Pinstriped Medicine

How the UCSF-Stanford hospital merger foreshadows the new -- and sometimes frightening -- world of health care

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."

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