Since the concrete was poured for their foundations, most of the 49 district hospitals operating in California have been stand-alone operations.
But market pressures are prompting the quasi-public facilities to either merge or seek joint alliances with other hospitals or health systems at a rapid pace, industry observers say.
Two district hospitals in the Bay Area-Sequoia Hospital in Redwood City and Brookside Hospital in San Pablo-announced deals with Catholic Healthcare West and Tenet Healthcare Corp. during the summer. Mount Diablo Medical Center in Concord is awaiting voter approval in November to complete a merger with John Muir Medical Center in Walnut Creek. Three other district systems, including Desert Hospital in Palm Springs and Palomar-Pomerado in the San Diego area, also are seeking partners.
Swift transactions have been common among hospitals in recent years. But observers say the tendency of district facilities to hold out for independence has lent a particular urgency to their making a deal now.
"Entities that would not have been caught dead getting together two or three years ago are cutting deals in a matter of weeks now," said Wanda Jones, president of New Century Healthcare Institute in San Francisco. "Delay does not serve them because they have run out of strategies that might help them."
Jones observed that Proposition 13- a ballot initiative passed in 1978 that slashed property taxes-has undercut the ability of hospital districts to raise revenues through new taxes, while their publicly elected boards of directors may have political rather than business interests at heart.
"The changes in healthcare financing and delivery systems will bring about more consolidation and collaboration among hospitals, irrespective of their ownership," said Duane Dauner, president of the California Healthcare Association. "That includes district hospitals."
Dauner projected that more than 75% of the district hospitals in the state would merge or enter a strategic alliance by the end of the decade.
Hospital districts were created in 1947. Unlike private hospitals, district hospitals serve a distinct geographical area. With the approval of voters living within the district, they are able to levy small taxes for capital improvements and other special expenditures. Their boards of directors are also elected by the public, usually for two- or four-year terms. The seats are sometimes occupied by people with little professional healthcare or hospital administrative experience.
The reasons for merging are obvious: economies of scale and better geographic coverage to snag big HMO contracts and compete against larger hospital operators such as Columbia/HCA Healthcare Corp. and Tenet. District hospitals also have a far easier time accessing capital with the help of a private partner.
"The whole concept of a district hospital really doesn't make sense anymore," said Ron Spoltore, senior vice president of Healthcare Financial Advisors in Rancho Mirage, Calif. "The governance issue has hurt their ability to change with the marketplace in many ways."
By merging with a district hospital, privately held facilities also enjoy a greater degree of independence than they would by selling out to a chain. While district hospitals may not be the most efficient facilities in terms of securing contracts, observers agree they are often well located geographically to change that situation with some savvy management.
"We've been competing dog-eat-dog for the past 20 years. It is truly the marketplace that has made us change," John Muir's chief executive officer, J. Kendall Anderson, said of the merger with Mount Diablo, the district hospital. Anderson added that the thought of the two hospitals joining forces was inconceivable a few years ago, "but by coming together we can compete against the larger hospitals and networks."
Still, most district hospitals seek courtship tentatively. Officials at Palomar-Pomerado, which operates hospitals in Escondido and Poway, said they are hosting a series of six forums to sound out the public on a possible alliance with ScrippsHealth, a not-for-profit system that operates four other hospitals in the region. Desert Hospital in Palm Springs earlier this year backed out of a proposed deal with rival Eisenhower Memorial Hospital in nearby Rancho Mirage. The hospital is now in negotiations with Tenet regarding a management contract. Desert only began seeking partners after its bottom line became too weak for the hospital to go it alone. It has lost $9.6 million since 1994 and spent $18 million on uncompensated care during the past year.
Despite so many district hospitals taking the plunge, public-private alliances can be difficult to negotiate. Many districts require voter approval before a deal can be closed, and constituents are often wary of change. While most transactions may put the assets of both parties into a new corporate entity, most also leave the official hospital district and the input of voters intact.
"If the district ceased to exist, I think the voters would have a far more difficult time saying yes," said Anderson, who cited polls that give the approval of his hospital's merger a comfortable lead.
Not all district hospitals will throw in the towel, however. Dauner and Jones agreed that facilities in rural areas are more likely to remain independent. Other determining factors include patient population, obsolescence of the facility and composition of the medical staff.
"A cookie cutter is not going to lay out our every institution," Dauner said.