JOHN GILWEE : Unhealthy Turn for Hospitals : Indigent Tide, AIDS Will Force Upheaval, Expert Says

Competition is commonly extolled as the force that improves productivity and efficiency and ultimately drives a company to success.

But in the hospital industry, competition has taken an unhealthy turn, contends John Gilwee, director of the Hospital Council of Southern California’s county office. The organization represents 38 of the 42 general acute-care and psychiatric hospitals in the county.

Because of severe cuts in state and federal programs to reimburse care for the poor and the elderly, hospitals are competing for larger numbers of patients who can pay their own way or who have private medical insurance. In the race for that clientele, the poor are being left behind.

According to Gilwee, hospitals are revolting against a government reimbursement that guarantees them losses. Some are closing emergency rooms that by law must accept indigent patients, while others are establishing satellite clinics that are under no obligation to treat Medi-Cal and Medicare patients. And they are pulling out of contracts to provide longer-term care to Medi-Cal recipients.

He predicts that hospitals that keep accepting indigents will sink deeper into the red as they receive an increasingly larger share of such patients. The crises for them will worsen substantially, he adds, with the projected growth of the acquired immune deficiency syndrome epidemic, which will produce patients who will swell Medi-Cal rolls and require more costly treatment than the average patient.

Criticizing the state Legislature for abdicating its responsibility to the poor, Gilwee said Proposition 99, a 25-cent cigarette tax approved by state voters, may pave the way for other special assessments to pay for indigent health care.

Gilwee was assistant executive director of the Orange County Medical Assn. for 5 years before becoming director of the Hospital Council in 1984.

He expressed his concerns about the distorted outcome of hospital competition and inadequate reimbursement systems in a recent interview with Times staff writer Leslie Berkman.

Q. Simply stated, why are hospitals in financial trouble?

A. It all started in 1982 when California was faced with a severe budget crisis, and the state chose to make cuts in the Medi-Cal program by setting up a system of selecting certain hospitals to provide all non-emergency medical care to Medi-Cal patients at discounted rates. Then the state gave the counties responsibility to provide medical care for the “medically indigent adult population” (mostly poor people who are not on welfare) and reimbursed them only 70% of the funds that the state previously would have spent for their care.

In all, the state cut more than $500 million out of the state’s Medi-Cal program. The major brunt was taken in the hospital sector, although physician reimbursement rates were also cut. At the same time, the federal government established a much tighter fee schedule for reimbursing hospitals that treat Medicare (elderly) patients. When hospitals responded by trying to increase their charges to privately insured patients, the insurance companies got state legislation to allow them also to contract with hospitals for discounted fees.

Q. How have hospitals been affected by these reimbursement cuts?

A. Care simply winds up being uncompensated. The amount of uncompensated care in California has grown dramatically since 1982, from about $800 million to more than $2.2 billion. In California last year, about 50% of the hospitals were operating in the red.

Q. Does this change in reimbursement policies encourage competition among hospitals?

A. The real basis of competition among hospitals is to try to attract privately insured patients and reduce the number of indigents that they serve. Although competition in health care has nothing inherently wrong with it, the flaw is that the poor patient is left out of the equation. They are the discards of the competition theory because their care is reimbursed at less than cost. Medi-Cal, for instance, reimburses hospitals at only 60% to 70% of the cost of services.

Q. Do the poor end up with a lower level of care?

A. Public policy says everybody is supposed to have equal access to health care. But someone who has no health care coverage or is dependent on county Indigent Medical Services or Medi-Cal experiences a great deal of difficulty finding physicians who will take care of them. In an emergency situation, they can go to an emergency room and be taken care of. But for routine and preventive care, it is next to impossible for them to find physicians, and so most of them are dependent on free clinics.

Q. Several county hospitals have been opening outpatient clinics. But invariably those clinics open in middle and upper-middle income areas. Is that because the hospitals are trying to avoid the poor?

A. That is the result of hospitals competing like other businesses. A basic business strategy is to go where there are revenue-producing opportunities. When the survival of your hospital is on the line, you don’t go and open up a satellite clinic in downtown Santa Ana. Also, when you take a service outside the walls of the hospital, you are establishing a business that is free of any obligation to take care of indigent patients. The obligation to take care of patients who cannot afford to pay is a licensing requirement of a hospital but does not apply to a stand-alone clinic.

And that illustrates what I am saying is wrong with the competition theory. It really makes the indigent population very vulnerable and puts up significant barriers to access to care for them. I think we are down to about 200 doctors in the county who are willing to see a new Medi-Cal patient out of a total of about 4,000 doctors. That is a graphic portrait of what the situation has deteriorated to.

Q. Were you surprised to learn that Western Medical Centers in Santa Ana and Anaheim and Chapman General Hospital in Orange had given the state notice that they will withdraw from the Medi-Cal program?

A. I am not surprised by it. It just took this long for the Medi-Cal contracting system to deteriorate.

Q. How many hospitals in the county contract with the state to accept Medi-Cal patients?

A. There are 16 contracting hospitals. The Selective Contracting System for Medi-Cal is the state’s structure for paying for inpatient hospital services for Medi-Cal patients. All hospitals provide emergency services to Medi-Cal beneficiaries. But a non-contracting hospital is required to transfer a patient to a contracting hospital at the point that the patient is medically stable.

Q. Would the loss of three contracting hospitals affect the rest of the county system?

A. My concern is that a larger Medi-Cal load will fall on the remaining contracting hospitals who may not be able to withstand the added financial burden. In a domino effect, they also may decide to withdraw from the program.

Q. What share of the county’s Medi-Cal patients is taken care of by the three hospitals that say they are withdrawing?

A. I would guess about 20%.

Q. Some say that the hospitals’ announced pullout is just a ploy they are using in negotiations to get a higher reimbursement rate from Medi-Cal.

A. I don’t think so, although Medi-Cal officials like to say this is just a negotiating ploy. We have already been through the negotiations where there have been threats, and then contracts have been signed. But I think the problem has become much more severe. I think we are really ready to see a shakeout of the Medi-Cal contracting system here in Orange County.

Q. Have other hospitals backed out of the Medi-Cal system before?

A. One other hospital, Healthcare Medical Center of Tustin, dropped its contract about 2 years ago.

Q. Do you believe that other hospitals will follow?

A. I do expect more hospitals to back out. We should see how it shapes up in the next 6 months as hospital Medi-Cal contracts come up for renewal. Already the California Medi-Cal Assistance Commission that oversees the California Medi-Cal Selective Contracting System has shelved its plan to expand the Medi-Cal contracting system into south Orange County and the Newport Beach-Costa Mesa area--which are the only two areas of the county not yet covered by the program.

Q. Is that because there aren’t any hospitals in that area willing to serve indigent patients at the rate of reimbursement that the state Medi-Cal program provides?

A. Yes. So the state commission would simply designate all the hospitals in those two areas as non-contracting hospitals and force them to transfer their Medi-Cal patients to surrounding hospitals.

But that plan, which was proposed in late August or early September, has been put on hold. My opinion is that the state is fearful of the plan’s effect on the remaining contracting hospitals. The surrounding hospitals that would have to absorb the load would be Western Medical Center in Santa Ana, which says it wants out of the Medi-Cal program; UCI Medical Center, which has no room for more Medi-Cal patients, and Fountain Valley Regional Hospital & Medical Center, which is trying to figure out how to cope with the pressures.

Q. Is the AIDS epidemic expected to place another financial strain on county hospitals?

A. Sure it will. The nature of the disease depletes the financial resources of patients, and the number of AIDS patients supported on Medi-Cal continues to increase. Also, the care provided to an AIDS patient tends to be more expensive than that of an average patient. The average cost at hospital discharge for an AIDS patient is almost three times as high as the average cost per discharge for all patients.

Orange County had 832 AIDS cases as of the end of September, and that number is expected to grow. Currently, about 25% of AIDS patients in the county’s hospitals are Medi-Cal beneficiaries, and that percentage also is increasing.

Q. Will certain hospitals be designated to take AIDS patients?

A. There have got to be some changes in our health system to accommodate the future needs of AIDS patients. Now the overwhelming majority of AIDS patients in Orange County are going to UCI Medical Center and Hoag (Memorial Hospital Presbyterian). They probably take 95% of the AIDS hospitalizations. Mostly it is a function of where physicians are located in the county who are willing to take AIDS patients.

Q. How can AIDS health care be funded?

A. AIDS is such a significant health care problem that I don’t know there are really adequate resources to deal with AIDS on a state-by-state basis. I think it requires national coordination and financing. I think we’ve recognized other special situations for coverage under Medicare, such as for people who need kidney dialysis and those who are completely disabled. We need to look at the Medicare program as an alternative.

Q. If national funding is not established, will hospitals such as Hoag have difficulty continuing to admit AIDS patients?

A. Yes. The way the population of AIDS patients is dispersed, the majority are in New York and California, and those states and others with a higher-than-average number of AIDS patients would be disproportionately affected. So it is something that requires a national approach.

Q. How far will the new cigarette tax go in alleviating the financial crunch on hospitals?

A. It may offer some relief, especially to hospitals that are up against the wall and forced to decide whether to keep a trauma center or emergency room open that must accept Medi-Cal patients. Maybe it will buy us some time while the state tries to figure out how the uncompensated-care problem will be addressed.

Q. The tax doesn’t solve the problem?

A. No. The money that the tobacco tax generates for health care is estimated at about $300 million a year, while the total uncompensated care problem in California is estimated this year to exceed $2.7 billion.

Q. How much of the new money goes to Orange County?

A. I really can’t tell you because a bill has yet to be adopted by the state Legislature that will determine how the money will actually be allocated. But it is roughly estimated that $20 million to $25 million will be available to Orange County. By contrast, the county’s total uncompensated care load is about $135 million-plus.

The new money is designated to help pay for the health care of indigents who are not covered by Medi-Cal or Medicare. Mostly they are the working poor, who can’t afford to buy insurance, and undocumented aliens.

We are very pleased that the added cigarette tax passed. However, we are concerned that because of the passage of Proposition 98, which guarantees that a certain percentage of the state budget will be spent on education, Medi-Cal and other health care programs may become targets of state budgetary cutbacks. That has the potential to offset most of the benefit from the cigarette tax.

Q. Do you foresee the council supporting other kinds of taxes to pay for health care?

A. Yes. I think the tobacco tax sets the stage for other types of assessments that could in fact be used. The state Legislature and the governor thus far seem committed to not addressing the (hospital financing shortfall) problem out of revenues from the state general fund. So the only avenue left for funding is through taxes that would be applied, such as the tobacco tax or other special fees.

Q. What, for example, would be the kind of taxes you might support?

A. I think you could make an argument to support emergency trauma services from a gas tax since so many casualties occur on the roads. And you could make an argument that it would be reasonable to have a certain amount of payroll taxes go to support medical care for persons who don’t have insurance offered to them through their employment. These are just possibilities. What we need is to find a method for broadly dispersing the responsibility to pay for a societal obligation that our Legislature will not live up to.

Q. Do you believe that some hospitals will be forced by financial pressures to shut down in Orange County?

A. The first reaction will be to close down services that are money losers, such as emergency rooms. After that, if the state and federal governments’ health care reimbursement policy doesn’t change, it is unavoidable that we will see some hospitals close. Reimbursement rates are not keeping pace with the increased costs of providing health care.

Q. Are all the county’s hospitals needed?

A. There is no doubt there is some percentage of our hospital-bed inventory in the county that may not be completely necessary. The occupancy rate of hospitals in the county now runs at around 55%.

But you have got to have excess capacity in the system. You have to be prepared to deal with health care demands that will grow with the aging of the county’s population. Also, there will be increased hospitalization requirements as the AIDS epidemic progresses. And we need to be able to deal with earthquakes and other disasters that occur.

Q. What kind of hospitals are most likely to fold?

A. The smaller hospitals functioning at low occupancy rates and the larger hospitals operating with high indigent-patient loads.

Q. So the best hospitals are not necessarily the ones that will survive?

A. Right. The hospital running at 90% occupancy but full of Medi-Cal and Medicare patients will not survive. Quality has always been the N1 driving consideration in health care. The quality of care is very closely regulated. But I get concerned that we might start restructuring the system so (that) cost may outweigh the emphasis put on quality.