Some nine years after the Loma Prieta earthquake struck the San Francisco area, collapsing buildings and a huge slab of the Bay Bridge, the city's healthcare landscape has been shaken no less severely by unprecedented change.
The City by the Bay has become a prime laboratory for the managed-care revolution.
The trouble is, the results of the experiment are inconclusive.
Virtually all the Bay Area's major hospitals are now part of one of four large, integrated not-for-profit systems: Kaiser Permanente, Sutter Health, Catholic Healthcare West and the year-old UCSF Stanford Health Care.
"The battle lines are pretty well drawn," observes Peter Boland, a Berkeley, Calif.-based managed-care consultant.
It isn't as clear who the ultimate winners and losers will be, however, and critics worry that bigger won't prove better. In heavily unionized Northern California, many of those critics are members of the Service Employees International Union Local 250 or the California Nurses Association, both of which have often blasted the region's leading hospital systems for putting profits ahead of patients.
"You're looking at four or five systems that monopolize all of the hospital resources. That's very alarming," says Chuck Idelson, a CNA spokesman. The unions say consolidation is reducing the quantity and quality of services while exacerbating access problems for the uninsured and underinsured, not to mention jeopardizing union jobs.
The picture gets clearer. The last big piece of the puzzle fell into place in November 1997, when University of California San Francisco Medical Center and Stanford University Hospital, along with two affiliated hospitals, joined forces as UCSF Stanford. The new, 1,350-bed complex expected to post $40 million in profits on revenues of about $1.5 billion for the fiscal year ended Aug. 31, 1998 (audited financial results weren't available). But officials acknowledged earlier this month that the merged institution will lose $10.7 million for the first quarter of fiscal 1999, which ended last Nov. 30.
That's a big drop-off from the expected $45 million in profits for the system's current fiscal year. Even so, Peter Van Etten, the merged organization's president and chief executive officer, says UCSF Stanford has a unique plan for long-term survival.
"Our strategy is different from a number of other academic medical centers'. We see ourselves as a referral center," says Van Etten. Consequently, UCSF Stanford is trying to retain strong relationships with the other major systems in the area while it works to increase referrals from a broader California and Western U.S. market.
But UCSF Stanford has yet to do the hard-core clinical consolidation that many say is its only chance to keep costs in line long-term. And the new losses make it clear, Van Etten says, that the organization must redouble its cost-cutting over the next year or two. Because of tighter Medicare payments and increasing expenses, "the next fiscal year (will be) a very daunting one," he says.
Holdouts. Only two independents survive within San Francisco's city limits-St. Luke's Hospital and Chinese Hospital-and their long-term viability as stand-alone facilities is questionable.
St. Luke's has tried to align with various partners in recent years, including Sutter, CHW and San Francisco General Hospital Medical Center, the public hospital for the city and county of San Francisco.
So far, all those attempts have failed.
So St. Luke's decided to go to court, suing cross-town rival California Pacific Medical Center-Sutter's San Francisco affiliate-in mid-January for allegedly skimming its best patients and threatening St. Luke's survival (Jan. 25, p. 18). The antitrust and restraint-of-trade lawsuit, filed Jan. 14 in San Francisco Superior Court, charges that California Pacific lured many of St. Luke's private-pay patients through an exclusive contracting arrangement with Brown & Toland Medical Group.
Doctors in that group admit patients only to California Pacific and UCSF Stanford, according to the lawsuit.
Meanwhile, tiny 47-bed Chinese Hospital, in San Francisco's historic Chinatown, is contemplating building a 70- to 120-bed replacement facility and also exploring the launch of a center for east-west integrative medicine. The construction project could be done independently or with other local hospitals, according to Chinese Hospital CEO Tom Harlan. But Harlan stresses that no facility can be truly independent these days in the tough San Francisco market. Chinese has contracts with most of the other facilities in town and depends on their acquiescence for its survival. "Fortunately, the others understand the mission of Chinese Hospital and decided to support us," Harlan says.
Systematic approach. Nearly two-thirds of all hospitals in the San Francisco market are owned by corporations, according to SMG Marketing Group, a Chicago-based healthcare information and marketing consulting company, and 60% belong to an integrated health network. Both figures are far higher than comparable industry averages across the country.
Meanwhile, more than 83% of the region's staffed hospital beds belong to integrated systems, and those beds account for more than 85% of hospital admissions-a huge step up from the national average of just 62%.
The growing dominance of large systems in the greater Bay Area was illustrated yet again in mid-December, when Sutter announced a definitive agreement to acquire 420-bed Summit Medical Center in Oakland. Summit is one of the remaining stand-alone hospitals in the area that is considered a tempting acquisition target.
Thanks to previous consolidations and the area's urban nature, the typical San Francisco hospital is much larger than the national average and has more staffed beds, admissions and net patient revenues. The latter averages nearly $108 million per year (See chart, this page). The average length of stay is high, at 5.44 days compared with a national average of 5.19 days. The difference is largely because of the unusually heavy concentration of high-end tertiary and quaternary facilities such as UCSF Stanford and California Pacific.
But it also reflects increasing patient-acuity levels, according to Jean Chenoweth, a senior vice president at HCIA, a Baltimore-based healthcare information company.
Hospitals in California have done as much as they can to transfer less-acute cases to nonacute facilities, Chenoweth says. The patients remaining in acute-care beds need to be there, which means "West Coast hospitals have hit rock bottom in reducing length of stay."
Even so, San Francisco's Medicare and Medicaid discharges per thousand patients are considerably below national averages, as are admissions, surgeries and patient days. All this reflects the region's significant managed-care penetration. Although giant West Coast HMOs, such as Health Net, Kaiser Permanente and PacifiCare Health Systems don't dominate San Francisco quite as much as they do in Southern California, managed care is definitely king.
And like providers nationwide, San Francisco-area hospitals are feeling the pinch of what they consider stingy Medicare HMO rates. Shrinking rates "continue to be a huge issue," says John Williams, CEO of CHW's Bay Area division. Williams' unit is engaged in tight negotiations with several major health plans and is trying to convert capitated Medicare risk contracts to per diem deals.
More Medicare restrictions will continue to reduce physician income, erode hospital profit margins and eliminate the hidden subsidies that have kept many providers afloat, Van Etten predicts.
Ruthless efficiency. All this has pressured hospitals to economize and become even more ruthlessly efficient. Hospitals that can't do that will probably disappear, local experts warn.
"The systems are going to begin to look strategically at which hospitals they're going to close," says Mary Ann Thode, who until recently was Kaiser Permanente's senior executive in San Francisco. Thode is a former CHW executive who joined Kaiser in August as senior vice president and Golden Gate Service Area manager and was promoted in January to chief operating officer for Northern California.
Kaiser has seriously considered closing several local facilities, including its Redwood City Medical Center about 30 miles south of San Francisco, but it has backed away from those plans, she says.
The pressure to eliminate unnecessary hospital beds remains, however.
Overall, San Francisco hospitals' operating margins and profit margins in fiscal 1996 and 1997 were far below national averages, according to SMG. The average profit margin was a thin 3.3% and operating margins were in the red.
Moreover, hospitals in the San Francisco market hold an average long-term-debt-to-capital ratio of nearly 46%, which is considerably more burdensome than the national average of 40%.
"Most hospitals (in California) barely cover their variable costs," says UCSF Stanford's Van Etten. "Personally, I'm very concerned."
Resistance is futile. All these factors have combined with intense pressures from HMOs and employer coalitions to control costs and improve quality. As a result, the departure of freestanding, independent hospitals in the region is inevitable, most observers say. "I don't know how it's possible (for an independent to survive)," says Martin Brotman, M.D., CEO of California Pacific.
California Pacific, with 1,254 beds, is one of Sutter's premier hospitals in the region. In July, Brotman's hospital acquired Davies Medical Center, one of the few remaining independents in the Bay Area.
California Pacific did not always do so well. It lost close to $43 million from fiscal 1993 through 1995. By 1997, however, under Brotman's leadership, the hospital had reversed course and posted a $30 million profit on revenues of $290 million.
In contrast, Davies lost more than $9 million in 1996 and 1997, and had been seeking a financial savior.
As much as Davies needed rescue, California Pacific needed space. The tony tertiary facility's main campus, in San Francisco's well-to-do Pacific Heights neighborhood, has been so full lately that many patients have had to be turned away. Through September of last year, critical-care patients were diverted to other facilities roughly 25% of the time, according to hospital spokeswoman Sara Kelley. The Davies acquisition is expected to solve California Pacific's space crunch.
For the time being, many non-Kaiser facilities are benefiting from construction at Kaiser Medical Center in San Francisco. In fact, as many as 15% of Kaiser's hospital referrals are going to non-Kaiser facilities in the city, according to Thode. But within a year to 15 months Kaiser expects to care for most of those patients in-house-a development that could pressure other systems to consolidate.
So far, CHW has resisted pressure to consolidate services at its five hospitals in the Bay Area, including two in San Francisco itself, St. Mary's Medical Center and Saint Francis Memorial Hospital, and a third, Seton Medical Center, just over the border in Daly City. Williams says the Catholic system's strategic plan calls for continuing acute-care services at both San Francisco facilities. But he cautions that the issue will have to be revisited as the system responds to new seismic safety requirements in California.
For now, however, all three of its hospitals in or near San Francisco are profitable, with St. Francis posting a healthy profit margin of about 7%, Williams says.
The dominance of not-for-profit systems extends to nearby Marin County, immediately north of San Francisco, and San Mateo County, to the south. Both are considered part of the San Francisco metropolitan area.
Just two major contenders, Kaiser and Marin General Hospital, the Sutter hospital that dominates the non-Kaiser market, are to be found in Marin County.
In San Mateo County, it's more of a three-way fight, involving Sutter, CHW and regionwide leader Kaiser, with UCSF Stanford playing a major role in tertiary care and as a local powerhouse in Palo Alto and the vicinity.
For-profit giants such as Tenet Healthcare Corp. and Columbia/HCA Healthcare Corp. have opted not to compete in the San Francisco market per se, although they have made some inroads in the greater Bay Area. Columbia, however, has sold or is selling its two hospitals in the North Bay region.
However, some observers, including the CNA, suspect that Tenet may be eyeing the region.
Big HMOs in control. A similarly intense consolidation has occurred among health plans. A handful of giant statewide and national HMOs-led by Kaiser Foundation Health Plan, Health Net, PacifiCare, Aetna U.S. Healthcare, Blue Cross of California and Prudential HealthCare-control the bulk of the commercial HMO market in Marin, San Francisco and San Mateo counties.
And if the pending Aetna-Prudential merger goes through, that would further shrink the competition.
In San Francisco, for example, the six health plans accounted for nearly 88% of the city's 404,000 HMO enrollees in 1997. The figures were compiled by the Cattaneo & Stroud consulting company in a confidential report MODERN HEALTHCARE obtained from a healthcare source in the area.
In the three counties that make up the San Francisco metro area, Kaiser led the pack, with more than 410,000 enrollees, trailed by Health Net's 115,000, according to the study.
Kaiser-which controls roughly one-third of the entire Bay Area managed-care market-had more than doubled the enrollment totals of the second-place health plan in each of the counties.
And experts expect to see more HMO consolidation this year. Aetna's pending $1 billion acquisition of Prudential will have some local impact, possibly making Aetna the second-largest health plan in Marin County, and a stronger player in San Mateo County. Further, "there's continuing talk of more mergers," says John Bertko, a principal at the San Francisco office of Reden & Anders, a healthcare consulting company.
However, Leeba Lessin, PacifiCare's president of Northern California operations, believes continued consolidation must be preceded by improvements in operational efficiency by health plans, hospital systems and medical groups. "The degree and breadth of hospital consolidation (in the area) is unique," says Lessin, but the tangible benefits of that consolidation aren't as obvious.
Doc groups in a bind. Consolidation has also hit physicians, creating mega-independent practice associations such as Brown & Toland and-primarily across the bay in Alameda and Contra Costa counties-East Bay Medical Network and Hill Physicians Medical Group. But many medical groups and IPAs are foundering financially. In the wake of the collapse of San Diego-based FPA Medical Management last year and the woes afflicting MedPartners and other practice-management companies, many observers expect more disruption soon.
Brown & Toland, which links about 2,000 doctors affiliated with California Pacific and UCSF Stanford, has been seen as one of the best of the bunch. But even that IPA has been humbled in recent months. A $4.5 million budget deficit forced it to revamp, slashing 10% of its staff last fall. It is also rethinking its ambitious expansion plans.
"These are shaky times in the medical management community, and Brown & Toland has had a tough couple of months," says Cecilia Montalvo, the medical group's vice president of strategic development.
But she insists the group is financially strong enough to survive. That could distinguish it from others in the market.
"The IPAs are pretty fragile at the moment, and we'll go through a turbulent time for the next few years," says Robert Montgomery, who retired as president of Sutter's western division at year-end.
Several medical groups in San Francisco and the vicinity are reportedly near collapse, and few have the capital to make the investments in information technology and infrastructure that most observers agree will be critical to long-term survival and success in the market.
"If the HMO is the car, the medical groups are the engine. And, man, they've got to start putting some attention into that engine," says Steve McDermott, executive director of Hill Physicians.
One idea under discussion is that health plans invest in some of the stronger medical groups and IPAs. PacifiCare's Lessin says her 3.5-million-enrollee managed-care company is studying Brown & Toland's methods carefully, largely because of its innovative attempt to use the Internet to let doctors and others access necessary data.
Now that the initial consolidation appears to be completed, the big question is, how will the players in this revamped healthcare landscape interact?
It's possible that the few remaining health plans and health systems will work out long-term partnerships to avoid the stresses of frequent contract battles and to motivate the two sides to take on quality measurement, disease management and technology challenges, say industry consultants. But little progress has been made on this front.
Meanwhile, providers will be pressured even more by the Bay Area's treacherous geography and by the state laws requiring many hospitals to implement seismic safety upgrades by 2008.
"There are going to be some tough decisions made about whether or not to retain a presence in a particular community," says CHW's Williams, who adds that meeting the new earthquake standards can easily cost $30 million or more for a typical facility.
For a region already shaken by a double dose of consolidation and capitation, that means more rumbling is ahead.