Hospitals micro-manage to avoid macro losses.

At Tarzana Medical Center, they know how to deal with a cost-conscious health care climate where profit margins are being squeezed like never before.

They micro-manage. With their custom-designed computer program, they know the budgets of every department at every hour of every day. They know how much money is coming in at every hour and how much money is going out. They even know which doctors have the best record of delivering the most efficient care.

They preach service. Everyone from the parking attendant to the neurosurgeon is evaluated in a monthly patient satisfaction study by an independent company. Salary raises are based upon that PSMS (Patient Satisfaction Monitoring System) score.

They examine files. One task force of physicians scrutinizes case files to determine the quality of care and whether it couldn't have been streamlined better, especially for the Medicare patients, whose bills are reimbursed at a flat fee by the government. Four other non-physician task forces look at the files in terms of efficiency, even going so far as examining the nuances of the admitting process.

Tarzana, a 212-bed hospital owned by a real estate investment trust, AREIT in Colorado, is doing what only a handful of hospitals can manage in L.A. County: making a healthy profit.

"Hospitals traditionally couldn't control expenses," said Roger Drue, chief executive of the hospital. "We're profitable because we're able to pinpoint the understanding of this business."

The hospital pays $5 million a year to AREIT and then keeps the rest. In 1991, the hospital made $10 million, said Drue.

That kind of profit is extremely rare among hospitals these days.

In 1990, 60 percent of the 178 hospitals in L.A. County lost money and for the other 40 percent, the average profit margin was 1 percent, according to figures by the Hospital Council of Southern California.

That's a dramatic change from a decade earlier, when 80 percent of the hospitals in L.A. County were operating in the black, with profit margins of 22 percent, according to the council. Estimated net income figures for hospitals in the 1992 fiscal year are considered to be far less, according to hospital officials.

The hospitals that survived the 1980s -- with the advances in technology that decreased hospital stays, the boom in managed care companies that negotiate contracts close to the margin, and the decrease in government reimbursements for Medicare and Medi-Cal patients -- are a small and varied lot.

According to financial data filed with the Office of Statewide Health Planning and Development for June 30, 1990, to June 29, 1991, only 11 percent (19 hospitals) reported a positive net income of more than $5 million. None seems to have the same strategy for success.

L.A. County's most profitable hospitals(*)
(June 30, 1990 - June 29, 1991)
Hospital                                        Net Income
UCLA Medical Center                            $21.1 million
Cedars-Sinai Medical Center                    $20.2 million
Northridge Hospital Medical Center             $17.9 million
Sherman Oaks Community Hospital                $12.8 million
St. John's Hospital and Medical Center         $10.7 million
Tarzana Medical Center                          $7.6 million
St. Vincent Medical Center                      $7.5 million
Memorial Medical Center of Long Beach           $7.4 million
The Hospital of the Good Samaritan              $7.1 million
Little Company of Mary Hospital                 $6.8 million
Kenneth Norris Jr. Cancer Hospital              $6.7 million
City of Hope National Medical Center            $6.3 million
Century City Hospital                           $6.2 million
Downey Community Hospital                       $6.1 million
Humana Hospital West Hills                      $6.1 million
Garfield Medical Center                         $6.1 million
Torrance Memorial Medical Center                $6.1 million
Beverly Hospital                                $5.9 million
Lancaster Community Hospital                    $5.5 million
Antelope Valley Hospital Medical Center         $5.2 million
L.A. County Community Hospital                  $4.3 million
Medical Center of North Hollywood               $4.0 million
San Dimas Community Hospital                    $3.9 million
Los Altos Hospital & Mental Health Center       $3.9 million
Methodist Hospital of Southern California       $3.8 million
Doctor's Hospital of Lakewood                   $3.6 million
Pioneer Hospital                                $3.5 million
Midway Hospital Medical Center                  $3.4 million
Pomona Valley Hospital Medical Center           $3.3 million
Westside Hospital                               $3.0 million
St Francis Medical Center                       $2.9 million
Glendale Adventist Medical Center               $2.8 million
Huntington Memorial Hospital                    $2.7 million
St. Mary Medical Center                         $2.7 million
Children's Hospital of Los Angeles              $2.7 million
Santa Monica Hospital Medical Center            $2.6 million
Long Beach Community Hospital                   $2.5 million
C.P.C. Westwood Hospital                        $2.5 million
Whittier Hospital Medical Center                $2.4 million
L.A. Doctors Hospital                           $2.3 million
L.A. County+USC Medical Center                  $2.1 million
Bellwood General Hospital                       $1.9 million
Hollywood Community Hospital                    $1.9 million
Verdugo Hills Hospital                          $1.8 million
Queen of the Valley Hospital - West Covina      $1.8 million
Neuropsychiatric Institute - UCLA               $1.7 million
Las Encinas Hospital                            $1.6 million
Charter Oak Psychiatric Hospital                $1.6 million
Foothill Presbyterian Hospital                  $1.6 million
College Hospital                                $1.5 million
Daniel Freeman Memorial Hospital                $1.4 million
Centinela Hospital Medical Center               $1.3 million
Westlake Medical Center                         $1.3 million
St. Joseph Medical Center                       $1.3 million
Barlow Hospital                                 $1.1 million

Much of a hospital's bottom line depends on what specialties it emphasizes. Orthopedics, cardiology and outpatient surgery are considered health care cash cows, while pediatrics, emergency rooms and Medi-Cal patients are considered big money drainers.

Here's a look at how some of the more profitable hospitals in L.A. County are competing in this harsh environment. (The profitability is based on positive net income figures given by the hospitals for the period between June 30, 1990, and June 29, 1991. That bottom line figure includes all income, not just a surplus from operations.)

UCLA Medical Center (12.2 million): The 732-bed teaching hospital's strategy is simple. It has the market on transplants, said Dave Allen, the hospital's controller. He said the hospital performs 500 to 600 transplants a year: a couple hundred liver, a hundred heart, a hundred-plus kidney and about 50 to 60 bone marrow transplants.

Considered a place of last resort, the hospital performs a number of complex procedures, which gives it leverage with managed-care companies because there is little competition.

"The bread and butter stuff like normal deliveries just doesn't make money any more," said Allen.

The hospital's net income, however, dropped radically from $21 million in 1990 to $12 million in 1991 and is expected to dip to $11 million in 1992, said Allen. He attributed the decline in net income to the growth in managed-care contracts -- 20 percent today versus nothing five years ago and the growth in Medi-Cal patients.

Sherman Oaks Hospital and Health Center ($12.7 million): The 156-bed hospital is located in a reasonably affluent area and has an unusually large amount of privately insured patients (60 percent), said David Levinsohn, the hospital's executive director. That's down from 70 percent a few years ago.

The hospital doesn't have obstetrics, pediatrics or cardiology, but it is strong in orthopedics, AIDS, oncology and general surgery, Levinsohn said. The hospital has a well-known burn center that attracts patients from all over the world. As an offshoot of the burn center, the hospital operates an outpatient program for minor burns and it has a wound care program.

He said the hospital's success is "short-lived" because the "cadre of private patients is decreasing." Net income for fiscal 1992 should be $3 million to $4 million less than last year's $12.7 million, he said.

St. John's Hospital and Health Center ($10.7 million): The 551-bed hospital in Santa Monica reduced full-time staff by 91 positions in 1991, said Alan Strauss, the hospital's senior vice president for finance.

Sixty percent of the hospital's patients are on Medicare, so the hospital is "stepping down care" at a variety of levels. As a patient gets better, he or she needs less care. In 1989 the hospital developed a 30-bed transitional care unit that's less labor intensive and has been exempt from the flat-fee government reimbursement. That exemption, however, is over this year.

Downey Community Hospital ($6.1 million): The 207-bed hospital is bucking the trend by pursuing Medi-Cal patients, said Carl Westerhoff, the hospital's vice president of corporate development. Prior to 1992, only 2 percent of the hospital's patients were Medi-Cal patients, he said.

Westerhoff said the government adjusts its reimbursement to hospitals bearing a "disproportionate share" of Medi-Cal. For hospitals with a 60 percent Medi-Cal load, the government gives 30 percent more, he said.

He said the hospital is also pursuing the capitated market, or being reimbursed by a flat fee instead of a per diem arrangement with a health maintenance organization.

"Half the business in L.A. County is capitated. You either have to embrace it or hide from it," he said.

Most hospitals are very skeptical about their future profitability. Most envision more consolidations and mergers between hospitals and hospitals pursuing partnerships with physicians.

Duane Carlberg, chief financial officer for Inter-Community Medical Hospital in Covina ($2 million), said the hospital's merger with Queen of the Valley Hospital in West Covina ($1 million) is expected to save between $5 million and $9 million annually in expenses within the next three years.

"With the merger, we'll have better economies of scale," said Carlberg. "We can avoid duplication in technology and reduce overhead."

He said the hospital has also acquired land in Diamond Bar to build an outpatient and ambulatory care hospital.

Other hospitals might take Long Beach Memorial Medical Center's ($7.4 million) lead by developing ancillary services.

"We're like GM," said Tom Collins, senior vice president for commercial services. "We can't make money on Chevrolets so we have a tire company."

The hospital operates three Lifeflight helicopters that fly 10 to 12 missions a day. Its Medical Care Management Services is a for-profit entity of 15 nurses that contracts out on an hourly basis to insurance companies who want a liaison with a patient. The hospital also started its own administrative agency for self-insured employers that now accounts for 35,000 lives, said Collins.

The problem with making money, especially for community hospitals, is the economic well-being of their area.

"If a community does badly, the hospital will reflect it. If it rebounds, so will we," said Ray Alan Rahn, executive vice president of Torrance Medical Center ($6.1 million).