American Healthcare to Offer Control of Chapman Hospital to Doctors

A bankrupt hospital chain said Wednesday that it plans to transfer control and substantial ownership of Chapman General Hospital in Orange to a group of the hospital’s physicians.

The proposed $20-million buyout of the 99-bed community hospital and an adjacent medical office building is expected to be completed before the end of the year.

David Huff, president of American Healthcare Management, a Dallas-based hospital chain in the midst of bankruptcy reorganization, said the sale of Chapman General will be modeled after a proposed $28-million transaction with physicians at San Clemente General Hospital, which it also owns.

Both agreements are contingent on approval of the bankruptcy court overseeing the reorganization of the chain. American Healthcare owns 26 hospitals nationwide, including eight in Southern California.

The San Clemente General transaction has been attacked by a second physician group, which says it is preparing its own purchase offer.

Huff said an unidentified lender has agreed to participate in the purchase of San Clemente General. But he said financing still must be lined up for Chapman General.

The San Clemente General and Chapman General transactions are structured to give physicians control of the hospitals while reserving for American Healthcare a minority ownership in the real estate and a 50% share of any future profits.

At both facilities, the physicians would be part of a real estate investment partnership headed by a new company, Irvine-based National Health Care Properties, which would perform property management services for the hospitals.

At Chapman General, ownership of the hospital and medical offices would be divided between American Healthcare with a 45% interest, the physicians with 45%, and National Health Care Properties with 10%. The ownership company would lease the hospital to another operating firm to be entirely physician owned.

Chris Wheeler, president of National Health Care Properties, said his company has also gone into escrow with similar physician groups purchasing two other American Healthcare hospitals in Los Angeles County: Community Hospital and Mission Hospital in Huntington Park.

Huff said he believes that physician ownership is a way to make hospitals more profitable and doctors more content in an era of intensified competition.

“Physicians control about 100% of your revenue and 80% of your costs. So you need their cooperation rather than their traditional adversary relationship with hospital administration,” he said.

A common complaint of physicians with American Healthcare and other chains, he said, is that money is taken from profitable hospitals such as Chapman General and San Clemente General and spent on less profitable hospitals in other parts of the country.

“The doctors are interested in obtaining control of this hospital,” said Dr. Dennis Long, an internist who is chief of staff at Chapman General. Long said 37 Chapman General staff physicians--most of whom practice in Orange--have signed letters of intent to participate in the buyout.

“The doctors are not so interested in making a profit,” Long said. “They are saying we know what we need in Orange better than a corporation in Dallas or any other corporate headquarters.”

Long and Wheeler said they expect that doctors will be lured away from competing St. Joseph Hospital in Orange and Western Medical Center in Santa Ana by the opportunity to acquire an ownership interest in Chapman General.

About eight weeks ago, Long said, American Healthcare allowed the doctors to form an “interim board” to make decisions on hospital operations until the sale is completed.

Among the doctors’ first objectives, he said, is to eliminate the use of temporary nurses and make various plant improvements, including an upgrading of telephone communications and heating and air conditioning.

In addition to the $20-million buyout, Wheeler said another $2 million would be raised for renovation and new equipment at Chapman General.

Huff said of the 26 hospitals in the chain that he would like to sell eight outright and retain partial ownership in the rest through transactions similar to the proposed Chapman General and San Clemente General buyouts. But first, he said, potential lenders will have to be convinced that the arrangement is financially sound.

“We are taking one step at a time. I think it will be a relatively slow and time consuming process because we are going to have to prove it works. I think San Clemente and Chapman will be the first tests of whether it will work or not. I think we will make believers of everybody,” said Huff.

Delayed by Opposition

Wheeler acknowledged that the proposed buyout of San Clemente General has been delayed by the opposition of the rival doctors group, Physicians Committee for Excellence, which has claimed to represent 113 staff physicians at the hospital.

The rival group wants to exclude American Healthcare from any ownership of San Clemente General though an arrangement in which physicians would buy the hospital and then lease it to SamCor Inc., a Phoenix-based, nonprofit health care corporation.

Dr. Dava Gerard, chairman of the rival group, said Wednesday that American Healthcare has still not presented its offer to the bankruptcy court for approval, and she doubted whether creditors would approve the transaction.

Gerard said that within a few weeks, her group will make its own formal offer, which will include a financing plan, to American Healthcare’s board of directors.

Wheeler, in turn, said that his group intends to take its offer to the bankruptcy court within the next two weeks.