Sharp, Palomar Discuss Merging Health Systems : Hospitals: New affiliation by Sharp, already close to joining Grossmont, would create giant health care group.

Palomar Pomerado Health System has begun talks on affiliating with Sharp HealthCare, a development that eventually could move Sharp another step toward dominating San Diego’s highly competitive health care market.

It also comes as Sharp is completing negotiations to join with the Grossmont Hospital District within the next month.

Officials of Palomar Pomerado, inland North County’s primary community health care system, are in the earliest stages of exploring a joint venture, said Bob Edwards, chief executive officer.

“How that will come out, it’s just too early to tell,” Edwards said. “We’re just in the very, very early stages of seeing what the pluses and the minuses are. The community is why we’re here, and it’s got to make sense for the community or you just don’t do it.”

The Palomar Pomerado hospital district operates hospitals with 446 beds in Escondido and Poway, as well as two nursing homes, a hospice, a blood bank and several specialty facilities.

Declining government reimbursements and a continuing trend toward cut-rate health insurance contracts are pushing hospitals to look at alliances to assure survival, Edwards said.

“We’re very strong financially right now, but at the same time, if you wait until you have to do something like affiliate with another hospital group, it’s probably going to be too late,” Edwards said.

“We sit geographically in a fairly strategic location, but it’s become apparent that . . . we still don’t have access to the kinds of contracts that seem to be coming on line--that’s where the large employer goes directly to the provider and kind of cuts out the middle man, the health insurance company.”

Officials of Sharp HealthCare were not available for comment Thursday afternoon, said Barbara Heineback, corporate media relations manager.

If Sharp were to affiliate not only with Grossmont but also with Palomar Pomerado, it would have hospitals and nursing homes stretching in a broad inland swath from Temecula to Chula Vista in the north and south, and eastward along Interstate 8 to La Mesa.

This would allow Sharp to more easily market its medical facilities and doctors’ groups to large employers looking for less expensive health plans for their employees. Many in the hospital industry say that this would eliminate the health insurance company component and save money.

It also would push traditional hospital systems toward operating more similarly to the way that Kaiser Permanente already works: contracting directly with employers to provide physician and hospital services.

Dennis Humberstone, Kaiser’s district manager for group sales in San Diego, said health care economists have predicted such changes for years.

“Visionaries have seen for a long time that the ideal model for competition in health care would be a number of vertically integrated medical care delivery systems, similar to Kaiser,” Humberstone said. “That could only stimulate improvement in medical care delivery, because everybody would be on an equal playing field.”

Kaiser is not worried about the emergence of other San Diego conglomerates, he said. It now has 375,000 members and has been growing by 8% to 10% a year.

Scripps Memorial Hospitals and Scripps Clinic signed an affiliation agreement in January, joining forces to create a coastal health-care conglomerate stretching from Encinitas to Chula Vista.

Palomar Pomerado until recently had been discussing joining that group, but those talks broke down, Edwards said.

That was partly because of Scripps Memorial’s plan to build a San Marcos hospital that would compete directly with Palomar Medical Center in Escondido, he said.

There was also a difference in philosophy between the two organizations, he said. Scripps seems to prefer funneling specialty patients to central hospitals, and Palomar Pomerado prefers giving care as close to the patient’s home as possible, he said.

Scripps Memorial spokesman Michael Dabney said informal talks with Palomar Pomerado began in December but ended shortly afterward. The possibility of individual cooperative programs still remains, he said.

“If it’s going to be a benefit to the San Diego area, in terms of enhancing health care delivery, then we think that’s a positive step,” Dabney said of the Sharp talks with Palomar Pomerado.

If mergers continue, as many predict, San Diego’s hospitals within a few years could be part of just four large health care conglomerates: Scripps, Sharp, UC San Diego and Kaiser, said Bob Erra, chief operating officer at Scripps Clinic.

In such an environment, hospitals may have no choice but to sign on with one, Erra said.

A key unaffiliated hospital remaining is Tri-City Medical Center in Oceanside and recent administrative turmoil there could delay consideration for merger, Erra suggested. Tri-City officials could not be reached for comment.

Larger, for-profit hospitals that remain independent, such as Alvarado Medical Center, may be able to survive only if they have the financial underpinnings of a healthy parent company, Edwards said.

Alvarado is operated by National Medical Enterprises, one of the country’s largest health care concerns.

Grossmont spokeswoman Karen Hamilton said the Sharp-Grossmont affiliation talks are expected to culminate within the next month. There was never any firm date set for completing the agreement, she said.

Because Grossmont is owned and operated as a district hospital, the affiliation will require setting up a holding company to operate the hospital under a lease from the district’s board of directors.

A similar arrangement might be possible at Palomar Pomerado, but it also might not fit at all, Edwards said.

“Virtually every joint venture or merger or affiliation that you see is different from every other one. It may turn out that there are many good reasons why that particular model would not work for Sharp and us,” he said.