Future of St. John’s still murky

Amid a nationwide wave of healthcare mergers, a deal was brewing this fall to sell St. John’s Health Center, a storied Santa Monica hospital founded by Catholic nuns and befriended by Hollywood stars.

Then, without notice, late last month the hospital’s out-of-town owner ousted the top executives, fired most of the directors and thrust into public view a long-simmering debate about the hospital’s future.

At the center of it all is Los Angeles billionaire Patrick Soon-Shiong, a hospital supporter who has committed $100 million to St. John’s and already has his name on several buildings there. And, according to people familiar with the matter, his family foundation was poised to help finance the sale of the hospital to a new nonprofit run by a board of local leaders.

In an interview, Soon-Shiong declined to discuss whatever board deliberations occurred. But he said he is committed to putting St. John’s back into local hands, and the management shake-up reinforced his view that new ownership is crucial to repair the hospital’s relationship with influential doctors and donors.

“It is very important that there be local community governance over this hospital,” said Soon-Shiong, a doctor and former drug-company executive whose net worth tops $7 billion. “If that means we have to -- philanthropically or in whatever form -- find a way to provide support so the local community can have governance control, I will be supportive of that.”

Soon-Shiong is a key player in other Southland institutions. He owns part of the Lakers and has expressed interest in buying sports and entertainment giant AEG, which is trying to draw professional football back to Los Angeles.

For months, officials at the hospital weighed various options including selling the hospital to rivals UCLA or Cedars-Sinai Medical Center or perhaps joining another Catholic hospital chain. Eventually, some board members supported the plan involving Soon-Shiong’s foundation.

But the hospital’s owner, the Sisters of Charity of Leavenworth Health System in Denver, stepped in before anything could be finalized. It removed the hospital’s top two executives and escorted them off the premises the morning of Nov. 29. And it fired 15 of the hospital’s 17 board members in a terse email.

Exactly what triggered the mass dismissals remains undisclosed, and the Sisters of Charity won’t discuss what happened. But this battle for control of St. John’s appears far from over. And whoever wins this tug of war will get a hospital rich in history but losing ground in the highly competitive Southern California hospital market.

Roman Catholic nuns founded the hospital during World War II and ran it until the late 1990s. The late Hollywood actress Irene Dunne was a longtime benefactor, and she secured royalties from the landmark film “How the West Was Won” for the hospital’s coffers. Over the years, people often camped out on the hospital’s lawn to catch a glimpse of celebrity patients such as Michael Jackson, Elizabeth Taylor and President Reagan. The hospital named its nursery for Maria Shriver.

St. John’s, however, has struggled to keep pace with rapid changes in the healthcare industry that increasingly favor bigger institutions. Those challenges underscore that even longtime pillars of the community are not immune to the financial pressures caused by the federal healthcare law and runaway medical spending. St. John’s is the only California hospital run by the Sisters of Charity.

“The idea of a stand-alone, nonprofit hospital doesn’t work well in a market that’s so volatile,” said Glenn Melnick, a USC health policy professor.

For years, hospital officials in Santa Monica had a productive relationship with the Sisters of Charity, according to people close to the situation. The people, who asked not to be named because of the sensitive nature of the issue, said that began to change after a new chief executive, Michael Slubowski, took over the hospital chain early last year.

A veteran healthcare executive, Slubowski inherited a chain of 11 hospitals that lost $70 million in 2010, and he wanted to get the nonprofit back on track. Around the time he took over, he said, the Sisters of Charity and St. John’s agreed that the hospital should explore its options.

“There were a variety of options considered, including becoming a stand-alone hospital, becoming part of a Southern California-based Catholic health system or aligning with other faith-based or secular providers,” Slubowski said.

Slubowski said that he isn’t looking to sell St. John’s at this time, and that he would like for the hospital to remain a Catholic institution under any new arrangement. Some former St. John’s board members favored forging closer ties with UCLA or Cedars-Sinai to gain bargaining power with health insurers while maintaining independence, according to people close to the situation.

Those ties to other healthcare providers are crucial for hospitals to boost their leverage with insurers that want to ratchet down payments. Medicare is also moving away from conventional fee-for-service in favor of lump sum payments to hospitals and doctors working together to coordinate patient care.

That’s why it was a blow to St. John’s when Santa Monica Bay Physicians joined the UCLA Health System in 2010. The primary-care physician group had been a major source of patient referrals for St. John’s, and Slubowski said there was a reduction in admissions from Santa Monica Bay after that deal.

The 266-bed hospital reported losses of $21.9 million for 2010 and $12.8 million for 2011, state records show. Slubowski said that depreciation on new buildings accounted for most of those losses and that the hospital generates positive cash flow. Patient revenue last year was $891.3 million, down 8% from a year earlier.

“Nearly every hospital in the Los Angeles metro area faces financial challenges,” Slubowski said.

Those fiscal problems may worsen as the hospital faces fallout from the management upheaval.

This year St. John’s announced that nationally known Kerlan-Jobe Orthopaedic Clinic was moving much of its business to the hospital. Now that deal appears to be in jeopardy.

“We have been in contact with St. John’s interim management team as we start the process to evaluate our alternatives,” said Ralph Gambardella, president and chairman of Kerlan-Jobe.

Soon-Shiong said, “As a result of this sudden action, the local doctors are very concerned, and it’s my understanding that Kerlan-Jobe is not proceeding with St. John’s.” Similarly, he has put on hold his plans for construction next year of a genomic pathology institute and a sports science center at the hospital.

Slubowski said he couldn’t speculate about Kerlan-Jobe’s plans.

St. John’s always had plenty of friends in high places, counting celebrities such as Jimmy Stewart and Julie Andrews as supporters over the years. Just before being let go, former St. John’s CEO Lou Lazatin posed with pop music star Pink at a hospital benefit. Lazatin couldn’t be reached for comment.

In 1991, St. John’s scored a coup by pulling the John Wayne Cancer Institute away from UCLA with the promise of top-notch facilities and support.

Three years later, in 1994, the Northridge earthquake shut St. John’s for about nine months. But drawing on its connections to some of Southern California’s wealthiest people, the hospital raised about $230 million to help rebuild. The years-long process was capped by the opening of its Keck Center building in 2010.

Now many of the hospital’s former directors are stunned at how they were treated.

“It is an act you would not have expected from the Sisters of Charity,” said Abbott Brown, a venture capitalist in Los Angeles and longtime St. John’s board member who was dismissed by email.

“It is clear the Sisters of Charity have chosen to disenfranchise those who have raised the money to build a brand new hospital, to recruit outstanding doctors and turn St. John’s into a hospital of outstanding reputation with positive cash flow.”

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chad.terhune@latimes.com