Hospitals: diagnosis poor, prognosis good. (Health Care Services: Advertising Supplement).

Community hospitals are an important part of our health care system. Like your family doctor, they are local, they are a part of your community, and, thus, you are deeply connected to them.

For most health crises that require hospitalization, physicians consider the community hospital a superior choice. Family is close by, as are the doctors that know a patient best, and even the specialists that know a patient's doctor best are locals. All in all, the community hospital is part of a proven system for safe, professional and friendly care, and the best prospect for recovery.

Non-profit community hospitals are true community assets. Yet many, although they represent a critical support system for the people they serve, stand alone in a hostile environment and are losing the battle.

For example, there are eleven such hospitals in the north Los Angeles area. Ten are attempting to reorganize their debt under the protection of the federal bankruptcy courts. One just emerged--for the second time.

Granada Hills Community Hospital, located in the northern end of the San Fernando Valley, is one of the most recent to face a crisis. Without intervention by crisis managers working in concert with the hospital's board of directors and legal counsel, or the strong support of its doctors and staff, this hospital would have failed before February first of this year. Such a failure would have struck a serious blow to a hospital delivery network that currently serves almost a million people.

Why? There are not enough hospital beds in the area. Losing a whole hospital would be, according to the CEO of a large hospital in the area, "catastrophic." Having a shortage of beds in hospitals that struggle day to day to find enough beds for their patients is much more than inconvenient for patients, it could soon be deadly. Transporting critically ill people over long distances in heavy traffic is dangerous business. Nearly 14 cents of every dollar of all of the goods and services produced in the United States, over $1.4 trillion per year, is spent on healthcare. Employers have had to pony up to pay for double digit increases in health care premiums over the past two years while their employees pay more out of pocket to cover the cost of decreasing benefits.

All of these things considered, it is easy to conclude that hospitals, doctors and other health care providers are awash in money.

They are not.

So, where does the money go?

The short answer is to pay for unprecedented technology, pharmaceuticals, surgical and diagnostic tools that save, extend and improve the quality of life.

The long answer ranges from an aging population to often well meaning but expensive and often unfunded regulation, legislation and litigation.

While all of these factors would seem to make a strong argument for national health care insurance to preserve our hospitals and health care providers, they do not.

With a payment system where Medicare and especially MediCal reimbursements, which pay hospitals for services at a rate that is generally at or below cost, have been traditionally subsidized by private insurance, managed care companies squeeze hospitals in their fight to keep premiums down and margins up. The subsidies have dried up.

Today, most private insurers pay either according to Medicare's flat fee system based on a patient's diagnosis, or a flat, all inclusive fee per day regardless of the services provided under their managed care models.

For example, a Blue Cross patient needing open heart surgery to implant a defibrillator at Granada Hills results in a staggering loss. The hospital will pay out more than $32,000 in cash on the day of surgery for the defibrillator plus all of the ancillary costs of open heart surgery, medications, diagnostic testing and provide 24 hour intensive and general care for the patient for an average of six days at a direct cost of over $50,000. Yet, the hospital is paid just $7,200, or $1,200 per day for 6 days, and will wait about two months to get that.

In order to care for members of its community who have Blue Cross insurance, the hospital must perform these services by contract. The problem is that, while the losses for providing other services are smaller, the hospital still pays out at least a million dollars each year more than it is paid by Blue Cross.

What is the answer? Hospitals hoping to survive need to reduce costs by cooperating with each other to eliminate duplicated services such as management functions, technology and even transcription services. In other words, share them. And, it would lead to negotiating contracts with insurers as a group, because as a group they have enough leverage to be paid fairly for their services.

Recognizing that necessity, Granada Hills is working with two nearby hospitals to share services and reduce costs by forming Valley Care, a separate company that they will own. Eventually, hospital administrators believe that they can add most, if not all, of the 26 other not for profit, community or charity owned hospitals in the greater Los Angeles area to reduce costs as much as $1 million per hospital in their first year.

Although the rule of hospital life is still "survival of the fittest" and over 3,000 U.S. hospitals that have not proved to be fit in the past 20 years have closed, in the Los Angeles area, there is no room for failure. If necessity is the mother of invention, Valley Care may be the solution.

James Doulgeris is a crisis manager, a partner in Bay Management Group and the president and CEO of Healthcare Resource Specialists, Bay's healthcare crisis management subsidiary. He has been serving as the Interim President and CEO of Granada Hills Community Hospital since January of this year. For more information please contact James at [e-mail]. For more information on Bay Management Group, visit www.baymgmt.com.