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

"We have very serious concerns about the accounting and the financial controls at the University of California."

To make UC's books balance, the auditors had needed to make $100 million in adjustments to the university system's financial statements. Many of those adjustments dealt with reserves that had been hidden "off the books" by university departments.

As with most academic institutions, UCSF divides its money into a variety of funds. These funds are roughly analogous to bank accounts; each has its own balance sheet. In making its report on the merger, Warren Hellman's third-party review team looked at the UCSF Medical Center's operating fund -- that is, the fund into which money paid for patient care flows and from which bills are paid.

But the Medical Center has many other accounts, some quite substantial. Among others, reserve and capital improvement accounts were not considered in the third-party review, even though they are part and parcel of the overall financial picture of the center.

In fact, back in November, auditors cautioned the regents that the medical centers were stashing money in reserve accounts. This stashing of excess year-end funds where legislators are unlikely to look is fairly common among universities and nonprofit entities. But the UC campuses were taking the practice to extremes.

Accountant Tom Weixel told the regents:
"Management needs to be more disciplined about monitoring the level of these reserves and more importantly not building them up just to avoid reporting larger bottom lines in these medical centers. At several medical centers active partnering and merger discussions are under way ... [text deleted by the UC's lawyers]."

In total, counting reserves, UCSF's most recent financial statements show the institution has $139 million in surplus funds -- that is, money available for operations or plant expenditures -- an increase of $42 million during the past two years. The Medical Center's long-term debt is about $40 million. In other words, the UCSF Medical Center, as a business, has enough expendable assets to pay off its debt three times over.

"Not only is the financial sky not falling, it's quite blue," says Blum. In fact, he adds, in the business world, the UCSF Medical Center is such a moneymaker that it would be a prime candidate for acquisition.

The laissez-faire accounting system that built huge reserves inside various components of the UC system basically was designed to allow those components to buy independence from the university bureaucracy. Money is stuffed into discretionary accounts used by department heads for recruiting and other activities unlikely to receive unrestrained legislative funding. These funds may not have been properly accounted for by the UC system. In fact the accounting system used at UC medical centers is clearly its own separate scandal.

But these reserve funds -- and others, including capital improvement accounts -- represent real, spendable money, even if so-called third-party reviewers refuse to acknowledge them as such.

It would be impossible to definitively determine all of the motivations behind the proposal to merge the University of California and Stanford University medical centers. Although SF Weekly reviewed thousands of pages of public and private documents while researching the merger, both UCSF and Stanford have denied requests to view numerous key documents related to the deal. And for perhaps understandable reasons, members of the press were not invited to many of the initial planning sessions for the merger.

But the available public record makes two things quite clear:
1) The official reasons given to justify a merger -- the financial crises predicted by university administrators and their consultants, including the so-called third-party reviewers -- are simply not true.

2) Many people who have been directing, or advocating for, the merger have the potential to make a lot of money if the merger becomes a reality.

When UCSF and Stanford officials talk about merging their medical operations into one nonprofit entity, they don't mean to say the resulting business will actually make no money. Placing the UCSF Medical Center within a nonprofit just means the resulting business won't distribute profits or pay dividends to owners. As is the case in any private business, control of the money flowing through a nonprofit corporation -- where it is spent, who is hired, what contracts are doled out -- remains in the hands of a private board of directors.

And therein lies the power to build an empire.
The board of directors for the merged entity known as UCSF-Stanford Health Care (USHC) will award tens or even hundreds of millions of dollars in contracts each year. And the strict anti-corruption laws that apply to government purchasing will be manifestly nonapplicable to that contracting process; what would be considered criminal self-dealing in governmental purchasing is often perfectly legal in the nonprofit world.

USHC will, therefore, have wide latitude to contract with businesses owned or operated by the members of its own board of directors, the administrators of the medical centers themselves, and the large web of business movers and shakers who have moved and shaken to make the merger a reality.

If the UC regents approve the merger, monetary opportunities will certainly abound at the UC executive level.

By comparison to their counterparts in the private sector, university hospital administrators are grossly underpaid. For instance, Kaiser's David Lawrence earns about $1.2 million a year in salary and bonuses. Both Peter Van Etten, previously Stanford Health Services' director, and William Kerr, UCSF's chief administrator before the merger, each make less than $500,000 annually.

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