Paradise Valley is losing money at this time. It has a heavy mix of unfunded or under-funded patients. Like all hospitals in California, it has to meet certain expensive seismic standards set by the state. It may not be in compliance with certain regulatory medical standards. So why does your company, Prime Healthcare, want to buy this hospital? What opportunity do you see?
Prime Healthcare got into the hospital market when it reacquired Desert Valley Hospital, an 83-bed hospital in Victorville. We have turned around a failing hospital in Victorville from an $8 million loss in 2000 to break even in 2001. Since then we have had profitable operations. If it were a profitable hospital, nobody would want to sell it to you. Paradise Valley gives us another opportunity to implement our protocols. To build a hospital, either new or replacement, takes substantial money, a million dollars a bed or more. Every hospital we have acquired has had financial troubles. I read about the negative events that are going on as published in the Union-Tribune. Some of our hospitals had the same situations when we acquired them. Our second acquisition in 2004 was Chino Valley Medical Center. It was in bankruptcy and about to be shut down. It is doing well now.
Does Paradise Valley lack accreditation from a national organization?
You need to have accreditation by one of two organizations. One is the Joint Commission on Accreditation of Healthcare Organizations. The other is American Osteopathic Association. Both are equally good for regulatory purposes.
Does the hospital have problems with the joint commission?
There are some problems, especially in the radiology department. I'm not privy to all the details. Paradise Valley had to submit a revised plan of correction. We go through those things not infrequently. Their situation looks to be of a larger magnitude because the problems pertain to several departments. But they're all correctable.
Have you done due diligence on the seismic standard costs at Paradise Valley?
I don't have a definite answer on that portion. I have done significant due diligence on all other aspects. Six of our hospitals are in the process of being upgraded. Desert Valley is already meeting the new standards. Some of our facilities are being upgraded for a cost of $2 million to $3 million. Sherman Oaks may require $35 million. Huntington Beach and now Paradise Valley will be two facilities where we need to evaluate how far we want to expand.
Is there a way to build a limited patient tower and use existing buildings for outpatient and administrative services? How much do you expect to invest for rebuilding and other capital expenses?
Here my budget is around $15 million, without constructing the building. They do have a good CT scan so I don't have to update that. They have a cath lab but it needs a lot of new equipment. We will be doing monitoring system upgrades. We haven't penciled all that out yet because we are still doing due diligence. We have done it to the extent to evaluate whether we could turn around this hospital and we believe we can.
Do you have a potential closing date on the sale? Has the price been disclosed?
I don't know whether there is an announced price, but somebody was quoted in the ballpark ($36.5 million). The Attorney General's Office will control the closing date since it must approve the sale from not-for-profit to for-profit status. Normally they ask for 45 to 90 days. I would prefer to close Jan. 1 for reasons of accounting convenience.
Are you buying the whole complex? Paradise Valley is something like 16 to 20 blocks, including some housing.
That's correct. It's a substantial parcel of land. But Adventist Health has sold some portions of the land already. One portion of the land is ready for development for condos for senior housing. And that complements our campus. The hospital campus is around 54 acres, 35 of which we are buying. The sale will include the hospital, three medical office buildings, one nursing care facility and one behavioral health facility that is being leased to an operator.
Will you be selling any property to developers?
I think anything that can be sold to developers already has been sold. Instead, I'm evaluating how best we can spend the dollars in trying to build a patient tower, for example. Sherman Oaks is in a similar situation, 150 beds instead of 300. We will keep pretty much all the facility as it is now, take the emergency department and some of the outpatient facilities, and build around it so we have the emergency room but it's an emergency department that's expanded. And build a 60-bed patient tower. In other words, we wouldn't build 150 beds. But in the existing portion, we could retain some of the first-level beds, both for outpatient and emergency department, physical therapy, rehab, psych facilities that don't need to meet the seismic requirements. So at the end we come up with the same 150 beds that are functional, but we are spending only $30 million in construction for 60 beds.
I am leaning toward the same approach at Paradise Valley. I believe we could add 100 new beds at Paradise Valley and keep 100 of the existing beds. For 100 new beds the cost would be $40 million.
Yours is a private, family-owned company?
Yes. My family, my three children and my wife.
Do you have access to significant amounts of outside capital?
We use real estate investment trust financing. The REIT buys the real estate and leases it to us as an operator. They have access to larger amounts of capital at cheaper rates. They finance pretty much all the cost of the building and the land so our money goes into operations. We deal with Medical Properties Trust of Birmingham, Ala. It is traded on the New York Stock Exchange.
Is there a cultural problem on non-compliance with regulatory requirements such as lack of training, language issues and other problems common to small hospitals that could block the deal at Paradise Valley?
My approach is to offer a small community hospital. If you believe a hospital has to be large to be efficient, that is not true. Except for certain services like cardiac surgery. One hospital excepted, we don't do cardiac surgery at our hospitals. But we do caths, we do stemmies, we do blood vessel openings. Among the 300 physicians at Paradise Valley are those with expertise for complicated surgeries. But they can perform them at a number of hospitals in the area.
How aggressively do you compete with other companies in making bids for hospitals?
If we want to get into a situation where we go in front of the attorney general and we invest our time and resource and capital, and somebody else puts in a competing bid, I would rather let them have it. For me, I'm in acquisition mode. I would like to buy hospitals that are community based. I don't want bells and whistles, tertiary facilities. Small hospitals actually do a lot more service than the big hospitals. Big hospitals try to do fancy things. What you need in everyday life is a well-functioning emergency department that can avoid bypasses (diverting ambulances to other facilities because the emergency department is overwhelmed). And I want patients we treat to be safely transported, if they need a higher level of service, to a tertiary care facility. For National City, I believe Paradise Valley is a big facility. You don't need 300 beds for a population of 75,000 or so (in its primary service area).
You've got 1,515 employees at Paradise Valley who are probably wondering what your future staffing will be.
Most employees retain their jobs because most of the employment in acute care facilities is nursing staff. So we need more nurses. In every facility we have acquired, we have added nurses. Instead of having a CEO for each hospital, we have a regional CEO with a nursing director at each site reporting to him. We would be willing to buy another hospital in this area so we could capitalize on the synergies.
Tell us about the person who's going to be your regional CEO.
Paul Hensler. He has a master's and a degree in hospital management. He's had work in several hospitals as CEO. He lived here for a long time. We try to fill from the community. We don't bring in outside doctors. We put in a hospitalist program, which means these are dedicated, full-time doctors who are available at the hospital all the time, 24/7, to care for the patients rather than a doctor who has one patient but his office is 20 minutes away. It is a voluntary program. Over a year or two, many of the family doctors who don't have time to care for their hospital patients will voluntarily ask the hospitalists to see them. But some people such as the Alvarado doctors didn't want that kind of a program. I think they're ill-advised.
Tell us about yourself.
I graduated in '73. I learned from one side being a doctor and I learned the other side from being a hospital manager. What I did for 15 years was build medical groups for Primecare Medical Groups, which operates mainly in the Inland Empire. We managed 250,000 HMO members under my ownership and supervision. Then I went to other states – Florida, Oklahoma, New York – trying to duplicate the same services. And my operations there weren't as successful. I sold those operations and came back to Southern California.
So under your formula, you are concentrating on primary care and not getting into complicated extended care?
From our experience now managing both sides, we learned that there are certain things we can do and certain things we can't. So knowing our limitations. One thing we all have to do, for-profits and not-for-profits, is keep an open emergency department (one that does not get overwhelmed with incoming patients). Typically, when we acquire a hospital the emergency department may have 15 percent uninsured. Under our management it's going to double. But luckily all the 30 percent will not be needing in-patient care. They seek emergency department as their primary care source because they don't have a doctor or they can't afford a doctor. But we also get Medicare and some insurance patients, too. We're able to do more indigent care. Desert Valley, a for-profit hospital, spends far more for indigent care than its larger, not-for-profit neighbors. The charity care at Paradise Valley will be the same or higher than previously under my management.
How do you achieve efficiencies?
We decrease management costs. We build from the purchasing agreements that we have. I am direct with the doctors, hands-on with them. What's your pneumonia indexes? How long are patients staying in the hospital? How much antibiotics did you use? What are the processes you are using? I go into all aspects of clinical management. I have my own that we've implemented. Our protocols are not only quality protocols but also cost-effective protocols. We don't keep the patients too long in the hospitals. Medicare patients' length of stay on average is close to 5.8 days per admission. In our hospitals it's usually 4 to 4.5 days. With that reduction in stay, you decrease the cost by 20 percent. That goes to the bottom line.
Prime Healthcare has a history of canceling contracts with HMOs.
Which we do, only to renegotiate. We have been successful in negotiating better contracts with Aetna and Blue Shield. Blue Cross, we're having a difficult time negotiating with them because that's the 800-pound gorilla. Paradise Valley can achieve better contracts. Good medical management and less bureaucracy. Our emphasis is on community hospitals, smaller capacity, bread and butter services. I may not be able to run a cardiac surgery program as efficiently as Scripps does. And I don't want to go there if I don't have to.
When you acquire a hospital, do you personally spend a fair amount of time there, implant your culture in the hospital, and once it has taken root then leave?
Right. From then on I review once or twice a month all the reports. How come your bed days (per patient) have increased? I will have a point man, a medical director, in each place who will contact me on a regular basis. Our model is quite intense in the beginning. We concentrate on key doctors. For example, there's no way I could educate 300 doctors. I'm meeting for the first time this evening with doctors at Paradise Valley. There will be a lot of questions, a lot of concerns. In a few months, I will hold another meeting and there will be less questions, more satisfaction, more people saying positive things.
During the transition we will pick perhaps 20 doctors as key doctors. We try to talk, express our problems, review good things and bad things. A medical director at the hospital is a liaison with all the staff and corporate, especially me. After six months or so, I expect local people to take part because I want to go on to the next hospital.
How long will you be on the Paradise Valley premises?
I'll intensely focus on Paradise the first three months. I'll probably live here three days a week until I understand the whole situation. I'm bringing my medical directors to spend time, rotate them, bring other hospitalists to talk to these hospitalists. And then we'll publish the data that is parallel for every hospital we have. How many hours did they go on bypass (diverting ambulance arrivals)? How many patients did they see a day? What is the average length of stay? What is the time between arrival and triage? Arrival to doctor? Arrival to the bed? We monitor everything.
The best tool I've found is peer pressure. Showing them how they scale with other hospitals. We monitor all lengths of stays and quality measures. One hospital is pitted against the others. For good reasons. To do good things. To challenge them to excel. We normally don't discuss monetary things at the meetings of the medical staffs. For the monetary, we have a separate group of financial people who are compared to each other.
I confess that when I took the systems I designed to other states, I couldn't duplicate them. So it's not a perfect plan. But right now I'm only in Southern California. I know the California market. I know Medi-Cal. I know how Medicaid works here. I know how HMOs work here. So I'm staying within that geographic market that I do understand.