Hospitals vs. HMOs: battle for survival in L.A. County.

Pity the hospitals of Los Angeles County.

With the nation's largest pool of uninsured residents, shrinking reimbursement rates from managed care, and a county-run system teetering on bankruptcy, L.A.'s 140-plus public and private hospitals are fighting for survival.

It is a dramatically different landscape than just five years ago, when fee-for-service payment and now vanishing indemnity health plans still set the tone for hospital finance.

Since 1991, average hospital reimbursement rates locally have fallen by 25 percent to 50 percent. More than 40 private hospitals in the six-county Southern California region have closed, and an estimated 40 percent of county hospitals will operate in the red this year.

As a result, it has been a busy year for hospital acquisitions and mergers, with already large chains like OrNda HealthCorp. and Tenet Healthcare Corp. securing more marketshare, increasing negotiating clout and cutting administrative costs.

Instead of well-heeled bastions of medicine where physicians call the shots and insurance pays the costs, L.A. hospitals have evolved by necessity into lean operations that must compete for paying patients.

"Hospitals just aren't getting paid as much as they used to," said Jim Barber, president of the Healthcare Association of Southern California, a lobbying group for private hospitals and preferred provider organizations.

The biggest factor pushing the transition, Barber and other industry representatives say, is the growth of managed care.

HMOs and PPOs have in recent years attracted vast numbers of patients through employee health plans. With so many covered lives in their camp - 30 percent to 40 percent of most hospitals' customers - private managed care has gained the upper hand in fee negotiations.

For in-patients, managed care payment takes two forms: a daily rate for time spent by patients in hospital; and capitation, in which a managed care group pays a hospital a monthly fee for each of its patient-members.

Under both systems, all costs incurred by the hospital - whether zero for healthier patients, or far more than the reimbursement rate, for the seriously ill - must be assumed by the hospital itself.

And that's where Los Angeles hospitals are being pinched.

In the good old days, most hospitals stayed afloat by juggling profits from indemnity insured patients to cover losses from indigents and the uninsured.

Contrary to popular misconceptions, all California hospitals must accept and stabilize all patients who need immediate care, whether or not the person has any money.

Private Los Angeles hospitals try to hustle uninsured patients to county-run facilities, like Los Angeles County-USC Medical Center or Martin Luther King, Jr. -Drew Medical Center, as quickly as possible. But in the process they inevitably incur some cost, and the county turns down up to 25 percent of transfer requests - usually on grounds that the patient is too ill to be moved or for other reasons.

Medicaid and Medi-Cal, the federal and state funding mechanisms for the very poor, cover part of the expenses. But with lower managed care reimbursement rates, there's far less financial cushion in the hospital system to make up the shortfall.

"In an area like Los Angeles, with such a large uninsured population, it creates a major problem," said Bob Holt, hospital liaison for the Los Angeles County Medical Association.

"You've got a requirement to provide certain services, but no guarantee you're going to get paid. It's probably harder (to run a Los Angeles hospital) than any time in the past," he said.

With 31 percent uninsured residents, Holt said, Los Angeles County has been the metropolitan region hardest hit by the growth in managed care.

The tightening of purse strings has had an upside: bloated hospitals with idle beds have downsized, and many have shifted their emphasis from inpatient to outpatient care.

But, critics say, reimbursement rates - not prudent medicine - increasingly set the standard of care.

"My fear is that the business side of health care will cut back to the point where people are harmed," said Brian Johnson, president of the Los Angeles County Medical Association.

Johnson further believes that the frenzy of hospital mergers will hurt the level of county-wide care. "The mergers are only good to the extent that we're now over-served" in bed capacity, he said.

If decisions on which hospitals remain open are made on purely business terms, Johnson believes, wide areas of the county will be underserved. "If it's purely economically driven, you're not going to see a hospital in South Central," he said.

As tough as things have gotten for private hospitals, the situation until recently has been worse for L.A.'s public facilities.

Last summer, the county came perilously close to going bankrupt when it faced an anticipated $1.2 billion budget shortfall. To avert the financial meltdown, county supervisors recommended shutting the massive Los Angeles County-USC Medical Center, which employs 9,000 staff and sees more than 900,000 patients a year. Most of those are from East Los Angeles and many are uninsured.

Like nearly all county hospitals, County-USC ran consistently and increasingly at a loss. But the announced closure set off a firestorm of community and employee protest. Shutting the hospital, critics said, would itself create a crisis in public health and overstrain the rest of the system.

The county responded by appointing a five-member citizens' committee that had 30 days to find an alternative.

Led by former Assemblyman Burt Margolin, the panel decided unanimously that the hospital should remain open, but that the entire county hospital system needed fundamental restructuring.

"This was a troubled system in need of restructuring, but the overnight closure of County-USC had nothing to do with rational system restructuring," Margolin said recently of the decision.

Like private hospitals, County-USC and other public hospitals had grown too large over the years in their in-patient capacity, with up to 50 percent of their beds idle last year.

What was needed, the citizens' committee decided, was a mimicking of the out-patient transition already underway in the private sector, while maintaining the emergency and technology-intensive services only the hospitals could provide.

To meet the immediate budget shortfall and pay for the transition, the White House provided a $364 million federal bailout package to be disbursed over five years.

To qualify for the money each year, the county must now show it is successfully downsizing inpatient capacity - by a total of at least one third at the end of the five-year period - through partnering with private-sector community clinic management.

"In terms of L.A. County's restructuring, the whole point is to convert from a hospital-based system to outpatients, in a manner similar to the private sector," said Mandy Johnson, executive director of the Community Clinic Association of Los Angeles County. So far, she said, it has happened at incredible pace.

"This is the fastest L.A. County has ever moved on anything," Johnson said. By year's end the county will have contracted with 27 private companies for the running of 80 community access clinics, she said.

To further reduce its in-patient capacity, the county this year sold two hospitals - Rancho Los Amigos Hospital in Downey, and High Desert Hospital in Lancaster to private operators.

Officials say more sales are likely.

If there is one thing the hospital industry [TABULAR DATA OMITTED] can take solace in, it is that managed care is set to increase reimbursement rates in late 1997 and early 1998.

"We've gone back to our customers and asked for increases," said David Olson, a spokesman for Health Systems International, one of the nation's largest HMOs. "We recognize the cost pressures on the provider side and are trying to do something about it."

Olson acknowledged that much of the impetus for HMOs to raise rates to customers and pass on some of the new revenue to hospitals, is that the managed care industry's own profit margins have dropped this year.

"It's a little early to talk about (how much rates will rise) but it's clear to the entire community that rates have got to come up because costs are going up," Olson said.

Whatever the reason, the greater revenue flow, combined with their own downsizing, may finally offer some light at the end of the tunnel for Los Angeles hospitals.