About PH&S

About Providence Health & Services in California
January 3, 2007

For the new year, ProvidenceWatch launches the first in a series of profiles on each of the states and major markets in which Providence Health & Services (PH&S) operates. The goal is to help ProvidenceWatch readers better understand PH&S’s place in the western U.S. hospital market by taking a deeper look at their community operations.

PH&S in Southern California

PH&S in California - 2005
	PH&S’s Southern California hospitals avg.	Los Angeles County Hospitals avg.*	California Hospitals avg.*
California market share by discharge	2.1%	NA	NA
Operating profit margin	2.4%	-5.5%	0.5%
Total profit margin	3.2%	1.3%	4.1%
Percent markup**	384%	299%	274%
Available bed occupancy rate	64.4%	63.7%	65.0%
Payor Mix, % of Net Patient Revenue
Medicare	37.3%	33.8%	31.3%
Medi-Cal	10.4%	22.7%	18.9%
Private insurance	46.1%	37.7%	44.5%
County indigent	0.0%	0.6%	1.4%
Other (principally self-pay)	6.2%	5.3%	3.9%
*Comparable General Acute Care Hospitals in California and Los Angeles County are all non-federal general acute care hospitals licensed in California. This group does not include prepaid health plan, state, Shriners, and specialty hospitals, nor does it include psychiatric health facilities. ** Markup is the difference between the actual cost of providing care and the sticker price charged for care. Average mark-up is expressed here as a percentage of actual cost, calculated as [(1/cost-to-charge ratio)-1] x 100. Source: California Office of Statewide Health Planning and Development (OSHPD) data

In contrast to the other states in which they operate, PH&S has a relatively small presence in California’s large hospital industry. PH&S operates the following in Southern California:

• four acute care hospitals
• four housing and assisted living businesses,
• four home health agencies,
• one primary care network, and
• one private high school.

Concentrated in these two submarkets, the PH&S’ presence continues to grow, expanding PH&S's delivery of high-end tertiary services and increasing its share of insured patient revenue 47% faster than comparable hospitals within the county between 2001 and 2005.

Operations and Finances

PH&S nearly doubled its operating profits in Southern California from $10 million (1.37% operating margin) in 2004 to $19 million (2.41% operating margin) in 2005. Over the past five years, PH&S has consistently produced significantly higher operating margins than the average Los Angeles county hospital. Including investments, the system’s total profits in Southern California rose from $15 million (2.02% total profit margin) in 2004 to $25 million (3.19% total profit margin) in 2005. In all, PH&S has increased total profits in Southern California 137% over the past five years (2001-2005).

A rapid increase in revenue from privately insured patients has likely contributed to PH&S’s improving margins. PH&S’s combined four California hospitals increased their share of net patient revenue from third party payors by 24% between 2001 and 2005 (37.3% to 46.1%), while comparable acute care hospitals across the county moved, on average, only 16% from 32.4% to 37.7% third party payors. Over the same time period, PH&S has increased its share of patient discharges in each submarket, which also helps its competitive position.

PH&S in Southern California - Comparison by submarket
	PH&S San Fernando Valley Hospitals avg.	PH&S South Bay Hospitals avg.
Operating profit	$21,010,626	-$1,969,760
Operating margin	4.4%	-0.6%
Total profit	$23,113,805	$2,223,294
Total margin	4.8%	0.7%
Percent markup	433%	312%
Available bed occupancy rate	69.9%	60.1%
Submarket market share	19.7%	30.2%
Payor Mix, % of Net Patient Revenue
Medicare	35.1%	40.6%
Medi-Cal	8.6%	13.0%
Private insurance	49.2%	41.4%
County indigent	0.0%	0.0%
Other (principally self-pay)	7.1%	4.9%
Source: California Office of Statewide Health Planning and Development (OSHPD) data

South Bay

In the South Bay submarket, PH&S co-sponsors and manages Little Company of Mary Hospital in Torrance and Little Company of Mary San Pedro Hospital. In 2005, the two PH&S hospitals accounted for 30.2% of discharges in this submarket.

Little Company of Mary Hospital in Torrance continues to be the most economically challenging for the system in Southern California, posting negative operating margins for three of the last five years. 2005 marked a low-point with a $6.7 million operating loss (-3.35%). Little Company of Mary San Pedro Hospital, however, has consistently been profitable; its 2005 $4.8 million (4.31%) operating profit made it one of only two hospitals with a positive operating margin in the South Bay submarket.

San Fernando and Santa Clarita Valleys

In the San Fernando Valley and Santa Clarita submarket, home to Providence Saint Joseph Medical Center and Providence Holy Cross Medical Center, the company’s market share has grown substantially in recent years. With two competitors closing their doors since 2003, PH&S accounted for 19.7% of all 2005 hospital discharges in the 16-hospital, 700-square mile submarket.

Providence Holy Cross Medical Center in Mission Hills and Providence Saint Joseph more than covered losses in the South Bay, allowing PH&S to post a $19.0 million operating profit across its California hospitals in 2005. Holy Cross made 50% of the system’s California operating profit ($9.6 million, for a 5.34% operating margin) while Saint Joseph’s made the other 50% and covered the South Bay operating shortfall ($11.4 million, for a 3.85% operating margin).

Growth Strategy

San Fernando Valley Market Share by Discharge, PH&S & Its Targets
Hospital	Percent discharges, 2005
Providence St. Joseph Medical Center	11.3%
Providence Holy Cross Medical Center	8.4%
Tenet Encino Hospital	2.3%
Tenet Tarzana Hospital	7.8%
Henry Mayo Newhall Memorial Hospital	6.4%
Source: California Office of Statewide Health Planning and Development (OSHPD) data

Wall Street analysts identify Los Angeles, where PH&S has aggressively pursued expansion over the past several years, as the most competitive market in which the system operates. As ProvidenceWatch has reported , PH&S has allocated $298 million to invest in Southern California, its least profitable region. The largest capital project is a planned purchase of Tenet Healthcare Corporation’s two Tarzana and Encino hospitals and further expansion at Providence Saint Joseph Medical Center.

In addition to the purchase of Tenet hospitals, PH&S also has a 136-bed, $116 million expansion planned at its Holy Cross campus in Mission Hills that would add profitable labor and delivery suites and tertiary services, such as an expanded GI Lab, surgery suites, and more intensive care services.

PH&S has also expressed strong interest in moving more deeply into the suburban Santa Clarita Valley to the north. During the spring and summer of 2005, while construction crews put the final touches on its new health center in Santa Clarita, local press reported PH&S’s offer to the nearby Henry Mayo Newhall Memorial Hospital.

"If Newhall Memorial does not join ‘the Providence family’ by the time Holy Cross [in Mission Hills] receives expansion approval, the hospital chain would immediately begin working on plans to build a second hospital in the Santa Clarita Valley," reported the Santa Clarita Signal.

If PH&S is successful at acquiring the two Encino and Tarzana hospitals and affiliating Henry Mayo, it will increase its market share in the San Fernando Valley from 19.7% of discharges to 36.2%

Executive Leadership Changes

Michael J. Madden, formerly CEO of the California Region, became system-wide Vice President for Advocacy and Development in October 2006. He is expected to remain active on both Providence St. Joseph and Holy Cross foundations. Madden is a former chair of the Catholic Hospital Association and has also been chairman of the board of the Hospital Association of Southern California. In 2005, Providence reports compensation to Madden of $550,000. Arnold Schaffer, moved from COO for the California region into the CEO spot, where he oversees all of PH&S's Southern California activity. In 2004, Schaffer was in charge of the San Fernando Valley Service Area, where he was responsible for Holy Cross and Saint Joseph's. Schaffer chaired the Hospital Association of Southern California in 2005 and continues on that board of trustees. In 2005, Providence reports compensation to Schaffer of $434,000. Blair Contratto was Providence’ CEO for the Little Company of Mary Hospitals until PH&S eliminated her position in the ongoing restructuring process. After seven years as CEO, overseeing "more than 25 sites throughout the greater South Bay community," she "declined to take an offered spot in the newly reorganized regional executive team," according to the local press. Instead, Contratto has decided to take time off with family, work as a consultant, and possibly teach. In 2005, Providence reports compensation to Contratto of $374,000. Michael Hunn is expected to take over as administrator of Little Company of Mary Hospital in Torrance and Nancy Carlson is expected to continue on as COO of Little Company Of Mary San Pedro Hospital. Kerry Carmody is administrator for Providence Holy Cross and Patrick Petre is top manager at Providence St. Joseph.

Since the merger of Providence Services with Providence Health System to form PH&S on January 1, 2006, the system has rapidly restructured top leadership into a new, more centralized system. In October 2006, Michael Madden shifted from the Southern California regional CEO slot to system-wide Vice President for Advocacy and Development, while Arnold Schaffer moved up to the top regional post.

Following the model of the rest of the system, PH&S also eliminated Blair Contratto’s CEO spot over the two Little Company of Mary hospitals, leaving administrators, or chief operating officers, who will answer directly to region CEO Schaffer.