3 million

Greater El Monte     $9 million/       $9.4 million/
Community Hospital   ($325,000)        ($472,000)

Midway Hospital      $24.5 million/    $16.9 million/
Medical Center       $7.4 million      ($857,000)

Monterey Park        $13.1 million/    $11.4 million/
Hospital             $2.8 million      ($536,000)

Queen of Angels/     $41.6 million/    $35.5 million/
Hollywood            $4.5 million      ($232,000)
Presbyterian

Whittier Hospital    $18 million/      $19.9 million/
Medical Center       $343,000          $593,000

TOTALS               $353.1 million/   $293.2 million/
                     $70.9 million     ($12 million)

                       Total     Needing
Name                 buildings   retrofit   Prospects

Brotman Medical          3          3       Dominant community hospital
Center                                      in Culver City market with
                                            well respected burn unit

Centinela Hospital      10          9       Historic moneymaker with
Medical Center                              reputation for fine
                                            specialty care in
                                            orthopedics and cardiology

Community and            3          3       Financially marginal, older
Mission Hospitals                           community hospitals a mile
of Huntington Park                          apart in Huntington Park

Daniel Freeman           3          1       Small money loser in
Marina Hospital                             growing area with very very
                                            strong and active community
                                            support

Daniel Freeman           8          1       Large community hospital
Memorial Hospital                           Tenet had briefly turned
                                            around but needs major
                                            upgrade

Encino-Tarzana           3          3       Valley moneymaker that like
Regional Medical                            its sister campus has fine
Center -- Encino                            specialty care, in wealthy
                                            area

Encino-Tarzana           8          3       Largest of two campuses,
Regional Medical                            Tenet plans to sell them
Center -- Tarzana                           together, historically
                                            profitable

Garfield Medical         6          3       Community and specialized
Center                                      care hospital that
                                            continues to make money

Greater El Monte         2          0       Financially marginal money
Community Hospital                          loser in major need of
                                            facelift, needed in
                                            community

Midway Hospital          4          3       Historically profitable,
Medical Center                              small community hospital
                                            serving the Fairfax
                                            District

Monterey Park            2          1       Historically profitable,
Hospital                                    community hospital that
                                            continues to make money

Queen of Angels/         7          4       Large baby factory, with
Hollywood                                   long history and strong
Presbyterian                                community support, major
                                            seismic work

Whittier Hospital        7          4       Mildly profitable,
Medical Center                              community hospital with
                                            near lock on the Whittier
                                            market

TOTALS                  66          38

Sources: Office of Statewide Health Planning, Business Journal research