Public hospitals in California have the right to accept paying patients, a state appeals court recently ruled.
That might not seem like news, but to partisans of public hospitals, the mere fact that a case arguing the contrary went all the way to the appellate level sent a shiver down their spines.
"Had it gone the other way it would have reversed 30 years of history," said Mark S. Windisch, a lawyer with Foley Lardner Weissburg & Aronson who represents the California Association of Public Hospitals and Health Systems. "The key points being pursued by the plaintiffs are fundamental to the way public hospitals operate in California and presumably in other states."
In the case, Community Memorial Hospital of San Buenaventura in Ventura, a private not-for-profit hospital with 192 beds, argued that Ventura County Medical Center's policy of accepting paying patients exceeded the county's power and constituted a gift of public funds.
The lawsuit was just the latest chapter in a feud between Community Memorial, or CMH, and 150-bed County Medical Center, three blocks away. Last March, voters in Ventura County, just northwest of Los Angeles, rejected a referendum on a bond issue to finance construction of a $51 million outpatient wing at County after CMH mounted a public campaign to defeat it (April 1, p. 4).
In that instance, as this one, CMH argued that County Medical Center was trying to poach its patients. "Our contention was that the County of Ventura . . . is competing with a private-sector hospital and physicians for paying patients, which they are not authorized to do except in certain circumstances, and the manner in which they have chosen to do so is illegal in any event," said John McDermott, a lawyer with Cadwalader Wickersham and Taft, which represented CMH.
He said that County, further, is violating the state's corporate practice of medicine act, which forbids hospitals to employ physicians. Only county hospitals are excepted, but then only if they are treating indigents, he said. "When you offer your services to the public to make a profit, then the corporate practice ban applies," McDermott said.
The county is also discounting its fees to entice paying patients, which is a gift of public funds, he added.
The state appeals court ruled against CMH on all these issues, but McDermott said his client feels strongly enough about them to petition the state Supreme Court for a hearing. The Supreme Court doesn't have to accept the petition.
Under California law, the appeals court said, the state wishes to "eliminate discrimination or segregation based on economic disability" at county hospitals. Therefore they may admit paying patients.
"The ruling validates what our understanding was of the right of public hospitals to compete for paying patients," said Denise Martin, president of the state public hospitals association. "You need some revenue to cross-subsidize. To have a hospital that only serves the poor is not a financially viable institution in these competitive times."
Martin said public hospitals are not aggressively marketing to commercially insured patients, but they are trying to entice county employees, union members and their families. In such limited ways, it is "very appropriate and cost-effective to the local taxpayer to have your payer mix spread among some private-pay patients. It's the only way you can sustain an operation to benefit your mission," she said.
Pierre Durand, the Health Care Agency director for Ventura County, said: "CMH contends that public hospitals should not compete or not accept any private patients and that they should have first choice on Medi-Cal (Medicaid) patients. They should sort out those they feel they should accept, and (they want) us to be the recipients of what is left.
"Non-profit hospitals pay no federal taxes, no state taxes, no property taxes," Durand continued. "For that exemption they are to provide charity care to the indigent. I believe that if all non-profit hospitals would provide charity care rather than use the non-profit status as a tax-avoidance instrument, then perhaps we wouldn't have the financial pressures that government systems do have."
Add to those pressures the costs of defending the lawsuit, which now total $1.2 million on the county side, money that Durand said could otherwise have been spent on patient care.
According to statistics from the Office of Statewide Health Planning and Development, provided by County Medical Center, CMH provided $210,000 of indigent care on $128 million in gross revenues for the year ended June 30, 1995. That is less than two-tenths of 1%.
County Medical Center provided $5.7 million in indigent care on $154 million in revenues in the same year, nearly 4%.
The Los Angeles Times reported in February that CMH had spent at least $700,000 on the lawsuit and $516,000 on the referendum campaign. It said CMH receives $2.5 million annually in tax relief.
CMH had $3.3 million in net income on $73 million in net patient revenues in 1995, according to figures from HCIA, a Baltimore-based healthcare information company. County Medical Center had $900,000 in net income on $94 million in net patient revenues that year.
Medicaid, known in California as Medi-Cal, is another source of friction. CMH has a Medi-Cal contract to treat patients for the state. In 1995, 10% of CMH admissions were Medi-Cal. At County, 75% of admissions were Medi-Cal.
Anne Camper, a lawyer with Powell Goldstein Frazer Murphy, said competition is so tough that "even the patients previously deemed not worth bothering with have now become attractive to private providers" as Medicaid payments have risen and private payers have cut their rates.
Public hospitals argue they need to hold onto those Medicaid patients to maintain a revenue base to offset the no-pays and the completely uninsured, which in California are the counties' responsibility to care for.
At the same time, the state has encouraged private hospitals and HMOs to bid to care for Medi-Cal patients as a way of forcing public hospitals to become more efficient and improve their services.
Durand endorses that philosophy. His county hospital has figured out how to compete efficiently with the privates. "If a person with insurance by choice wants to come here, I don't think that choice should be denied to the patient," he said.
But CMH attorney McDermott said County Medical Center is actually giving preferential treatment to paying patients by moving them to the front of the line. Sometimes, he said, County asserts it's full and cannot accept any more indigent patients, when in fact the patients occupying the beds are insured. Private hospitals end up having to treat many of the uninsured.
In that case, McDermott said, County ill serves the public if the government's goal is to give all patients free choice of hospitals and to eliminate economic segregation of the poor.
McDermott charges Ventura County is carrying out a "zero budget-deficit policy for healthcare" by loading "a special tax on the medical community."
"They don't get enough patient revenue to break even on government patients," he said. "They would run a larger and larger deficit and go out of business, as many counties have done. Most counties have quit running their hospitals and contract it out to private hospitals. They can't keep their bloated healthcare bureaucracy in place with all the vested union interests unless they go find revenue from a different source."
But HCIA figures show that CMH is actually staffing at a much higher level than County. In 1995 CMH employed 6.43 full-time-equivalents per adjusted average daily census, while County employed 4.31.
In either case, the appeals court specifically stated that if caring for the indigent is among the county's powers, then it may raise money for that by accepting paying patients rather than taxing the public, if it so chooses.
Ultimately, it has come down to a zero-sum game in an area where there aren't enough patients to support all the existing hospitals. "If the county succeeds in marketing its services to the general public and acquires these patients, it could very well spell the end of CMH," McDermott said. "It's a matter of survival."
Windisch concurred with the logic but drew a different conclusion. "A public hospital is getting penalized for being good at what it does," he said. Community Memorial's lawsuit is "a flagrant attack on a public agency. . . . . It's unlikely you'd see this in other states because the hostility is elevated in California."