Giving Away the Hospital

University of California regents are set to vote next week on finalizing a merger of the UCSF Medical Center with Stanford University's health service. Supporters claim the merger -- a transfer of $380 million in public assets to the private sector -- is

This merger has always been about money, as evidenced by the plethora of wealthy players who have orbited the deal since it was announced publicly. But when it was announced, the merger seemed to have a compelling raison d'étre. If a merger was not effected, proponents of such a move claimed, the UCSF Medical Center would lose more and more money with each passing year, eventually forcing the medical school to cut educational programs.

But the stated reasons for the merger are thinning with the passage of time. Heroic treatment -- a merger -- no longer seems justified by the disease, if there ever was one. The UCSF Medical Center not only hasn't lost vast amounts of money, as was predicted by advocates of the merger, but made more than $20 million during the past fiscal year.

Why, then, would UCSF caretakers want to literally give away a $400 million public asset, the top public medical institute in the nation, to a private-sector firm?

Conspiracy theories about the motives for the UCSF-Stanford medical merger are vast and tangled, some of the wildest of them reaching all the way to the White House. Theorizing aside, it is clear that the merger will privatize the University of California, San Francisco Medical Center and bring two of the nation's premier medical research institutes under the control of a relatively small group of extremely wealthy, politically connected people who can be accurately described as power brokers.

It is also clear that there is simply no pressing financial reason for either institution to merge with the other -- and certainly no reason for the UCSF Medical Center to go private. UCSF is, by any number of verifiable measures, in fine financial health.

By July 1996, merger talks had gained enough momentum to make the agenda of the University of California Board of Regents. The UCSF administration had already discussed a merger plan in some detail with Stanford executives; the regents had to give approval for UCSF to go further. While deciding whether to pursue a merger, the regents essentially ignored the question of whether they had the legal authority to hand UCSF's medical center over to a private nonprofit entity -- a move that, when viewed from a certain angle, could be seen as an unconstitutional gift of $380 million in public funds. (Allegations that the merger constitutes a gift of government assets are part of a lawsuit challenging the deal.)

Even if constitutional niceties were glossed over, however, the regents could not approve a move as drastic as a merger without compelling reasons.

As the merger was being considered, UC President Richard Atkinson commissioned a "third-party review," billed, just as its name would suggest, as an independent financial analysis of the proposed merger.

The review was extremely narrow in scope, focusing entirely on whether the proposed merger of UCSF Medical Center and Stanford Health Services was a good business deal for the University of California, based predominantly on data provided by the UCSF Office of the President. It did not address any other options for dealing with alleged fiscal problems at UCSF. It also did not address any effect a merger might have on teaching or research. But perhaps the oddest part of this independent third-party review was its lack of an independent third party.

The reputedly impartial third party had apparent conflicts of interest involving both of the parties with which it supposedly was unallied.

Although they have regular dealings with a variety of large accounting and law firms, the UC regents didn't base this initial merger vote on the opinions of certified, sworn, or licensed lawyers or accountants. Instead, Atkinson turned to San Francisco investment banker F. Warren Hellman, a longtime, extremely generous benefactor of the university who had served on the board of the UCSF Foundation -- a primary fund-raising vehicle for the university -- and directed UCSF's $555 million capital fund-raising campaign. His firm also managed a portion of Stanford's pension funds.

At the regents' request, Hellman hired a team of people, including two executives from Bain & Company Inc., an international management consulting firm, to assess the financial pros and cons of a merger. Hellman found few cons.

But his team certainly had connections. Even though its executives were key players in what was presented as a review independent of both UCSF and Stanford, Bain & Company had previously worked as a consultant to both institutions. As a matter of fact, Bain was the second-highest paid consultant to Stanford Health Services in 1994 -- a year included in the team's review of Stanford and UCSF financial performance. Meanwhile, the husband of a Bain employee who worked on the team was a member of the faculty at UCSF.

Also part of the review team was John McArthur, a former dean of the Harvard University Graduate School of Business Administration who has been credited with orchestrating the merger of Harvard-affiliated Brigham & Women's and Massachusetts General hospitals. Expense reports show that on Aug. 29, 1996 -- while he was traveling first class, and staying at the Ritz Carlton, courtesy of California taxpayers -- McArthur visited the home of Robert Halperin, a member of the Stanford Health Services board of directors, a body from which McArthur was to be independent.

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