Doctors operate this company

Andrew Edwards

The purchase this month of four Orange County hospitals is just part

of a larger expansion plan for Costa Mesa-based Integrated Healthcare

Holdings Inc., company officials say.

“We’re in an expanding mode to acquire more and more hospitals,”

said Larry Anderson, president of Integrated Healthcare Holdings Inc.

Integrated, which is controlled by a doctor-dominated consortium,

announced its first acquisition March 8 with the $70-million purchase

of four hospitals that employ about 3,500 doctors and staffers.

The buy was a big one for Integrated. In its current form, the

company is only about 18 months old and does not yet have a website,

Anderson said.

Though Integrated has no plans on tap for additional purchases,

Anderson wants to quintuple the firm’s portfolio.

“We intend to buy other hospitals,” Anderson said. “Our five-year

plan is to own 20 to 25 hospitals by the end of five years.”

Integrated was formed to buy and run hospitals. In November 2003,

Anderson, Integrated chief executive Bruce Mogel and chief financial

officer James Ligon purchased an inactive company called First

Deltavision Inc., according to a Securities and Exchange Commission

filing. They changed the company’s name in June to reflect their

business plan.

The acquisition of Deltavision, which was already qualified as a

public corporation, allowed the new owners to immediately offer stock

in Integrated, Anderson said.

Integrated retained the chief executives of the four hospitals the

firm purchased from Tenet Healthcare Corp.

During 2004, Tenet lost more than $2 billion. The four hospitals

sold to Integrated Healthcare were among 19 California facilities

Tenet decided to divest at the beginning of last year.

None of the four hospitals purchased by Integrated Healthcare are

in Newport-Mesa, though Western Medical Center Santa Ana is usually

the destination for the area’s trauma patients. The other three

hospitals are Western Medical Center Anaheim, Coastal Communities

Hospital in Santa Ana and Chapman Hospital in Orange.

Integrated Healthcare’s majority shareholder is a consortium of

doctors that paid $30 million to fund the hospital purchase.

Cardiologist Anil Shah founded Orange County Physicians Investment

Network LLC specifically to finance that deal. The consortium owns

83% of Integrated Healthcare.

Shah, who is a member of Hoag Hospital’s staff, is also chairman

of Integrated Healthcare’s board of directors.

“Basically, Integrated Healthcare Holdings is ours,” Shah said.

Before Shah’s involvement, doctors worried about the Integrated

Healthcare deal, said surgeon Robert Steedman, chief of staff at

Western Medical Center Santa Ana. Physicians opposed the sale because

under its original structure, the purchase would have been financed

by Hemet physician Kali Chaudhuri, who earlier bought -- and closed

-- several clinics.

In 2000, Chaudhuri’s company, KPC Medical Management Inc., closed

42 clinics the company bought in 1999, according to reports. KPC

Medical Management declared bankruptcy in 2000.

“That was the reason why it caused such a furor in Western Medical

Center,” Steedman said. “We really sort of stonewalled it initially.”

Steedman said he dropped opposition to the sale after Chaudhuri’s

role in the company was reduced. Chaudhuri, who is still involved,

owns 49% of the real estate subsidiary formed with Shah’s company to

own land associated with three of the four hospitals.

He also has the right, along with his lawyer, to buy almost 25% of

Integrated, Shah said.

Chaudhuri could not be reached for comment. Shah said anyone

bothered by Chaudhuri’s involvement should not be.

“He will never have a controlling interest,” Shah said.

California’s Department of Health Services sent a letter dated

Feb. 3 to Integrated Healthcare President Anderson announcing the

agency had approved Integrated’s license to operate the hospitals

after Integrated announced Shah’s company would be the majority

shareholder.

So far, Shah’s consortium has more than 20 investors, and though a

medical degree is not a requirement for an investor to join, most of

the members have one, Shah said. He expects the company’s structure

will be welcoming to medical staff.

“Physicians, they’re interested in supporting the company; they’re

interested in supporting the practice, because that’s what’s most

important to them,” he said.

In early 2004, Steedman contributed to a company that was formed

by doctors at his hospital to consider buying the facility.

He agreed that physician ownership of hospitals has promise. “I

think you’ll find people looking at this -- more and more hospitals

will look at our model,” he said.

The model’s potential advantages, Steedman said, stem from

doctors’ input “to make sure money that comes in goes to appropriate

capital investment and proper patient care.”

* ANDREW EDWARDS covers business and the environment. He can be

reached at (714) 966-4624 or by e-mail at [email protected].