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Health Firms Go Under the Budget Knife

July 20, 1986|JUBE SHIVER Jr. | Times Staff Writer

The black Chevrolet Caprice that ferries American Medical International President Walter L. Weisman to his office in Beverly Hills from his Woodland Hills home is one of the few corporate comforts at AMI since industry cost-cutting forced Weisman to put his health-care company on a stern regimen.

Since last fall, Weisman--who says the car and driver enable him to get more work done during a long commute--has slashed operating budgets by a third, laid off more than 120 employees and pared everything from overnight mail to office space.

Despite the moves, AMI suffered its first-ever quarterly loss--$82 million--for the three months ended in February, 1986.

"Private industry has only begun to scratch the surface" of cost containment, Weisman said. "You think this is bad, you haven't seen anything yet. . . . A year from now, it will be even tougher in our industry."

After a decade of robust growth and record profits, the hospital industry has been hit with financial problems. Medicare, Medicaid and private insurance have restricted payments and clamped down on escalating medical fees. Hospital companies are also losing patients to health maintenance organizations and preferred-provider programs, which seek to provide lower-cost health-care services.

Major Chains Hurt

Nowhere is the new climate being felt more strongly than at the major hospital chains such as AMI, National Medical Enterprises, Humana Inc. and Hospital Corp. of America. All four have suffered declines in net income in recent months. Admissions and occupancy rates at the 73,000 beds controlled by the four chains have dropped to all-time lows.

"This has become a tough, competitive environment--no doubt about it," said Richard K. Eamer, chairman and chief executive of NME.

In response, the companies have pared staff, sold dozens of hospitals and streamlined operations. They also are becoming more aggressive, eyeing new marketing techniques and sophisticated technology to stimulate business and improve efficiency.

The changes are especially evident in Southern California--home of AMI and NME, the nation's second- and third-largest hospital chains, as well as the headquarters of the nation's largest investor-owned nursing home chain and health maintenance organization.

The two hospital chains, together with eight smaller publicly held health-care companies in Southern California, had about $10 billion in revenue last year. Altogether, the 10 top California health-care firms employ about a quarter of a million people nationwide.

For all their size, however, the giant chains have captured less than 3% of the $430-billion annual health-care market. And they remain deeply dependent on the federal government's cost-conscious Medicare program--which furnishes about 40% of hospital revenue--and the equally frugal state Medicaid programs, which contribute about 15% of hospital revenue.

A report by Sanford C. Bernstein & Co., an investment research firm in New York, said stagnating Medicare rates could "force 10% of the (nation's 5,550) hospitals into bankruptcy" by 1990.

"The financial pressures on hospitals are going to continue," said Randall Huyser, a health-care analyst at Montgomery Securities in San Francisco. "Hospitals are being hit with a double whammy" of tighter Medicare fees and competitive HMOs. "If we have another freeze on (Medicare rates), hospitals are going to find the financial climate onerous."

After decades of reimbursing hospitals for their actual costs in treating patients, Medicare began trying to be a tough customer. In April, 1983, a new fee system was approved that pays hospitals fixed rates for 467 specific ailments.

At first hospitals comfortably adjusted to the new rates, which were increased 6.25% in the first few months after the start of the payment program. But trouble began when rate increases slowed.

Congress approved a scant 0.5% increase in May, 1986, and Health and Human Services Secretary Otis R. Bowen has recommended a 0.5% increase for the fiscal year beginning Oct. 1, according to the Health Care Financing Administration.

Meanwhile, states too are holding the line on money for Medicaid--the health-care program for the poor.

Last month, for instance, Gov. George Deukmejian, vowing to retain a $1-billion reserve in the state budget, vetoed about $40 million in increases for California's $2.3-billion Medi-Cal program. Most of the money would have been matched by federal dollars.

Should Be Grateful

Despite the cutbacks, Secretary Bowen suggested in a statement released with his recommendation that hospitals should be grateful for the small 0.5% increase in Medicare rates since "our findings show that a net decrease would be justified."

But the beleaguered hospital industry--with its high capital and labor costs--has had a tough time coping with the austerity measures.

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