Merger & Acquisition

In our earlier post about the public comments at today's Regents meeting, we did not mention some comments by medical staff at Catholic hospitals UC-San Francisco wants to acquire. There were demands for staff to have a "seat at the table" as to how such a purchase would work out. The acquired hospitals would, if purchased, lose their religious affilation which has posed problems for UC in the past because of issues such as abortion.

From the San Francisco Chronicle:

On Wednesday, the University of California regents will decide whether to green-light formal negotiations, which could lead to an agreement by year’s end. The properties are assessed at $121 million to $192 million, but UCSF is offering just $100 million and said it would spend another $100 million to improve and expand them. Saint Francis Memorial now loses $32 million a year and St. Mary’s loses $22 million. Hospital officials see the takeovers as a way to help ease the overcrowding its patients have complained about for years. “We just have more demand than we can satisfy,” Suresh Gunasekaran, UCSF Health’s chief executive, told The Chronicle. He said he isn’t sure yet how many more patients UCSF’s doctors could see if a deal goes through. Last year, they served about 2.5 million outpatients.

The hospital also accommodates more than 300,000 admitted patients a year — more than any other UC hospital, and more than double the number served by Kaiser San Francisco and Sutter Health’s California Pacific Medical Center campus on Van Ness Avenue combined. Buying the two Dignity hospitals would give UCSF two more emergency rooms and 569 more beds, UCSF said. St. Mary’s Medical Center in San Francisco now loses $22 million per year, while Saint Francis Memorial loses $32 million. Buying the two Dignity hospitals would give UCSF two more emergency rooms and about 200 more beds.

The 166-year-old St. Mary’s serves 20,000 admitted patients per year, while Saint Francis Memorial, also more than 100 years old, serves 16,000. But most of their beds are usually empty, according to the American Hospital Directory, which said the hospitals only fill about a quarter of them. By contrast, UCSF said its beds are 94% filled...

Full story at https://www.sfchronicle.com/bayarea/article/ucsf-hospitals-18199779.php.

Old timers may remember a failed merger involving UC-San Francisco and Stanford hospital. From Stanford Magazine of January/February 2000:

It was Gerhard Casper who finally pulled the plug. After months of dismal financial reports, Stanford's president called late last fall for a breakup of the two-year-old merger of the medical centers at Stanford and UC-San Francisco. "With great anguish I have concluded that, in our efforts to find bold solutions to the problems of academic medical centers, we have taken on too much," Casper wrote in an October 28 letter to University of California President Richard Atkinson.

The unprecedented merger of private and public university medical centers was supposed to help the two schools weather the financial pressures of managed care. By pooling resources and increasing bargaining power, UCSF Stanford Health Care was projected to save $256 million by 2000. But instead the company, which was set up in November 1997, lost $86 million last fiscal year. As the two medical centers prepare to formally split up, Stanford looks at why the merger failed:

Separate Staffs: The venture's biggest downfall may have been that it never managed to bind the two institutions together with a common culture. Most professors continued to identify almost exclusively with their home campus. A September 1, 1999, deadline for consolidating clinical services came and went with little action. With the exception of pediatrics, doctors didn't combine their practices, share risks or pool revenue as the merger's architects had hoped they would. "We did not fully grasp the complexity of integrating two very different institutions," Casper said in an interview the month before he called off the union.

Revenue Shortfalls: The economic pressures that led to the merger only increased as the new corporation got on its feet. Managed care companies continued to cut payments to hospitals while, at the same time, the state and federal government trimmed reimbursements. At the federal level, the 1997 U.S. Balanced Budget Act resulted in a $10 million drop in Medicare payouts to the hospitals. Meanwhile, the state's Medi-Cal program cut payments, making it clear that academic medical centers would have to shoulder an increasing share of the cost of treating the poor. All told, UCSF Stanford Health Care provided more than $100 million in unreimbursed care last year.

Higher Costs: On top of those problems, the company's officials faced the unexpectedly daunting costs of the merger itself. For example, integrating computer systems at the two schools cost $126 million, five times what was expected. And the payroll ballooned. A state audit of the company released in August said 1,000 employees were brought on board after the merger. Proponents of the venture had projected only 200 new hires.

The Unexpected: "There were a lot of surprises about the financials of the two institutions, particularly the seriousness of the financial difficulties on the [San Francisco] campus," says Larry Lewin, founder of The Lewin Group, a health care consulting firm. Lewin facilitated early discussions between the two schools but was not involved in the audits that preceded the merger. One shocker was how much money UCSF's Mount Zion Hospital was losing. Three-quarters of the $86 million in losses during the last fiscal year came at UCSF facilities. Mount Zion alone lost nearly $60 million. The hospital, which served many of San Francisco's low-income residents and was the subject of vocal support from state and local politicians, shut its doors in November.

The total price tag for the merger -- $79 million -- may pale in comparison to what it costs to unravel the two medical centers. Each school will take back the resources it brought to the marriage (Stanford put in assets valued at $458 million; UCSF put in $415 million), and then the losses are to be divided 50-50. But by the middle of November, the two sides had drawn up a seven-page memo detailing issues that still needed to be resolved. Officials hope the two centers will be separated by March 1. But it won't be easy or cheap. As Lee Goldman, UCSF's acting vice chancellor for medical affairs, quipped: "Have you ever seen a divorce that was cheaper than the wedding?" ...

Full story at https://stanfordmag.org/contents/the-anatomy-of-a-failed-hospital-merger.

Does anyone on the Regents know or, or remember, this history?