The effects of Prem Reddys Prime Healthcare Services are once again being felt in Southern California.
This time, however, the activity isnt by the investor-owned Prime but is in reaction to the Victorville, Calif., company (March 5, p. 6).
Prospect Medical Holdings, Culver City, Calif., is negotiating to purchase Alta Healthcare System, a four-hospital system based in Los Angeles. Prospect owns independent physician associations, or IPAs, that manage the medical care of about 250,000 HMO members in Southern California.
Jacob Terner, chief executive officer of Prospect, said Primes strategy of acquiring a hospital and then canceling its managed-care contracts underscored the greater power that hospitals are wielding in Southern California. Once the managed-care contracts are canceled, Terner said, Prime focuses on admissions through the emergency department, leaving managed-care organizations on the hook for paying bills based on sky-high charges rather than negotiated rates that are usually based on 40% of charges or less. Prime officials were unavailable for comment.
The global point is that hospitals are becoming more important and more and more difficult to deal with. Im not knocking Reddy, Terner said in an interview. Buying hospitals, he added, allows us to have a vertically integrated business, which keeps the dollars within our system, rather than letting them leak out.
Prime has not canceled the managed-care contracts at all eight of its hospitals. The company had to promise to maintain the contracts at its most recent acquisition, 301-bed Paradise Valley Hospital, National City, Calif., to acquire it.
Alta Healthcares hospitals arent the only assets that Prospect wants to buy, Terner said. Its management team, including venture capitalist Samuel Lee, formerly a partner with Kline Hawkes California, also is attractive, as Terner said that he wants to keep the managers on to help Prospect buy more hospitals as opportunities arise.
While Prospect plans to increase its hospital holdings, Terner said he doesnt envision building a closed system on the Kaiser Permanente model. Physician investment is a possibility, but it isnt central to its hospital strategy, he added.
A definitive agreement between Prospect and Alta has not been finalized, and if one is, it will require regulatory approvals, Prospect said. The company will disclose the terms of the deal in a securities filing should the deal be completed, Terner said. That could happen as soon as July 1, he added. The publicly traded company has lined up $160 million in new credit facilities to finance the transaction and retire existing debt, according to two debt-rating agencies and confirmed by the company.
Prospect said in a securities filing that it completed a $48 million acquisition of ProMed Health Services Co., which includes a healthcare administration subsidiary and two IPAs.
Buying Alta Healthcare would be a big move for Prospect, but not an entirely surprising one, said Laura Jacobs, senior vice president of the Camden Group, a consulting firm based in El Segundo, Calif. Primes strategies have affected both medical groups and nearby hospitals, she said. Health plans are trying to push down on their costs and hospitals are trying to maximize what they can get, Jacobs said. Physician groups are sometimes caught in the middle.
Hospitals in Southern California are gaining clout because most of them are running close to capacity, so threats by insurers to move volume to other hospitals ring hollow, Jacobs said. Californias stringent seismic-safety standards and the states nurse-staffing ratios also have put a lid on capacity, she added.
Meanwhile, the regions population continues to grow, Jacobs said. The population of Los Angeles and Orange counties grew by 4.5% from 2000 to 2006, according to the U.S. Census Bureau. Were finding in general in most markets that youre seeing more and more integration of hospitals and medical groups, Jacobs said.