Bankruptcy proceedings that began last week could include tough choices, both for creditors and for the three public hospitals that owe them more than $100 million, according to attorneys and managers who have fallen on opposite sides of similar bankruptcy cases.

Valley Health System - a public health care district that owns hospitals in Hemet, Sun City and Moreno Valley - filed a bankruptcy petition Thursday to shield itself from creditors while it attempts to stem a flow of red ink; the district had been losing about $3 million a month.

Hospital managers say they plan to reduce costs largely by renegotiating burdensome contracts and discharging large portions of their debts.

Off the table, at least for now, are cuts in services and layoffs beyond the 41 jobs cut last month. But some employees say the layoffs already threaten the quality of care, and people involved in other hospital bankruptcies say even tougher decisions may become inevitable.

West Contra Costa Healthcare District, which has been in bankruptcy protection since October 2006, closed down the obstetrics unit at its hospital in San Pablo and laid off 300 of its workers after filing under Chapter 9 of the U.S. bankruptcy code, the same section as Valley Health System.

The hospital's emergency room closed, too, but was reopened a month later with the help of a $10 million bailout by the county. A sister clinic for sleep disorders closed permanently, said Henry Kevane, an attorney who represents unsecured creditors in the case.

Under Chapter 9 - which is reserved for hospital districts, city governments and other public entities - the debtor isn't required to pay creditors by selling off assets. It typically submits a new business plan and a proposal to pay off a portion of its debt immediately or over several years.

Though creditors can't submit alternate plans, they do vote on whether to approve debtors' plans. And it's rare for a bankruptcy judge to ignore the vote altogether, attorneys said. As a result, attorneys said, an indebted hospital rarely demands reductions in debt without proposing to cut some number of unprofitable services.

Even so, Kevane and others involved in the process said creditors are aware of the possibility that money-losing services often draw patients who stay on for surgery and other profitable procedures that can eventually help them recoup a larger portion of their money. As a result, creditors are careful in making demands and they review the new business plan using many of the same criteria as hospitals' own managers, Kevane said.

His firm, Pachulski, Stang, Ziehl & Jones, represented creditors of Corcoran District Hospital in Kings County, which emerged from bankruptcy protection in 2004, and represents creditors in a pending bankruptcy case involving Palm Drive Hospital District in Napa County.

"The creditors and the district are, like it or not, bound together in codependency," Kevane said.

The number of public and private hospitals statewide fell from 395 in 1999 to 357 in 2005, according to the Kaiser Family Foundation.

With an eye on such statistics, a creditor is generally willing to sacrifice to keep a hospital open, provided that other creditors make similar accommodations, according to bankruptcy attorneys on both sides of the issue. Some employees at Menifee Valley Medical Center in Sun City and Hemet Valley Medical Center have expressed similar willingness, though unionized employees said they recently talked managers out of a plan to cut year-end bonuses.

Kevane and an attorney who represents creditors in San Pablo both said they appreciate the problems facing hospitals, including growing numbers of uninsured patients showing up for emergency treatment who aren't able to pay. Health care experts cite that as a reason why many hospitals are closing their doors.

It can be a particular strain on public hospitals, said Gerald Kominski, a professor of health policy at the UCLA School of Public Health. Though all hospitals are legally obliged to provide emergency treatment, public hospitals tend to skirt that law less often, he said.

"It would be inconsistent with their mission," Kominski said. "Patients without insurance know this and so they go to public hospitals as a sort of hospital of last resort."

Chief executive Lee Barron of Southern Inyo Healthcare District said a Chapter 9 filing in 1999 forced district officials to consider eliminating emergency services at its hospital in Lone Pine, though they ultimately decided against it. The hospital did eliminate a number of services, including X-rays using barium and other radioactive liquids, she said.

The hospital, which emerged from bankruptcy in April of this year, has recently begun to build up its services again, for example, by setting up a CT scanner, an apparatus that produces numerous X-ray cross sections of the body. The scanner has proved vital in a remote area that gets its share of high-speed highway accidents involving broken bones and massive brain trauma, Barron said.

But Barron said the district might never have obtained the CT scanner if it hadn't tightened up its finances elsewhere. Though Barron had some experience in health-care before going to work for the district last year, she said her hiring last year had more to do with her background in finance.

"I'm always looking at 'How much is my return?'" Barron said. "You have to look at 'What kind of returns are you going to get?' and 'What is your expected time frame?'"

Contact staff writer Chris Bagley at (951) 676-4315, Ext. 2615, or cbagley@californian.com.