UC Regents to Sever Hospital Ties to Stanford

The University of California Board of Regents has decided to pull the plug on the 2-year-old merger of the UC San Francisco and Stanford University hospitals, a bold financial experiment designed to make teaching hospitals profitable that instead has hemorrhaged a million dollars a week in red ink.

A key committee of regents Thursday agreed with Stanford President Gerhard Casper that it is time to untangle the two medical centers’ joint venture, which was beset by faculty resistance, political turf battles and a staggering escalation of costs. A final, pro forma vote of the full Board of Regents will come today.

Conceding that the nationally watched experiment has failed, UC officials began to pick through the financial wreckage of UCSF Stanford Health Care to glean lessons that might boost the finances at the university system’s other teaching hospitals--at UCLA, Irvine, Davis and San Diego--teetering on the edge of unprofitability.

“I’ve got five medical centers facing the exact same problems,” said William H. Gurtner, UC vice president for clinical services development. “Every campus is facing declining profits,” he said, which have dipped collectively from 7% last year to a projected 4% this year.

The Stanford-UC San Francisco merger had some successes buried beneath the troubles, he said, such as the negotiation of more favorable rates with contractors. So UC’s five medical centers, he said, may soon join forces to strengthen their bargaining position in negotiating with insurance companies and health maintenance organizations.

“It makes the schools nervous,” he told the regents, given their historical independence. But in today’s cutthroat marketplace, he said, “we cannot pass up any opportunity.”

The 1990s have been tough for most hospitals, which have been squeezed by rising costs, federal cuts in Medicare, and financial restrictions imposed by HMOs and other managed care enterprises.

It’s been particularly difficult for academic medical centers, given their roles of caring for the poor and providing advanced medicine to the sickest of the sick, as well as training doctors and inventing cures.

The fiscal crisis at teaching hospitals is not restricted to California. A startling 52% of the nation’s 125 academic medical centers lost money in fiscal 1999, which ended in August.

The purpose of setting up the private, not-for-profit UCSF Stanford Health Care was to shepherd the universities’ teaching hospitals through this rocky period by combining their power to negotiate better rates with HMOs and reduce administrative costs.

Although the contracting went well, the payroll initially ballooned by 900 employees, and the cost of integrating the two computer systems leaped from the original $25-million estimate to $126 million. When the operation tried to trim costs, it confronted suspicions on both campuses, and the self-perpetuating tendencies of two powerful bureaucracies. The jobs that were eliminated more often were low-paying positions rather than those in upper-tier management with fat salaries, UC officials said.

So an arrangement that was supposed to make $65 million in its first two years actually had a net loss of $43 million. Furthermore, it cost both institutions about $79 million to set up the merger.

UC and Stanford officials estimate that it will take three months to break up the merger, but they won’t hazard a guess on the costs.

Dr. Lee Goldman, a UC San Francisco vice chancellor, put it this way: “Have you ever seen a divorce that was cheaper than the wedding?”

The 1997 merger was beset by controversy from the start. State lawmakers and others protested loudly the idea of transferring two publicly owned hospitals into a corporation that Stanford President Casper insisted must be private. The merger legally united UCSF Medical Center and its Mount Zion Medical Center with the Stanford Medical Center and its Lucile Salter Packard Children’s Hospital.

But in the end, Casper blamed faculty physicians for undermining the deal by resisting plans to join their medical practices, share risks and pool financial rewards. Faculty were never able to give up their loyalties to their home institutions, he said.

In a letter to UC President Richard C. Atkinson last month, Casper wrote with a “heavy heart” that the two institutions should unwind their merger. “In our efforts to find bold solutions to the problems of academic medical centers, we have taken on too much,” he wrote. “The transaction costs have been far higher than most had assumed. Energy has been sapped and great weariness has crept in.”

Goldman defended UC faculty Thursday, saying that a survey showed that 65% of San Francisco’s professors favored the merger in concept, even if they had doubts that management could pull it off.

“When you put together a fragile organization and it is losing a million dollars a week, it brings out the worst in everybody,” Goldman said. “If this organization was making a million dollars a week, a half-million dollars a week, or even a dollar a week, the merger wouldn’t have been dissolved.”

UC officials on other campuses have been carefully monitoring the merger to see what might help them stabilize their own medical centers.

“Bigger isn’t automatically better,” said UCLA Chancellor Albert Carnesale. “And merging hospitals isn’t necessarily the answer.”

Before coming to UCLA, Carnesale was provost of Harvard University, which owns none of the hospitals where it trains its medical students. As a result, he said, Harvard dodges the financial burden of keeping hospitals operating in the black.

But at UCLA, he said, “it’s an enormous value to have an academic medical center on campus, to fulfill our mission in education, research and public service. I prefer this situation, at least as long as the times are good.”

Like other teaching hospitals, UCLA Medical Center faces shrinking profits. It recently announced that it will eliminate 171 positions, mostly through attrition, to trim expenses. UC Davis Medical Center plans to cut about 100 positions by the end of the year.

UC Irvine Medical Center has been profitable since 1986, but the margins are growing smaller, said Mark Laret, the medical center’s chief executive. “We are a very large financial enterprise operating on very thin, or thinning, ice,” he said.

Laret told the UC regents that this is a good time to rethink the university system’s assumptions of how it runs teaching hospitals.

“As we have seen with the UCSF-Stanford,” he said, “a major financial setback can happen quickly.”