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Health Care With a Bottom Line : HealthWest Demonstrates Blurring of Nonprofit and For-Profit Hospitals

August 26, 1986|DANIEL AKST | Times Staff Writer

Like their counterparts at other successful enterprises, HealthWest executives are proud of their outfit's bottom line, rapid growth and reputation. They compete aggressively for business, and bonuses for some are linked to earnings.

The only difference is, HealthWest isn't a company. It's a tax-exempt, nonprofit health care organization that officials of Northridge Hospital Medical Center said they formed to help the hospital survive and prosper.

Yet HealthWest has tried awfully hard to make money--and its exertions continue even though the future of Northridge Hospital seems secure.

HealthWest is a prime example of how nonprofit hospitals turn into chains and then grow to resemble for-profit health care companies. As such, it illustrates some of the dramatic changes occurring in the increasingly competitive American health care industry.

Not a New Idea

Nonprofit chains aren't new. In California, religious groups such as Lutherans and secular organizations like Kaiser have run chains for years. But what's new is the aggressive diversification of newer chains like HealthWest, regarded as an exemplar of the phenomenon even though it's not one of the biggest.

HealthWest President Paul Teslow says he can focus on medical care instead of profits because his Chatsworth-based organization, officially called HealthWest Foundation, is free of shareholder pressures.

But that hasn't kept HealthWest from the ardent pursuit of profits and growth. Indeed, with 7,000 employees and $355 million in annual revenue, it has grown far beyond the San Fernando Valley and, in fact, beyond California.

The foundation now owns eight hospitals, and Northridge Hospital has accounted for little more than one-third of total revenue. HealthWest also has formed a wide array of other health-related businesses, including a for-profit health maintenance organization, programs for the elderly and the homebound, and management consulting.

It even started an advertising agency that specializes in promoting medical services. The agency also helps HealthWest manage its roughly $2.5-million ad budget.

For all of their imaginative diversifying, nonprofit hospital chains don't always have much to show for their efforts.

"Hospital systems have generally not generated profits from their so-called for-profit activities," said Jeffrey Goldsmith, a health care specialist with the Ernst & Whinney accounting firm in Chicago.

HealthWest, for instance, earned $25 million in the year ended June 30, 1985. Yet the two institutions that were its nucleus when HealthWest was formed in 1979--Northridge Hospital and Valley Hospital Medical Center in Van Nuys--together earned $27.7 million.

In other words, HealthWest lost $2.7 million on everything else.

Audited figures aren't available for the year just ended, but Teslow said earnings fell to about $18 million.

Ross Goldberg, vice president for communications, blamed start-up costs from the new health maintenance organization, plus an ongoing decline in hospital stays nationwide. But, he said, Long Beach Community Hospital, a HealthWest facility acquired in 1984, generated $2.5 million in surpluses for the year ended June 30.

Strategies Criticized

The strategies employed by nonprofit institutions these days have their critics. Dr. Arnold Relman, editor of the New England Journal of Medicine, said outfits like HealthWest are fine as long as their earnings go for better care, serving the indigent and offsetting money-losing enterprises such as education.

But he questioned whether that is always the case.

"You have to ask yourself: why is HealthWest or any other not-for-profit so anxious to expand its revenue?" he said. "Are they doing it just to gratify their own edifice complex, pay their managers more and grow more powerful? Or are they using their revenues to expand their services to the community?"

HealthWest insists it uses its money to provide better health care, and its hospitals seem well-regarded.

"Northridge and Long Beach have superb reputations," said Dr. Richard Corlin, a past president of the Los Angeles County Medical Assn.

By at least one gauge, HealthWest appears to be relatively generous in its care for the poor. Nonprofit hospitals in Los Angeles County incurred an average of 3.8% of their patient expenses in the first quarter of 1986 in caring for indigents and others who didn't pay their bills, according to the California Hospital Assn., a trade group. The five HealthWest hospitals in the county averaged 4.5%.

HealthWest's growth can be viewed as the outcome of measures taken by governments and insurers to curb rising medical costs.

These third-party payers have increasingly adopted fixed reimbursement schedules rather than looser cost-plus schemes. They also press for fewer, and shorter, hospital stays. The result is that many hospitals are finding it harder to raise capital to rebuild facilities, buy equipment and care for the indigent.

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