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

Three months later, after the supposedly independent, third-party team had recommended that the merger go forward, and after the UC regents had voted to proceed, Halperin was named to a committee that would select so-called "outside directors" to serve on the board of the nonprofit entity that would run the new, merged UCSF-Stanford megalith. These outside directors might be expected to represent swing votes, the people who would be independent of the directors named directly by UCSF and Stanford.

One of the outside directors had a familiar name -- Warren Hellman.

Because they were charged only with determining whether the merger was a good business deal, the members of the third-party review team looked at the UCSF Medical Center as though it were a stand-alone business. Essentially, the review team analyzed the medical center's performance in a vacuum -- totaling operating income and subtracting expenses, without considering the outside support UCSF receives. The report projected that UCSF Medical Center would be suffering a $19 million loss by the year 2000.

But that analysis was profoundly mistaken in the short run, and will likely be just as mistaken in the long run, because it is based on unfounded assumptions.

Some of those assumptions seem so wrongheaded that other financial experts have wondered if they were accidental or purposeful distortions of reality.

The UCSF Medical Center is part of the University of California system, and as such receives from the state about $12 million a year in clinical teaching funds. That money pays for the treatment of patients who cannot pay the full cost of their hospital care -- but whose admittance to UCSF hospitals is absolutely required, if new doctors are to be properly taught. The third-party reviewers refused to consider those funds as income of the UCSF Medical Center -- even though the state will continue to pay for clinical teaching, whether a merger goes through or not.

But $12 million in teaching funds was hardly the only funding underestimate made by the third-party team.

Unlike Stanford, UCSF does not currently pay into a pension fund for its employees, because the University of California pension plan is overfunded -- that is, it has enough money invested to sustain itself, at least for a time, without annual contributions. The third-party review ignored this overfunding -- worth about $21 million a year -- on the assumption that the overfunded situation could not go on forever, and UCSF would someday again have to contribute to the plan.

And someday it will. But unless it merges, the university will enjoy the luxury of not paying $21 million a year toward pensions, for at least a few years. It is only in the event of a merger that the medical center will have to immediately begin pension payments.

These and other financial discrepancies in the third-party review were pointed out by economist Mark Blum, a consultant hired by UCSF unions who have filed a lawsuit to stop the merger. Blum's analysis was backed by Richard Weber, an economics professor and expert witness on fund accounting for the Securities and Exchange Commission who had been hired by the UCSF Academic Senate.

"The Hellman [Third-Party Review] Report, apparently the justification for the UC Regents decision to merge the UCSF and Stanford Medical Centers, had projected a deficit of nearly $11 million for fiscal year 1997, based on analytic assumptions that I can only describe as somewhat bizarre," Blum testified in a recent state Senate hearing on the merger. "When I finally had the opportunity to review the Hellman Report, I was unable to identify any sound financial rationale for the projection."

UCSF quickly dismissed the Blum/Weber analysis -- but without effectively rebutting any of its key points. Essentially, the university administration continued to say the merger is a good idea because Hellman's team said so -- even though it was clear by then that many of the team's assumptions were wrong.

In July, at the request of California Sens. Quentin Kopp and Tom Hayden, state auditors looked at the proposed merger -- an examination that regents had never requested.

Again, the auditors had a limited charge; they were only to examine the financial benefits of the proposed merger, not its legality or constitutionality, or its impact on patients, students, and the public.

State auditors found that both Stanford and UCSF were in good financial health, and that the third-party review had overstated the financial benefits of a merger by tens of millions of dollars.

"A merger is not needed for either of them to remain viable," says State Auditor Kurt Sjoberg. "They need to address any number of initiatives to be more competitive in the market in which they find themselves. That can be accomplished in any number of alternatives."

But the UC regents didn't need to wait for the state auditors' report to know the financial condition of the university's medical centers.

Last November, during a private meeting of the Board of Regents Committee on Audit (university officials, apparently realizing the meeting had been illegally closed to the public, would later release transcripts of the event), accountants from the firm of Deloitte & Touche, which had been hired to audit all five of the University of California medical centers, delivered some news that was disturbing, even when presented in the flat prose used by members of the dismal profession:

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