Participants included Dr. Joseph Martin, chancellor of the University of California at San Francisco, and Stanford University President Gerhard Casper. Among their wide-ranging fiscal responsibilities as luminaries in academe, these men oversaw two of the nation's top medical schools, home to four Nobel Prize winners. Both schools relied heavily on the teaching hospitals to which they were attached. And that's why Martin and Casper were worried.
During the intermission, the two men took a walk together. Both knew their schools were being hammered by managed care, through which HMOs and other payers were holding their teaching hospitals' purse strings very tightly. And for some time those same payers had played the two institutions' high-priced specialty practices against each other, cutting revenue streams that had been crucial to building their schools' prestige. The medical schools had expanded their hospital operations in the late 1980s, only to see the government money on which they depended begin to wane quickly.
Other problems loomed. Nearly a quarter of both institutions' patients were indigent -- an increasingly difficult cost to absorb. And, all around them, Bay Area hospitals were merging; a circle of more cost-effective giants was enticing HMOs to send over their patients for a better price.
Stanford Health Services had cut its budget by $74 million in recent years. UCSF Medical Centers had cut $52 million -- to a current $450 million budget -- and had already laid off employees. Both were looking at an operating profit of barely more than $1 million. A loss would be devastating -- research and training are their primary missions, not extra activities.
So, on that walk in the desert air, Martin and Casper agreed to form some kind of alliance. They would have their people call other people and figure out how to start sharing more -- and competing less. They would no longer be the pawns in someone else's market gamesmanship. They would be players. Big players.
That was the beginning.
And after the meetings and the huddles and the consultants and the plans that followed, what was left on the table was likely the biggest decision of their careers. "A merger was at least a more likely success story in the end than simply saying, 'Well, let's try to collaborate here and there,' " remembers Martin.
For UCSF, the move would mean turning from public to private, and separating the medical business from the medical school (already private, Stanford had done the latter a few years before with the creation of Stanford Health Services).
But, more than anything else, the merger would mean placing science in the hands of business -- rather than continuing to fight what seemed to be a losing battle against it.
As a result of the Palm Springs stroll, the University of California Board of Regents late last year relinquished control of a $400 million public asset -- the world-renowned UCSF Medical Centers -- to a private board of conservative moneymakers. The move remains legally questionable. But, quite simply, the regents were afraid of what might happen if they didn't do it.
Here's the deal: The merger created UCSF Stanford Health Services, a new, nonprofit corporation, directed by a board of top administrators drawn from both universities and outside business players. This new entity will take over operation of UCSF's Moffit/Long and Mount Zion hospitals, Stanford University Medical Center, Lucille Salter Packard Children's Hospital, and all of the clinics and clinical practices of the doctors of both universities. (City-owned San Francisco General Hospital and Veterans Affairs Medical Center, both staffed through agreements with UCSF, are not a part of the deal.)
Both universities keep their separate medical schools, and UCSF Stanford Health Services continues to fund both medical schools -- for now.
Essentially, the move says that the only way for the practice of academic medicine to survive is to take it out of academia. The prescription for survival is profit through corporate control. But the side effects could be devastating.
The white coats may be still giving the shots, but the suits are now calling them, even in the formerly sacrosanct arenas of research and training. Jobs are at risk. Lawsuits are being filed left and right. And the future of medicine -- from training doctors and pursuing scientific discovery to caring for the poor -- is now in the hands of big business.
The academic epitome of California's public university system, built with taxpayer money, has become a private shop.
All of those baggy-eyed young surgeons wander the halls of UCSF hospitals for a reason. Medicine is not learned in the classroom. And that means medical schools have to be in the health care business. They have to have patients in order to train physicians and do the research that leads to curing disease, fixing broken parts, and keeping society healthy.
Yet because of the overhead of those two missions -- teaching and research -- the hospitals and clinics attached to medical schools can't compete with their counterparts in what has become a very cutthroat health care market. That's why academic medicine is in such trouble.
During the last two decades of shrinking education budgets, medical schools became increasingly dependent upon the money from patient care -- more than 28 cents of every dollar coming in from medical care was being used for academic support -- and that left them vulnerable to the health care market. Medical school profits have actually declined by 20 percent since 1990, according to the American Academy of Medical Colleges (AAMC). "This is a very significant piece of the revenue stream that medical schools have grown lusty on and very dependent upon," says David Korn, head of the AAMC's Task Force on Medical School Financing, and former dean of Stanford University School of Medicine. "It's kind of like if you have a beautiful car that cost you a bundle and you don't have any oil in it, it's not going to run. These funds made the medical school run. That's very much under duress right now."
The dependency is even greater at UCSF. More than 40 percent of UCSF's budget comes from patient care, and 55 percent of that comes from the government, through Medicare and Medi-Cal. Medicare pays universities through a formula akin to finding the square root of pi, designed to compensate for universities' big share of charity care and for teaching doctors. But as those Medicare patients have fallen more and more under the managed care of HMOs' middlemen, universities increasingly have been cut out of compensation. What's more, Medicare is about to be cut by as much as $100 billion in the name of balancing the federal budget.
Two other parts of the financial structure are also key here. UCSF has been a leader in national research grant awards for 16 years, collecting nearly $200 million a year. But those funds are restricted to supporting specific research projects that require seed money to start. And, at the same time, caring for the poor and uninsured is expensive -- UCSF alone absorbs $66 million every year in unreimbursed care.
So, hit by all sides, medical schools across the country have rushed to reconfigure their hospitals. For a while, expanding to bring in more patients seemed to be the order of the day. Stanford joined physician groups in Menlo Park and Redwood City. UCSF merged with Mount Zion Hospital in 1990. But that move was made just as the new cost controls under managed care were really beginning to hit home, and now Mount Zion is only about half occupied; it's losing $23 million a year.
On a gray afternoon last November, the Health Services Subcommittee of the Board of Regents sat in the basement of UCSF's Laurel Heights campus and listened to a series of union representatives, employees, physicians, and business folk heap praise or scorn on the UCSF-Stanford merger plan.
For at least six months beforehand, the various unions representing employees at UCSF -- the largest employer in the city outside of the municipal government -- had fought the deal, allied as something called the Coalition of Unions Representing the Employees of UCSF. They had picketed, protested, and taken out full-page advertisements in the New York Times. UCSF officials had been blasted at every public hearing.
Now, at this meeting, which was assumed to be a cursory event leading to a foregone conclusion, the tension rose and fell with each speaker.
"Make your documents public," union leader Libby Sayre told the regents. "Take your case to the real owners of the university."
A small army of police officers -- videotaping the entire event -- hovered throughout the building, waiting for the place to erupt. And it did.
Union representatives, holding "citizen's arrest" warrants for regents accused of "stealing public assets," stormed police. The cops responded with a few real arrests for disorderly conduct. But the deal was done. The committee approved the merger, sending the matter forward for what was a sure vote from the full board.
Why so sure? For the simple reason that, all along, UC's regents and Stanford's trustees shared a common motivation in coming together: fear.
The health care business in California, which leads the country in managed care, is volatile and uncertain. HMOs have joined to form powerhouses like Kaiser, Pacificare, and HealthNet that have the muscle to shop the competition and demand lower costs. Play their game, or you don't get their patients. At the same time, physicians and other hospitals have also consolidated, forming networks for their own survival.
The board of each university is terrified that its medical center will take down the rest of the institution with it. So they'd just as soon not be in the health care business right now, thank you.
Particularly not where business deals are a matter of public record.
"It's very difficult, in market-based planning, to respond with public scrutiny ... revealing all of your plans in advance," says UCSF Medical Centers Director William Kerr. "Competitors are able to move in a timely and competitive fashion. There have been times where we have talked with physician groups about joining and questions about the condition of the public university have come up. And they wouldn't join because of the lack of confidentiality."
The message: The only way for the premier public medical research and teaching institute to thrive is to hand it over to the private sector. It was an idea that most of the 26 predominantly Republican-appointed businessmen and -women who serve on the Board of Regents enthusiastically embraced.
Regents are appointed by the governor to 12-year terms and take their power directly from the state constitution. And therein lies one of the legal challenges brought by UCSF employee groups. The state constitution allows the regents to manage and convey assets of the university system. In the past, this has mostly applied to land and buildings. There simply isn't precedent for transferring control of a multimillion-dollar business operation over to a private board of directors. So, it's up to the courts to decide whether or not regents have the authority. But that question has not at all slowed UCSF and Stanford from moving forward.
"I doubt we can do this," says Lt. Gov. Gray Davis, who is also a regent and who voted in favor of the merger, despite his apparent legal questions. "I don't see how we have the legal power to transfer the assets of the public to a board that is majority privately controlled. ... I was voting for the least unattractive of the options."
The employee groups filed a complaint with the Public Employee Relations Board and a lawsuit against the regents in San Francisco Superior Court, both of which are still pending. Along with the fundamental question of whether or not the regents have the authority to transfer the medical center to a private entity, issues at hand include the public board's decidedly nonpublic handling of the matter and alleged unfair business practices stemming from shutting labor out of the deal. The merger essentially will result in medical center employees no longer being in the public employee system, and they may very well lose access to some or all of the Public Employee Retirement System; UC refused to disclose such details.
Labor took an initial blow in December when Superior Court Judge William Cahill ruled that, under the public records law, UCSF did not have to disclose anything that might also contain proprietary information from Stanford, because the latter is a private entity. That has meant that everything anyone really wanted to see, such as the business plan for the new entity and its employees, has remained a public mystery.
University officials initially said they were figuring on employee cuts of only 5 percent, but they're not the ones making the call anymore. That decision ultimately will be made by the new board of directors of the new private entity.
It may have been inevitable, though the clandestine manner in which the board handled its business raised doubts. But in any event, it means a number of health care workers are going to join the ranks of S.F.'s unemployed.
"These places are not going to be bigger and employing more people on the service side in the future," says Michael Holt, who follows health care issues for the Institute for the Future in Menlo Park. "It's very much like the steelworkers. This is the kind of stuff that plays out in the end. In the end, workers go find something else to do. In the meantime, you've got months and years of people losing jobs and being kicked back into the community."
Proponents of the merger, including UCSF Chancellor Martin, Medical Center Administrator Kerr, and most of the regents, argue that the deal will cut the loss of jobs in the long run. But that's akin to saying, "Trust me," because they also won't reveal the numbers that support their plan. Needless to say, labor stopped trusting them some time ago.
In many ways, the UCSF Medical Centers began acting like a private entity long before they officially became one. A selected group of leaders huddled behind closed doors in weekly planning sessions. They shared not just financial statements, but their intimate business dealings -- their successes, their failings, and their fears -- with private consultants who were bound to guard them. And in the midst of all of this, one financial wizard in particular quietly became a guiding force in closing the deal.
F. Warren Hellman is a multimillionaire partner in the San Francisco investment firm of Hellman & Friedman. He sits on the boards of a handful of businesses, not the least of which is Levi Strauss (being as he is also a member of the Haas family). Hellman's name is on the short-list of longtime movers, shakers, and philanthropists in the high-society and business crowds. He directed the UCSF Foundation and sat on the UCSF Campaign Cabinet from 1991 to 1996.
When Warren Hellman talks, people listen.
Before the Board of Regents Health Committee even took the merger to a vote at that November meeting, they issued a formal apology to Hellman for Regent Frank Clark's earlier criticism of a report Hellman had done on the pending business deal. "We apologize for the unforgivable treatment you received on Friday," John Davies, chairman of the committee, told the guru. Hellman had been invited by the regents into their inner circle to perform a "third-party review" of the proposed merger deal. He was hardly the first outsider to enter the game. The Lewyn Group, a health care consulting firm based in Washington state, had recommended that the medical centers merge in the first place. The accounting firm of Ernst & Young had crunched the numbers and acted as financial analyst for the actual deal. UCSF refused to disclose either the Lewyn Group or the Ernst & Young reports, and significant parts of Hellman's report.
Hellman put together a team, issued a report, and gave the Board of Regents the celebrity imprimatur it craved.
"My thinking on the whole issue was greatly influenced by Warren Hellman's report," says Lt. Gov. Davis. "His report persuaded me that many more people would have a job two years from now than are currently working at UCSF."
It was no surprise, then, that on Jan. 7 Hellman was named to the new board of the new entity known as UCSF Stanford Health Services. That's business. And, now, academic medicine is business, too, something that troubles a lot of people.
"Fundamentally, health care doesn't belong in the marketplace," argues Vishwanath Lingappa, a UCSF professor of physiology and medicine, and a vocal opponent of the merger. "When you go buy orange juice, you can taste it and make a decision. Unless you are a physician, you are dependent upon someone who has looked at the X-rays and tests and makes a decision that you are not allowed to evaluate. Medicine is judgment. Now you superimpose either financial incentives to do things, or the new managed care incentives not to do things. Neither of those is right. You, my patient, want my judgment to be free of financial incentive either way."
The whole point in merging Stanford and UCSF medical centers and turning them over to a private board to run was to create a better, more competitive business. After all, this deal started because of the bottom line, which is likely to become much more of a driving factor.
Without the deal, the universities ran the risk of losing everything they had to financial crisis. Now they run the risk of losing it all to financial gain.
The new UCSF Stanford Health Services is a nonprofit, public-benefit corporation, which basically means that the money doesn't leave the corporation, and the corporation supports the UCSF and Stanford medical schools. It does not mean that the corporation isn't profitable. The risk lies in how that profit is made and how it is spent, particularly with respect to research and training.
So private business has just moved onto what was previously sacred ground. The public's $400 million UCSF Medical Centers are the top AIDS research center in the country. They were the first to devise the techniques of recombining DNA for tests and vaccines that launched the biotechnology industry, the first to perform a successful surgery on a baby still in the mother's womb, the first to discover the genes that lead to cancer. UCSF performs more kidney transplants than any other medical institute in the world.
"Well-trained, bright scientists must be allowed to do their work in a clinically sensitive environment," explains the AAMC's Korn, who generally supports the idea of the merger. "The business environment might make that research environment a little less conducive to new discovery. In the long run, that would be a tragedy. You need the hospital management to be committed to that research or it won't happen."
The affiliation agreement between the two medical centers binds the new entity to provide that environment. But specifically how -- and for how long -- is up to the new board of directors.
The UCSF Medical School graduates 140 new doctors, 200 advanced-degree nurses, 120 doctors of pharmacy, 80 dentists, and 16 dental hygienists every year, and it is home to the highest number of minority medical students in the country, outside of African-American colleges.
The primary funding for all of this is now in the hands of private business. The UCSF Medical Centers provide $20 million, more than 40 percent, of the medical school's annual budget. According to the Hellman report, the affiliation agreement of Stanford and UCSF specifies that the new entity "will target historical funding," make an additional annual academic contribution ($1.25 million to $2.5 million in the first year), and create a reserve fund of 5 percent to 7 percent of adjusted operating profits.
But the report also states: "Beyond year one, the board of directors will determine the amount of academic contribution in the context of its annual budget-setting process and overall financial plan. ... It strives to maintain historical funding levels while recognizing the financial uncertainty of the future."
In other words, no guarantees are given. Initially, the regents imposed a number of constraints, including a minimum financing level. But the review team persuaded them that it was a better business move to leave that in the hands of the new board.
The business plan for this new health care giant remains a mystery. It will be crafted by the new board and whomever it hires to run the place. Meanwhile, the doctors are a little edgy about how the pinstripes are going to direct the money.
Especially in recent years, money from the faculty practice has grown to be a big source of income to medical schools. But that is now under the umbrella of the new corporation.
"The faculty is nervous about it," says one UCSF doctor. "The way support will be put together is going to be different. And the concern is about how the monthly salaries are going to be figured."
The poor might have even greater cause for concern. More than 25 percent of UCSF's patients are indigent, which translates into $66 million in unreimbursed care every year. Another 20 percent of Stanford's patients are indigent. The Hellman report states that the merger will not likely reduce that. In the future, however, deciding the level of unreimbursed care will lie in the annual budget discussions of the new board. And if they cut and run, it will fall even more on the public's shoulders than it does now. Private hospitals are not rushing into the charity care business. In fact, with more Medicare cuts coming down the pike, they're likely to back off even more. Losing money is not good business.
Lost somewhere on an inside page of its national news, the San Francisco Chronicle buried the Jan. 7 announcement that UCSF Stanford Health Services had selected a new board of directors.
They missed a good story; despite a lot of blather about equal representation between UCSF and Stanford, the end result was that business would rule. What kind of business? Well, a lot of these new board members simultaneously sit on the boards of things like pharmaceutical companies. (For reasons passing understanding, the University of California's legal eagles quickly dismissed this as a source of potential conflict. But see the accompanying sidebar on Page 16.)
Of course, given the players on this financial dream team, it's a good bet that UCSF Stanford Health Services will make money. That's what these people do, most of them quite successfully. And now, if they don't make money, the alternative is even more depressing.
Under the agreement between Stanford and UCSF, if the new corporation dissolves, its assets go back to each of the universities. Nothing, however, prevents the corporation from being sold. And that's what's really scaring the hell out of merger opponents, because willing buyers lurk in the wings.
Specifically, Tennessee-based Columbia/HCA, the nation's largest for-profit health provider, has been making inroads into academic medicine for some time now. It purchased Tulane University's hospital, launched a failed attempt to buy Emory University, and recently bid to contract operations at the University of California at San Diego. (That's the subject of pending action by the Attorney General's Office.)
For-profit ownership would mean that revenue leaves the building, and that demand for a return on investment is, literally and figuratively, the bottom line.
Vishwanath Lingappa, the UCSF faculty member so vocal in his opposition to the merger, worries what would happen if a hospital could not deliver high-quality care for the specified amount that HMOs and the government pay for each procedure. If so: "The only way you can do it is if you're skimping on care in ways that no one other than those inside medicine would know. That's why they have gag clauses," he says, referring to prohibitions against medical professionals discussing higher-cost options with their patients.
"They will give bonuses to whichever doctor comes in under [a specific amount]," he adds. "That's what the for-profit HMOs do."
And, given this money-driven climate, the white coats are inherently skeptical of the pinstripes.
"I have no voice on this board," says another UCSF physician. "And anyone who might represent my interests has no power."
Immediately following the Board of Regents Health Services Committee vote in November, after the police carted off the demonstrators, and while the pinstripes were shaking hands and congratulating one another, Stanford public relations consultant Judy Frabotta stood in front of a clump of reporters dutifully passing out Stanford President Gerhard Casper's phone number.
"He's expecting your call," she told the pack, adding that he was very pleased at the news. Obviously, this was no surprise.
On Nov. 15, two days later and with much less drama, the UC Board of Regents made history, putting their stamp of approval on the deal. Later that same day, 40 miles away, the Stanford Board of Trustees also approved the deal. UCSF Stanford Health Services was officially born.
Where Stanford and UCSF might not have remained competitive standing alone, together they could very well monopolize the high end of medicine. Together they will lead the market in 20 out of 26 medical specialties.
Stanford is one of the nation's leading cancer centers. UCSF is in the midst of completing what will be the first National Institutes of Health-designated Comprehensive Cancer Center in California.
UCSF already does more kidney transplants than any other medical institute. Now, Stanford's transplant work -- particularly hearts and lungs -- will combine with that to create what is likely to be one of the largest organ transplant centers in the country.
The examples go on and on, predominantly in specialized, expensive medical procedures like cardiac care, pediatric surgery, brain surgery, and the reconstruction of body parts.
Those are the kinds of things that community hospitals can ill afford the overhead to continue, unless they're reconstructing a lot of brains.
This is a power shift. The landscape is changing.
No longer will managed care buyers be able to play Stanford and UCSF off of one another to cut costs. They're one and the same now. And together, they hold the cards for highly specialized medicine, which means, to some extent anyway, that they can also control the price.
"They will become a regional power," says the AAMC's Korn. "There are things that Stanford and UC do that are really hard to imitate in a community hospital. By combining forces, you have a citadel of clinical excellence and won't be able to drive prices down to bankruptcy. [Grant-giving organizations] get critical mass by combining the academic talent of the two programs.
"The wealth of talent for a comprehensive cancer center is absolutely dazzling," Korn says.
Hellman's report predicts that the new entity will bring in $50 million more in specialty care during the first two years.
Health care watchers predict that, unable to compete, a lot of hospitals will simply get out of high-end business altogether.
"A small community hospital is not going to find it feasible to offer all of the services required by the members of a managed care provider," says Greg Pickard, a health care consultant for Deliotte & Touche.
"The implications of that for a lot of [providers] are dire. They don't have the economic power to go and negotiate with the big boys for contracts for high-ticket items."
Before he left the Board of Regents committee meeting that November day in the basement of the UCSF building that overlooks the city from Laurel Heights, Hellman reviewed his findings a final time with the regents.
"We believe the risks associated with any merger are associated with this one," he said. "And we believe the risks can be managed."
This is not a panacea for Stanford, nor for UCSF. Not with the tenuous and fluctuating state of affairs in health care. It is a business deal.
Of all the mergers of academic medical institutes across the country, none has involved two that were 40 miles apart. Most of the clinical operations will remain separate, while the smaller, specialty work is likely to be consolidated into one location with lesser overhead. If you need your brain reconstructed sometime down the road, you're likely to have little choice where to go; you probably will still be able to receive chemotherapy in both San Francisco and Palo Alto.
But in this deal, the particulars are less important than the bigger picture.
What happened here is that the chronic state of health care chaos sent academic medicine's leaders searching for a treatment. They found it in private business. But whether the cure proves worse than the disease will involve subtle post-traumatic care. The vital signs to be monitored: future doctor skill, advancement of medical science, the length of the health care industry's unemployment line, and the level of sickness among the poor.
The prognosis is uncertain.
