As physician practice management companies continue to post impressive financial results, it's clear physicians have moved into the driver's seat in many markets.
One such market is Bakersfield, Calif., where a hospital is suffering because of actions by a prominent local group practice.
Moody's Investors Service has downgraded the credit rating of Bakersfield Memorial Hospital, citing a loss of revenues from one of the region's largest group practices.
Moody officials say the downgrade of $90.6 million in bonds to Baa1 from A3 and the issuance of a negative outlook was triggered by an affiliation last year between Bakersfield Memorial and Mercy Hospital, a 239-bed facility in Bakersfield operated by Catholic Healthcare West. That affiliation alienated an important group of physicians, who in turn changed their loyalty and admitting patterns to a third hospital in town.
"(The CHW affiliation) resulted in the alienation of (the physician group) and shifted management's focus away from the implementation of much-needed expense reductions," Moody's said. "These factors, combined with revenue pressures from managed-care payers, contributed to a trend of increasingly weak financial performance."
It also noted that in the wake of the April 1996 affiliation, Bakersfield Memorial and Mercy have yet to "develop a cohesive strategic plan."
San Francisco-based CHW is one of the largest not-for-profit hospital operators in the country, with ownership of or affiliation with 35 hospitals in Arizona, California and Nevada. Company officials did not return phone calls seeking comment.
"It's not an issue we're concerned with in the entire CHW system," said Moody's analyst Karen Young. "There were physicians in this particular instance who had objections to the affiliation."
Bakersfield Memorial President C. Larry Carr disputed Moody's findings. He suggested that Standard & Poor's decision earlier this year not to issue a downgrade (Standard & Poor's kept its negative outlook) meant that Moody's had no basis for its action.
"They received the same financial packet, and the reasons they cited for the downgrade were irrelevant," he said.
Carr said his hospital and Mercy have a joint strategic plan. A four-page outline called for establishing an integrated health system.
Young countered that it was not a "cohesive" strategic plan. "From our standpoint, the hospitals have come together and have not been able to reduce expenses," she said.
As for the source of the financial stress, Young said the key loss came from Bakersfield Family Medical Center. With 300 physicians, it's the largest group practice in the city and has historically admitted patients to Bakersfield Memorial. Bakersfield Family cut off relations with the hospital in May 1996 and began making referrals to 178-bed San Joaquin Community Hospital, operated by Roseville, Calif.-based Adventist Health.
Bakersfield Memorial's average daily inpatient census dropped to 116 last October from 174 in February 1996. It has since rebounded to the mid-130s.
"I feel (the drop) was a protest against our affiliation," Carr said.
He added that the bulk of referrals to the hospital from Bakersfield Family come from the physicians' Medicare-risk contract with Secure Horizons, an HMO operated by Cypress, Calif.-based PacifiCare Health Systems.
Carr said that under the terms of the contract with Secure Horizons, Bakersfield Family receives a global capitation payment to cover both physician and hospital care.
Steve Valentine, president of the Camden Group, a Torrance, Calif.-based consulting firm, observed that global capitation gives medical groups far greater power over hospitals.
"It helps put the physicians in the food chain upfront," he said. "They can move the patient volume any way they want because of the nature of the contract. And when you have a critical mass of lives, you can wreak havoc. In Bakersfield's case, 40 or 50 patients a day is a hell of a lot of lives."
Bakersfield Family officials declined to comment on the termination of its relationship with Bakersfield Memorial or the subsequent trickle of patients back to the hospital.
Meanwhile, Carr said the hospital has begun to refocus on cutting costs. A combination of layoffs and attrition has cut employees to 890 from 1,104 in February 1996. It earned a profit for five consecutive months through February.
February operating revenues increased 6.7% from a year ago, to $8 million from $7.5 million. However, operating revenues for the first eight months of fiscal 1997 decreased 19.3% to $55.6 million from $68.9 million.
As for the downgrade, Carr said it should not affect interest payments on the hospital's bonds. And Chief Financial Officer Paul Jerdin asserted that the hospital continues to accumulate cash each month. Reserves had grown to $72 million at the end of last November from $54.8 million in June 1994.
"We would have been much better off not losing the business. But the bottom line is we have enough cash and net receivables outstanding to pay off the bonds today," Jerdin said.