Bellwethers tend to behave like truffles, dodging the sunlight, an extraordinary item preferring the shade of obscurity. Could French Hospital be one of healthcare's little truffles?
The 124-bed campus in central California has architecture from the height of the 1970s' tan-stucco-and-chocolate-wood school and is circled by a doctors' parking lot filled with more Volkswagens than Mercedes. The campus sits on a plot of land about 20 feet lower than the adjoining surface street. It barely kicks the corner of your eye as you drive by.
But its apparent ordinariness hides an extraordinarily turbulent history.
French Hospital Medical Center, its formal name, has been hit as hard as any hospital by the dramatic changes reshaping healthcare since World War II. After five ownership changes in the past two decades alone, French is facing yet another pending sale, this one ordered by federal antitrust authorities. Its past and current uncertainties reflect the stormy transformation of the healthcare industry.
The hospital is in San Luis Obispo, midway between the bustling metropolises of Los Angeles and San Francisco on California's central coast. It was founded as a downtown clinic and a 35-bed hospital in 1947 by local physician Edison French. During California's hospital building boom of the 1970s, it moved to a new $2 million campus east of downtown.
In 1976, a group of 23 physicians purchased the hospital. By 1979, medicine was going corporate, and Dallas-based American Medical International purchased French for about $8 million. Five years later, the Federal Trade Commission ruled that AMI monopolized healthcare in the region and ordered French sold. Subsequently, Burbank, Calif.-based Summit Health Corp., another investor-owned chain, bought the hospital for $23 million.
The first half of this decade brought a series of mega-mergers affecting French: Summit merged with OrNda HealthCorp in 1993; AMI merged with National Medical Enterprises to form Tenet Healthcare Corp. in 1994. Tenet merged with OrNda last year.
In a strange sense, French had gone full circle. This did not escape the notice of the FTC. This January, it again ordered the sale of French, deeming that competition was threatened by Tenet's ownership of two San Luis Obispo hospitals: French and 178-bed Sierra Vista Regional Medical Center.
Another circle soon will be completed. French began as a not-for-profit, then it became for-profit, and now it will return to not-for-profit status when its sale to a California not-for-profit, Vista Hospital Systems, is completed this month. French will be managed by F. Scott Gross, a former top-ranking NME executive and perhaps the only hospital manager in recent memory to have close ties to the management of a racetrack.
Rolling with the punches. What makes this all the more special is French's staff seems to view such turmoil more as a freeing experience than a nagging pain. Many staff members are transplants from big-city hospitals, and they roll with the punches. "Why obsess over constant change, when the only constant is change?" seems to be the unofficial philosophy of French.
Tom Miller, M.D., French's chief radiologist, likens the situation to the corporate disconnect that's frequently portrayed in the "Dilbert" comic strip.
"The conventional wisdom is that a place bereft of a corporate culture can't function, when in fact the opposite is true," he says. "The hospital has thrived creating its own culture, where all of the employees identify with each other."
Emergency department head Eugene Keller, M.D., echoes Miller's praise: "It's a hospital of unexpected quality."
Keller moved to San Luis Obispo from Los Angeles four years ago, seeking a better quality of life for his family. He had headed the emergency room at 783-bed Cedars-Sinai Medical Center, a hospital more than seven times French's size with a worldwide reputation.
In some instances, Keller insists, French's size makes it even better than Cedars. "I can get a patient in the (cardiac catheterization) lab in a half-hour, a lot quicker than (at) Cedars," he says.
According to a 1994 analysis of Medicare data by Aurora, Colo.-based Healthcare Data Source, French had the lowest mortality rate for open-heart surgeries in all of California at 1.4%. The statewide average was 5.9%.
Partly because of the small-town atmosphere, French staff members say they're driven to protect patients from all the changes. "We've been able to shelter the patients from all the garbage. We take pride in that," says Andrea Gaslan, a cardiac unit nurse.
That is not to say that French's staff has not been sent reeling by the constant change. James Youree, 61, French's chief operating officer, is in his second stint as acting chief executive officer. (William L. Gilbert, French's second CEO in as many years, departed in May to run Good Samaritan Medical Center in San Jose, Calif., for Columbia/HCA Healthcare Corp.)
News of the FTC-ordered sale really rattled the staff, says Youree, who also endured Summit's purchase of French and Summit's merger with OrNda. "We were in shock," Youree says of the FTC order. I couldn't believe it. Here we were, one of (Tenet's) better hospitals, turned loose. There was a period of disbelief."
Staff members left in droves, including 26 of the hospital's 160 nurses, he says.
"Everyone was wondering what was going to happen to the hospital. Morale plummeted," Youree says.
The transition is especially nerve-wracking because French had barely settled in with OrNda when it became Tenet and was forced to back off. "We've gotten to experience a lot of extended dating periods," says Steven Goodman, M.D., a family practitioner at French, "but the bride always seems to leave before anything is consummated."
The chief. Gross feels their pain.
"I'm sorry for them. It's the type of thing that can really be a big psychological blow, something that can take months to recover from, even when nothing bad is going to happen," Gross says. "But you do bounce back."
Gross, 51, is CEO of the company that will manage French for its new owner, Vista. Over lunch a few doors down from his office in San Francisco's financial district, he talks with great enthusiasm about his plans. "This is a great opportunity for us; it's not every day a hospital of this caliber comes up for sale," he says.
Gross should know: During the 1980s, he was president of the hospital group at NME. He left the firm in 1987, burned out from overseeing more than 50 acute-care hospitals. He says he likes his current work precisely because it only involves a handful of facilities. "If Vista wanted to own more than 10 hospitals, I probably would disinvolve myself," he says.
Gross looks more the type to handle the finances of a movie studio than a surgical suite: On a casual Friday, he wears a black-and-silver weave shirt with a band collar and black trousers, a perfect complement to his sculpted salt-and-pepper beard and hair. He talks with his hands, using expansive but controlled gestures.
When he isn't involved with hospitals, Gross indulges a lifelong passion for horse racing, nurtured by admission passes he received as a youth from an uncle who was in charge of security at Hollywood Park near Los Angeles. Last September, Gross was appointed to the board of directors overseeing operations at Bay Meadows racetrack near San Francisco, according to the San Francisco Chronicle.
Gross said the appointment was actually to the board of the real estate investment trust that leases the land on which the track sits to Bay Meadows' operators. "It's like being on the board of a hotel that's owned by a casino," Gross says. "I'm not involved in the operations of the track." He says he has since resigned.
Organization chart. Gross radiates charisma as he pauses to scribble on a place mat an outline of the corporate structure of French's new owner. It's a pregnant pause, for the relationship between the companies is complex.
Gross explains that he owns Primus Management Co., which will be paid to operate French by its legal owners, Vista and Vista's parent, Denver-based Permian Health Care. Primus also runs four other Permian/Vista hospitals in California and Illinois. It's paid about $4 million a year to do so. Out of that, comes Gross' salary and those of top-level executive staffs at each hospital.
It's unclear where Primus' control of the hospitals ends. Permian and Vista have boards of directors but no executive suite. Gross says Primus receives Permian's mail and handles its tax returns and other regulatory filings. On Vista's behalf, Gross also negotiated the purchase of French.
Permian and Vista are 501(c)(3) organizations, owned by no interest. Should the companies be dissolved, there assets will fall under the control of the Colorado and California attorney generals, Gross says. "I can't own Permian and Vista," he declares. A lengthy aside about federal conflict-of-interest laws, relating to Primus' management contract, follows. On many fingers, Gross ticks off the generations of Grosses who would be barred from involvement in Vista and Primus.
Permian/Vista isn't without troubles. The FBI is investigating whether its hospital in Chicago, 172-bed Edgewater Medical Center, illegally funneled senior citizens living in a faraway federal housing project to one of its clinics (April 15, 1996, p. 32). The Illinois attorney general's office is also probing Edgewater's conversion from for-profit to not-for-profit status when Permian purchased it in 1994.
Aside from the occasional malpractice and wrongful termination lawsuit, similar problems are not apparent in California, according to court records. There, Vista owns and Primus manages 114-bed Corona (Calif.) Regional Medical Center and its affiliated Magnolia Rehabilitation Hospital, and 34-bed Arroyo Grande (Calif.) Community Hospital, which is about 12 miles south of San Luis Obispo.
In the Edgewater matters, Gross denies any wrongdoing, saying the company was the victim of a media attack. "Now we know what it's like to be in a drive-by shooting," he says. (MODERN HEALTHCARE broke both stories, which later were picked up by other media outlets.)
The Arroyo connection. How the Permian/Vista-Primus combination arrived at owning French was simple: Its ownership and management of Arroyo Grande made it the leading choice.
"If it was not for Arroyo Grande, we would never have made the second cut of bidders for French," Gross says, noting that this gives Permian/Vista a chance to establish a regional network. Gross says the two hospitals will be controlled by a single CEO.
Gross' take was confirmed by Tenet, which had sent out requests for proposals to roughly a dozen hospital operators and received five bids. "Finding someone who already has a facility in the marketplace was important. They were the most competitive fit," says Donald W. Thayer, Tenet's vice president of acquisitions.
Thayer declined to comment on morale at French, saying Tenet was told to keep its distance from the hospital.
Terms of the deal were not disclosed. According to a common industry method for calculating purchase prices-six times a hospital's positive cash flow-French might have sold for roughly $30 million. Gross declined to either confirm or deny the estimate.
Not surprisingly, the purchase initially did not sit well with French's staff.
Just three days after the deal's announcement, Spencer Kulick, M.D., chairman of the department of medicine, a member of the medical executive committee and a French trustee, abruptly resigned all his positions. Local media speculated that Kulick was unhappy with the deal because of the tattered reputation of Arroyo Grande. But Kulick never commented in the local media. Contacted by MODERN HEALTHCARE, he contended the resignations were for personal reasons. "I don't even want to say I have no comment," he says.
Other staff members are forthcoming about their feelings for the deal.
"French is a crown jewel. . . . Arroyo Grande has a different reputation, and there's a lot of turnover there," says Jill Urmy, a senior member of the French nursing staff.
Fellow nurse Gaslan, who has been at Arroyo Grande as both an employee (before Vista's ownership) and patient (after Vista bought the hospital), was more critical.
"It was the worst nursing experience I ever had," she says of her employment at Arroyo Grande, adding, however, that a colleague was more to blame for that than the hospital.
But she put full blame on Arroyo Grande for delivering what she believes was poor care when she went to its emergency room four years ago during a pregnancy. Although she had lost 18 pounds, was dehydrated from chronic morning sickness and could not stop vomiting, Gaslan was dismissed after a cursory examination, she says. Gaslan maintains she should have at least received treatment for her dehydration.
"It made me angry, very angry," she recalls.
Neither hospital could be described as bustling. In 1995, the most recent year for which data were available for both hospitals, French's occupancy rate was 31.5%, while Arroyo Grande's was 36.3%. But French is far more profitable, reporting 1996 net income of $5.9 million, compared with $4.7 million in 1995 and $2.8 million in 1994. Arroyo Grande's 1995 net income was $687,831, compared with $1.4 million in 1994 and $815,982 in 1993. In 1995 French's total assets were $41 million; Arroyo Grande's were $20 million.
Open to change. Gaslan, like many in San Luis Obispo, initially thought the sale was a deliberate attempt by Tenet to sabotage French's reputation, allowing Tenet's other hospital in town, Sierra Vista, to pick up additional business.
But San Luis Obispo is also a town with an open attitude toward change. Although its population is only 45,000, it's not an ordinary small town. San Luis Obispo is one of the few municipalities in California holding both a state university and prison. The same streets that are closed every Thursday for a farmers' market are also lined with upscale stores such as Barnes & Noble and Starbucks and art galleries.
Rather than condemn Gross for the upcoming change, many members of the French staff praise him for going far to allay their fears. He has spent hours with them in group and one-on-one sessions.
"He's been very forthright and open to the discussions of issues. I came in with an agenda, and he answered my questions, including questions about Edgewater," Urmy says-an assessment with which Gaslan concurs.
Emergency department chief Keller believes Gross' willingness to answer questions has contributed to a decided uptick in morale over the past two months: "He's aggressive, self-assured, egocentric and dynamic, but Scott also has an ability to throw himself under the rails when need be. He did that, and made the future more recognizable," Keller says.
As to the future, Gross says it includes some $8 million in capital improvements over the next few years, including the addition of an obstetrics ward, the hiring of 20 new registered nurses, and a general face lift and reconfiguration of the hospital, much of which has remained unchanged since it opened.
"This facility was designed 30 years ago for a method of caring for patients that's not appropriate today," Youree says.
Gross says some services that overlap at French and Arroyo Grande will be eliminated, and more managed-care contracts will be sought. Despite the changes, Gross says he doesn't anticipate layoffs.
Hope vs. skepticism. That cohesive plans were laid on the table seems to have given hope a slight edge over skepticism. Gaslan observes that because the two hospitals will be working more closely, French's criticism of Arroyo Grande will have to be smoothed over.
"We put them down and insulted them," she says. "But we're professionals, and we have to work together. Some fence-mending is going to have to take place. That's life."
Meanwhile, Keller, cheered by a smaller owner than Tenet, expresses perhaps the greatest hopes.
"I'm not going to have to kick ideas through 14 layers of management anymore," he says. "And with a not-for-profit running the hospital, the dollars are going to stay in the community.
Nonetheless, the previous history of both French and its latest owner is tempering his enthusiasm.
"We'll wait and see how it plays out," he says.