Hospital shuffle.

CONSOLIDATION CONTINUES AMONG SMALL LOCAL FACILITIES

Teetering on the brink of financial doom, dozens of L.A.-area community hospitals have been selling out to large conglomerates that are looking to expand and thereby gain more clout with managed care companies.

So at first blush, last week's sale of two more small community hospitals to a larger hospital operator seemed to fit that mold. But it doesn't.

Houston-based Healthplus Corp. bought the 180-bed Memorial Hospital of Gardena and the 127-bed East Los Angeles Doctors Hospital. Unlike most other small hospitals selling out, these two actually have been turning a profit, according to hospital officials.

And Healthplus, a privately held company founded in 1996, is too small to gain much clout with local managed care operations. In addition to the two small L.A. facilities it bought last week, Healthplus only owns two hospitals in Houston and one in St. Louis.

Health care analysts, in fact, were somewhat puzzled by the deal.

"Healthplus is new in the market," said Glenn Melnick, a health care analyst for Rand Corp. in Santa Monica. "It's kind of surprising they would enter into the California market with such a small presence. What we usually see are large systems doing acquisitions to get larger in a state. Ideally, they would like to acquire all the hospitals in a geographic area, but there are antitrust laws that inhibit that."

Healthplus Chief Financial Officer Mac Burt said the company might well continue to expand in Los Angeles, though no further local acquisitions are currently planned.

The real reason the company opted to enter the L.A. market is that Healthplus officials believe they can make the two local hospitals just as profitable as their facilities in Houston, which are doing well financially, according to Melnick.

"The L.A. market is a market we feel we can do well in - it's not that different from the one in Houston," Burt said. "We specialize in acute care - bread-and-butter hospitals that serve a specific community and probably have 200 beds or less."

The two hospitals were purchased from Woodland Hills-based Foundation Health Systems Inc., which took possession of them in 1992 as part of its acquisition of Century MediCorp Inc.

Foundation Health had been trying for more than a year to sell them, according to spokesman David Olson.

"It's not our business," Olson said. "We're a health plan company, not a hospital company. But we thought it was important to put those hospitals in the hands of someone strategically committed to the hospital business over the long term."

Olson said Health Net, the managed care subsidiary of Foundation Health, will continue to serve patients at the two hospitals. This agreement was one of the key provisions of the sale, Bug said, because it relieves the two small hospitals from having to immediately negotiate with the hard-nosed managed care industry.

The almost 1,000 employees at the two hospitals just acquired by Healthplus believe their new owner will improve the capital resources of the hospitals. Burt said no layoffs are planned.

The outlook isn't as positive at other community hospitals that have just been taken into the fold of a larger organization. Earlier this month, Long Beach-based Memorial Health Services acquired two Orange County hospitals, the 139-bed La Palma Intercommunity Hospital and the 205-bed Martin Luther Hospital in Anaheim, from Catholic Healthcare West of San Francisco.

Officials at Memorial Health said layoffs are expected, but they have not yet determined how many positions will be cut. La Palma, which employs 560 people, may be shut down or converted into a psychiatric facility. Martin Luther and neighboring Anaheim Memorial Medical Center, already owned by Memorial Health Services, will be combined.

These two Orange County hospitals were originally part of Unihealth America, a Burbank-based company that merged with Catholic Healthcare West late last year.

Catholic Healthcare West took over a total of eight hospitals in the Los Angeles area in December. Besides the two in Orange County, it also acquired the Northridge Hospital Medical Center, Valley Hospital Medical Center in Van Nuys, Glendale Memorial Medical Center, Long Beach Community Hospital, California Hospital Medical Center Los Angeles and San Gabriel Valley Medical Center. No layoffs occurred at these hospitals.

After these acquisitions. Catholic Healthcare West became one of the largest non-profit hospital chains in the state, with a total of 48 hospitals.

That muscle came in handy when it was time for Catholic Healthcare West to renegotiate its managed care contract with Blue Cross of California, Melnick said.

The hospital company threatened to pull its network out of Blue Cross, so Blue Cross was forced to give its hospitals a higher reimbursement for expenses, according to Melnick.

ln fact, the Healthplus deal notwithstanding, that fits the pattern of most of the hospital consolidations going on in Los Angeles and elsewhere.

"A lot of the trend has to do with the changing competitive economic environment at hospitals," Melnick said. "Freestanding hospitals are finding it increasingly difficult to compete in this kind of marketplace. They join larger systems to hopefully attain greater bargaining power with managed care companies and insurance plans."