Few hospitals can claim as tumultuous a legacy as Friendly Hills Regional Medical Center, which is slated to close its doors next month.
It began in 1988 as a bold experiment by physicians who thought they could tame inpatient costs by buying a hospital.
Its demise in the hands of a giant healthcare corporation serves as a reminder of the fragility of integrated delivery systems.
Birmingham, Ala.-based MedPartners announced this month that it will close the 199-bed facility in La Habra, Calif., on May 15. The physician practice management firm cited "financial losses incurred by the center."
Data filed with the state of California and HCFA show the hospital has been profitable, but a MedPartners spokesman last week called the data "erroneous." He said it is against company policy to release the hospital's financial results.
The hospital's occupancy rate as reported to HCFA was 36% in 1996.
MedPartners said it hasn't decided what to do with the building. Some of the hospital's approximately 650 employees will be considered for placement by Tenet Healthcare Corp., which has a joint network with MedPartners in Southern California. Earlier this month, Santa Barbara, Calif.-based Tenet agreed to treat 116,000 capitated enrollees from the Friendly Hills network at its nearby hospitals.
MedPartners has been attempting to shore up its operations after reporting a whopping $841 million loss in the fourth quarter of 1997.
The closure was announced on the second page of a news release that touted the expansion of the MedPartners-Tenet contract.
Contractual links between hospitals and medical groups have gained favor as common ownership proves inflexible in competitive markets.
Last year MedPartners sold Pioneer Hospital in Artesia, Calif., which was operated by Mullikin Medical Enterprises, another large physician group MedPartners acquired in 1995.
"The (so-called) integrated systems that we're all so high on, where a single entity owns all of the participants, haven't seemed to work very well," said Jim Hillman, senior vice president for the Physician Groups Council of the Healthcare Association of Southern California. "They seem to work better as a virtual (network)."
At its inception, Friendly Hills Regional Medical Center was meant to transcend the boundaries between physicians and hospitals.
The 50-physician Friendly Hills Medical Group purchased the hospital for $20 million in 1988, anticipating that hospital costs would rise and diminish the money available for payments to physicians, said former Friendly Hills Chairman and Chief Executive Officer Albert Barnett, M.D.
Friendly Hills HealthCare Network took the unusual, if not unique, step of consolidating hospital and medical group finances. Resources such as nurses and laboratory services were shared.
"All the departments were functioning for both the physician organization and the hospital," Barnett said. "It was probably the most highly integrated system in the country."
Integration enabled the network to make clinical innovations. It pioneered the use of hospitalists, clinical pathways and demand management, and defined a seven-point continuum of managed care.
There were flops, too. An evening wellness clinic for women had to be rescheduled because many women were too tired by that time of day to attend, said Gloria Mayer, former president and chief operating officer.
"It was a fun environment to work in, and nobody criticized people for taking risks," said Mayer, now a consultant.
She said too many healthcare systems take a year to implement new programs, which is too slow in today's healthcare environment. At Friendly Hills, "we had a three-month rule. You should be able to think of a program and implement it in three months, evaluate it in six months and have it as part of the culture within a year," she said.
By 1991 Friendly Hills derived 90% of its $140 million in revenues from capitated payments. It managed to turn a modest profit.
It wasn't long, however, before the system needed capital to expand and enable retiring physicians to recoup their investments. In a groundbreaking decision, the Internal Revenue Service approved the transfer of the network to a not-for-profit foundation, enabling it to issue bonds.
But the foundation model proved too cumbersome for Friendly Hills' entrepreneurial culture. The network was sold to Caremark International, which shocked Friendly Hills physicians by selling to MedPartners in 1996.
The MedPartners sale touched off an ugly round of litigation between Friendly Hills' leaders and MedPartners management, which accused Barnett, Mayer and Mayer's husband, Thomas Mayer, M.D., of undermining its efforts to integrate Friendly Hills with other MedPartners operations. The litigation was finally settled last summer. Barnett and Gloria Mayer said the settlement terms restrict them from discussing MedPartners.
But both said they believe the Friendly Hills model of physician-driven integration still could work in the right circumstances, even though "it is a very risky investment," Barnett said.
Mayer agreed. "You need to have professional hospital operators to make it efficient. Life is more complex than it was in 1987," she said.