health care networks buying up local hospitals.

Buyers step up despite institutions' scant profits

L.A. County hospitals are hardly a solid investment opportunity in today's health care environment. Profits at most are either low or non-existent, and many hospitals report more than half their licensed beds are empty at any given time, according to industry sources.

But despite hospitals' seeming lack of appeal, several large Southland facilities have, in fact, changed hands over the past year.

Most sellers cited lackluster profitability as their primary reason for selling. Buyers. meanwhile, said they are strategically purchasing hospitals in an effort to build up their Southland health care networks.

Nearly all buyers of L.A.-area hospitals over the last year already owned or operated other hospitals in relative proximity to their new purchases.

A case in point is Long Beach-based Memorial Health Services, which signed an agreement in December to purchase FHP Hospital in Fountain Valley from FHP Inc. for $87 million. Memorial Health already owns the 752-bed Long Beach Memorial Medical Center in Long Beach, the 220-bed Saddleback Memorial Center in Laguna Hills and the 224-bed Anaheim Memorial Hospital in Anaheim.

"These hospitals are very strategically located for us. They cover four adjacent service areas, providing almost complete coverage for L.A. and Orange counties," said Tom Collins, president and chief executive officer of Memorial Health.

Collins pointed out that Memorial Health is not simply "gobbling up hospitals" wherever it finds them. Instead, the company he heads is building up an area network of hospitals that complement each other geographically, with as few redundancies as possible, he said.

Strength in synergy

Similar to Memorial Health, Providence Health System of Seattle recently announced plans to purchase an L.A.-area hospital. Providence, which already owns and operates the St. Joseph Medical Center in Burbank, announced in December its intent to buy Holy Cross Medical Center, also of Mission Hills. Holy Cross is currently owned by the Holy Cross nuns of Notre Dame in Indiana (see related story on page 6A).

"Hospitals aren't the greatest investment these days, especially in Southern California. But what we look at is our ability to serve our community and adjacent communities. The synergies between (Holy Cross and St. Joseph) will make both of us stronger," said Michael Madden, chief executive for Providence Health System's L.A. region.

If the sale goes through, it would mark Providence Health System's first acquisition in L.A. County, apart from St. Joseph. Madden predicted the pending sale would result in eventual savings of about 2.5 percent for each of the two hospitals, through the combining of some operations and elimination of other redundancies.

Over on L.A.'s Westside, UCLA Center for Health Sciences in Westwood acquired its own new health facility last summer, when it purchased Santa Monica Hospital from Burbank-based health care conglomerate UniHealth.

UCLA made the purchase to bring together two hospitals with complementary strengths in adjacent communities, according to hospital officials. UCLA's strength lies in its highly specialized care, whereas Santa Monica Hospital is strong in primary patient care, according to Gerald Levey, provost at UCLA's school of medicine.

Reopening closed doors

While UCLA, Memorial Health Services and Providence Health System all pursued acquisitions of functioning hospitals, Friendly Hills HealthCare Network of La Habra is attempting to purchase a closed hospital facility once operated and still owned by Cigna HealthCare of California.

In that pending deal, now up for approval before the California Department of Corporations, Friendly Hills hopes to purchase the downtown L.A. building that was formerly Cigna Hospital. Friendly Hills plans to reopen the building for inpatient and outpatient services sometime later this year, according to Friendly Hills CEO Albert Barnett.

Barnett explained that Friendly Hills' planned purchase of Cigna Hospital is only a small part of the pending deal between the two companies. In addition to the downtown building, other assets Friendly Hills has agreed to purchase from Cigna of California include 29 clinics throughout L.A., Orange, San Bernadino and Riverside counties.

"We're going to have about 45 clinics altogether (following the purchase from Cigna), which will give us coverage throughout Southern California - from the San Fernando Valley, to Laguna, to San Bernadino County," said Friendly Hills Chief Operating Officer Gloria Mayer.

Collins of Memorial Health Services said the Southland's recent wave of hospital purchases is part of a larger industry consolidation occurring throughout the United States. By buying up more facilities, hospital operators are hoping to increase their size, efficiency and attractiveness to potential clients, particularly managed care companies, said Collins.

"The fundamental trend in the health care industry is consolidation, which produces more-efficient operations. In today's health care climate, it's hard for individual hospitals to compete with companies that do business in economies of scale," he said.