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Kellie Schmitt

When Culver City, Calif.'s Brotman Medical Center filed for Chapter 11 bankruptcy in late October, attorneys paid attention.

Its financial struggles are likely to be a harbinger of hospital woes to come as the number of uninsured patients grows and hospital revenues decrease.

"All of those factors are forming a real storm for hospitals," said Stephen Warren, a partner in O'Melveny & Myers' L.A. office. "And this wave is going to involve sophisticated counsel."

That's why O'Melveny is actively targeting hospital bankruptcies, hoping to cash in on a climate of upheaval. It hopes to compete against firms more established in the health care area. Other firms, such as Buchalter Nemer, are ramping up as a hospital crisis looming in California may mean plenty of legal work to go around.

"It's an area in which we're putting a heavy degree of emphasis," Warren said. "Some of the hospital bankruptcies won't be big, but the aggregate will have a significant impact."

It's also worthwhile on the billing-rate side, he added: "These are not discounted rates. They tend to be very high margin, since these are bet-the-hospital problems."

COMPETITORS LINE UP

But O'Melveny will probably have its work cut out for it in a health care field dominated by established players such as Foley & Lardner and McDermott, Will & Emery.

"What differentiates us is that we have a broad and deep knowledge of the health care industry, including hospitals," said Charles Oppenheim, a partner with Foley's health care team in Los Angeles. "We know where the land mines are and how to work around them. We know the regulatory issues, and we also know a lot of the players."

McDermott Will, too, touts experience as a key advantage:

"We are so well-known in the area that we're going to be in the line of fire in anyone's choice of legal counsel," said Douglas Mancino, a health partner in Los Angeles. "We're pretty ubiquitous."

Ubiquitous, and likely to be busy. Mancino said his firm already does a lot of work for lenders and distressed hospitals. Many use local counsel on more routine legal needs but call in the McDermott Wills of the legal world when it comes to "bet-the-farm" matters.

Adding to the competition are bankruptcy specialized shops. Insiders point to well-established firms such as Los Angeles' Pachulski Stang Ziehl & Jones, and Klee, Tuchin, Bogdanoff & Stern, the firm representing the debtor in the Brotman case.

The other law firm involved in Brotman is Buchalter Nemer, on behalf of the official Committee of Unsecured Creditors. The firm saw an opportunity when that committee was formed and threw its name into the interview hat.

"We showed our experience in numerous areas of the law that had to be dealt with," said partner Benjamin Seigel, who practices in the firm's financial restructuring and insolvency group.

Buchalter Nemer has full-service capacities in areas such as labor, real estate and corporate governance that add to its support network, and, as a regional firm, its rates are lower than national firms, Seigel said.

O'Melveny said it's aware of the entrenched competition and is also trying to get ahead of any newcomers looking to get in on the wave.

"When it really hits the fan, when this becomes a more obvious trend, every major firm will be involved," Warren said.

To position itself, O'Melveny has changed the focus of its 10 health care restructuring attorneys to hospitals. It's working with and forming alliances with financial advisers who specialize in the arena and who are involved in the early stages of the distress. And, it's making contacts with turnaround firms on the business side.

"Having relationships is useful in both client services and marketing," he said. "We're aggressive in the amount of resources we're putting into this process."

CALIFORNIA'S CLIMATE

Many California lawyers are especially interested in the hospital woes, since the state's high cost of compliance and higher costs of operating magnify the problems. The state's retrofitting requirements add an additional layer of expense to some already beleaguered hospitals. That's coupled with overarching stresses such as the proliferation of urgent-care centers as an alternative to hospital care.

"I think there has to be a shakeout," Buchalter Nemer's Seigel said. "The hospital industry is going through a revolution."

While more established hospitals like L.A.'s Cedars-Sinai will likely weather the storm, smaller community hospitals such as Brotman will be the hardest hit, he said.

The trend isn't going unnoticed. Just recently, members of Southern California's Turnaround Management Association, a group of professionals who work with distressed businesses, organized a presentation titled "Hospitals in Need of Care: The financial crisis looming in southern California's hospital system."

"California's hospital system may be the 'canary in the mine' -- demonstrating weaknesses that are extant throughout the United States but have yet to become obvious elsewhere," the presentation stated.

The southern part of the state may be hit harder simply because there is a greater proportion of hospitals -- and people -- in the region, said Mette Kurth, a member of the group and a special counsel at Sheppard, Mullin, Richter & Hampton.

"We've seen a number of them this year, and it seems to have become a regular part of the California insolvency background," Kurth said. "You are going to see firms across Southern California continue to be involved, because it's a big issue down here."

While no one's offering up a simple solution to the impending hospital crisis, O'Melveny's Warren does predict that health care will be a high priority on the national agenda after the upcoming election, regardless of who gets elected. It's an industry that can't be ignored, he said.

"Hospitals aren't just a retail store where you shut down and send people home," he said. "This is an area where we're going to see tremendous change."