There's no gold rush in California's hospital market. It's more like a mass exodus.
Earlier this year the nation's No. 2 hospital chain, Tenet Healthcare Corp., put 19 of its 36 California hospitals up for sale, citing costly seismic-safety requirements. It also decided to move its headquarters from Santa Barbara, Calif., to Dallas.
Last week, Triad Hospitals, Plano, Texas, announced that it would sell its only Golden State holding- 80-bed San Leandro (Calif.) Hospital-to a local healthcare district. A Triad official said it "recognized that hospitals in California face significant-and unique-challenges," although the San Leandro hospital was profitable.
Perhaps even more bruising, one of the state's biggest not-for-profit systems-Catholic Healthcare West, or CHW-has focused much of its expansion strategy in the Phoenix and Las Vegas markets, where it plans to build new hospitals with proceeds from an April bond issue.
"The fact that we are looking at growth areas and diversifying our asset base out of just California is something that any investor will see as a good move," CHW Chief Financial Officer Michael Blaszyk said.
Indeed, California is cementing its reputation as a challenging business environment for hospitals. Last week a court upheld the state's right to enforce its minimum nurse-staffing ratios during work breaks. Earlier in the month, the California Public Employees' Retirement System announced with great fanfare that it would eliminate hospitals it deems too costly from its HMO networks.
Furthermore, at least five hospitals closed in the state this year, according to the California Healthcare Association. Two that closed in May were Monrovia (Calif.) Community Hospital and Angels Hospital, Rancho Cucamonga. The latter was shut down by state regulators because of quality concerns.
"There's no question that if you were designing a healthcare system today, you would not put it in California," said Andy Pines, who manages the West Coast healthcare practice at Citigroup.
Still, the picture isn't all bleak. Two major California systems, CHW and Sutter Health, were awarded recent upgrades of their bond ratings. Many more including Kaiser Permanente, Scripps Health and Sharp HealthCare are reporting improved operating margins.
According to Moody's Investors Service analyst Mimi Park, California's median hospital bond rating slipped from 2000 to 2003, from A2 to A3, which is the national average. "What you're now seeing is recovery and greater upgrade activity," Park said.
But the hospital association disagrees. It's preparing a study showing that more than half the state's 450 hospitals lost money for the 12-month period ended Sept. 30, 2003, with an overall operating margin of -1%. "That's pretty similar to the way it was (the previous) year," said Sherreta Lane, the association's vice president of reimbursement.
While major systems are solidifying their market share in profitable areas such as Orange County and parts of central and Northern California, stand-alone hospitals in less profitable areas with heavy indigent care and Medicaid loads are struggling. The problem is taking a toll on access to specialty care for the uninsured, particularly in Los Angeles and rural areas, according to a study commissioned by the California HealthCare Foundation.
Jan Emerson, spokeswoman for the California association, said finances of even the strongest hospitals will worsen as nurse-staffing mandates are phased in. "The state has got to stop passing all of these unfunded mandates," Emerson said.