To stay fiscally healthy, California's hospitals want fewer patients To survive the unprecedented challenges coming with federal healthcare reform, California hospitals are upending their bedrock financial model: They are trying to keep some patients out of their beds. Hospital executives must adapt rapidly to a new way of doing business that will link finances to maintaining patients' health and impose penalties for less efficient and lower-quality care. It's too soon to know precisely how the changes will affect patients. But experts say more will be treated in clinics and doctors' offices than in hospitals. And when they are admitted, their hospital stays could be shorter. "How can we change our mind-set from how many patients we have in the beds to how many patients we are keeping healthy and out of the hospital?" asked Michael Rembis, president and chief executive of Hollywood Presbyterian Medical Center. We haven't figured out how to do that yet. The federal reform law changes the way hospitals and doctors will be paid. Going forward, fees will be based on patient outcome rather than on how long patients stay in the hospital or how many services they receive. And hospitals will be penalized for preventable readmissions and hospital-acquired infections. Promoting higher-quality hospital treatment is long overdue, said Anthony Wright, executive director for the consumer group Health Access. "We were inadvertently subsidizing bad care," he said. Wright said he hopes the new incentives will lead to more coordinated treatment for patients. In preparation for the healthcare overhaul, many hospitals are replacing paperwork with electronic record systems and working more closely with physicians to improve care and reduce the number of unnecessary tests. "As hospitals and physicians think about how they are going to care for populations, they recognize they have to collaborate," said David O'Neill, senior program officer at the California HealthCare Foundation. Some hospitals are going a step further and partnering with physicians to form accountable care organizations, groups that agree to offer coordinated care for Medicare patients. Under the reform law, the organizations will share the savings from lowering costs and improving care. The California Medical Assn., a leading doctor alliance, says the new accountable care groups will succeed only if physicians still have the autonomy to make medical decisions on behalf of their patients. "If they are dominated by the hospitals, they will fail," said Francisco Silva, the association's general counsel. They will not reduce costs or improve efficiency.... It has to be a true partnership. Hospitals that don't adapt may have to eliminate services or close their doors, according to the California Hospital Assn. Already, the state has fewer hospital beds per capita and shorter hospital stays than the national average. "Everyone is scrambling on the hospital side to prepare for fewer patients," said Jim Lott, executive vice president of the Hospital Assn. of Southern California. It does change the paradigm. The shifts - which will occur along with ongoing cuts in Medicare and Medi-Cal - don't take effect until 2014, but already they are prompting hospitals to cut costs and stop duplicating services wherever possible. Hollywood Presbyterian is working with nearby hospitals to identify the best and most cost-effective treatments. In addition, the hospital is trimming expenses and entering new partnerships with outpatient clinics to keep discharged patients from returning to the hospital unnecessarily. Providence Health & Services, Southern California, which operates five hospitals, has offered voluntary buyouts and streamlined supply purchases. The hospital group also is trying to reduce the chances of medical complications and is standardizing treatment of some illnesses to improve efficiency. The Providence hospitals couldn't afford to wait until healthcare reform takes effect in two years, said senior vice president and chief executive Michael Hunn. "The numbers are not sustainable," he said. We have got to get our arms around waste. The most significant moves are driven by cuts to Medicare and Medi-Cal, which in California make up more than half of hospitals' gross revenues. California also has some of the lowest Medi-Cal reimbursement rates in the country. Because government insurance programs don't cover costs, hospitals have traditionally relied on private payers to make up their deficits. But that is becoming more difficult because insurers are under pressure to reduce rates as part of healthcare reform. Hospitals are launching their transformation when revenue growth at some facilities is running at 20-year lows, according to Moody's Investors Service. "They are being hit on both fronts - fewer patients and getting paid less for each patient," said Brad Spielman, vice president of healthcare ratings for Moody's. Michael Blaszyk, chief financial officer of Dignity Health, which operates more than 40 hospitals in California, Nevada and Arizona, said healthcare reform has placed hospitals at a "fundamental crossroads." "All hospitals have had to make choices about what services are appropriate and what services are not," he said. You cannot continue to operate at a financial loss. Smaller hospitals will be among the hardest hit because they are on their own in paying for administrative costs and negotiating rates with insurance companies, said Richard Scheffler, a UC Berkeley health economics professor. The ones that join larger health systems are more likely to survive, he said. "Mom-and-pop hospitals have two choices: disappear or join the party," he said. Long Beach's Community Hospital executives knew their bottom line wasn't improving. So last year, the hospital decided to join MemorialCare Health System, which runs several hospitals in Southern California. Now the hospital is in the black and can focus on care rather than finances, said former board chairwoman Nancy Myers. "If we had not merged ... we probably would not have been able to make it," she said. Even as hospitals rush to revamp their care, there is still uncertainty about what lies ahead, said Allen Miller, an L.A.-based healthcare consultant. An increasing number of aging baby boomers may require more hospitalization in the years ahead, complicating efforts to reduce costly admissions. "No matter how much we think we can decrease hospital admissions, we are still going to need the beds," he said.