A SPECIAL REPORT ON THE SOUTHERN CALIFORNIA ECONOMY : THE SOUTHLAND’S INDUSTRIES : Health Industry’s Vital Signs Are Strong, Prognosis Excellent

Los Angeles may have developed a reputation as Tinsel Town across the country, but the region’s well-known film industry is now dwarfed in size by a business that was virtually non-existent 20 years ago: health care.

Employment in the health industry in Los Angeles County grew to about 240,000 workers in 1986 from 143,000 in 1972, making it the fifth-largest employer behind financial services, tourism, aerospace and wholesale trade, according to figures Los Angeles Area Chamber of Commerce.

The entertainment industry, by contrast, directly employed about 54,000 people in 1986 and ranked seventh.

In fact, because of its phenomenal growth here, the health industry in the Southland is now viewed by most experts as one of the region’s chief competitive advantages for the future. Given an aging population and advances in medical technology, health care appears poised for continued growth despite short-term problems.

The expansion of the health business in the Southern California has been as quick as it has been large. Much of the growth has come from for-profit, publicly traded hospital and nursing home chains. Leading that list is Pasadena-based Beverly Enterprises, the nation’s largest nursing home operator with about 110,000 employees across the country.

Founded in 1963, Beverly’s revenue skyrocketed to $2 billion in 1986 from just $81 million in 1977 and net income increased to $51.5 million from $2.4 million in 1977.

Also based in the Southland is Maxicare Health Plans, a Los Angeles-based health maintenance organization whose nationwide network of physicians provides medical services to about 2.3 million customers in 26 states.

Add to that two of the nation’s biggest hospital chains--National Medical Enterprises of Los Angeles and Beverly Hills-based American Medical International.

Growing Staffs

The area’s boom in health care has also been fueled by growth in big teaching hospitals such as Los Angeles County-USC and UCLA Medical Center. As advances in medicine have been made, the staffs of such facilities have grown sharply.

Hospitals, health insurance firms such as Blue Cross and Blue Shield and other medical providers have been around for decades, of course. But until the late 1960s, most were operated as nonprofit enterprises outside the rough-and-tumble world of public corporate ownership. As a result, few could quickly acquire the needed capital to expand as rapidly as the investor-owned health-care businesses that have sprung up in the last 20 years.

Many of the for-profit Los Angeles health-care companies that began in the 1970s and early 1980s found themselves in the right place at the right time. They benefited from a period of rapid population growth in the West as well as a big expansion of employee medical benefits by major corporate employers that has helped make health care a $426-billion-a-year industry nationwide.

“(Spending on) health care since 1975 has been increasing at rates of anywhere from 10% to 15% a year,” says Glenn Melnick, a Rand Corp. consultant and an assistant professor at UCLA’s school of public health. And not just traditional hospital care has grown. Alternative plans such as HMOs, which provide prepaid medical services to consumers, have proven especially popular in California.

Although less visible than entertainment, the health-care industry has had a substantial effect on the local economy, analysts say.

More than 40% of hospital revenue comes from Medicare reimbursements, which are federal government funds “imported from outside the state of California,” noted Melnick, the Rand Corp. consultant. Another 5% to 15% of hospital revenue comes from MediCal reimbursements, which are also partially funded by the federal government.

$51-Billion Tab

Overall, according to the U.S. Health Care Financing Administration, Californians spent nearly $51 billion for their personal health care in 1985, the latest year for which figures are available. That amount is more than double the $20.7 billion spent in 1978.

Yet despite this dramatic increase in spending, health-care professionals are not entirely certain why Los Angeles has become such a magnet for successful health-care firms.

Some speculate that the concentration of medical schools and a liberal state regulatory climate that has permitted more hospital construction than in many Northeastern states helped fuel early growth.

But some health-care executives say the phenomenon may also result from Southern California’s traditional encouragement of risky, entrepreneurial ventures that seem out of the mainstream elsewhere.

For example, the nation’s first health maintenance organization--Ross Loos, which has since been absorbed by Cigna Healthplan of California--was founded in Los Angeles more than 80 years ago. And alternative health-care plans such as HMOs and preferred provider organizations have won far greater acceptance among consumers here than in most other parts of the country.

“West Coast medicine is more forward thinking than that on the East Coast,” says John C. Bedrosian, senior executive vice president and one of the founders of National Medical Enterprises.

“The East Coast has an establishment mentality . . . but clearly the (rapid) population growth in the West has been instrumental in supporting the health-care industry here.”

But that growth could be jeopardized by government and business efforts to curb rising medical costs. The central part of the new medical economy measures is a drive to keep people out of the hospital. That has slashed the annual rate of hospital revenue growth to less than 7% a year between 1983 and 1986 from 15.2% between 1977 and 1983, according to the American Hospital Assn. And nearly all of the big Los Angeles health-care firms have been forced to tighten their belts.

American Medical International, for example, has eliminated about 500 jobs in its corporate headquarters over the past two years. In a bid to improve its bottom line, National Medical Enterprises this summer sold off seven subsidiaries that employed 4,500 and had $500 million in annual sales.

Gloomy Picture

The picture is nearly as gloomy at Beverly, where net income dropped to $44.9 million for fiscal year ended Dec. 31, 1986 from $59.8 million the previous year.

Meanwhile, Maxicare’s long history of profitability was shattered last year after it purchased the competing HMO HealthAmerica for $400 million.

But experts point out that while hiring is down at major health-care companies, many smaller companies are stepping in to fill the void.

“The big companies used to be a steady source of employment for our graduates,” Melnick says. “But at a time when hospital budgets are going down, they are needing more people in health services and management” to help cut costs. “I think the kinds of changes going on are actually going to create more opportunities overall.”