At least in the short term, the four hospitals that created UCSF Stanford Health Care two years ago would have been better off if they had not merged, suggests a report released last week by the California state auditor's office.
The 84-page document is one of the first independent reports questioning the cost-saving promises made by merging hospitals across the country.
Typically, merging hospitals justify their actions by claiming that consolidation will eliminate duplicative services, which will save millions of dollars.
In the case of UCSF Stanford, the four hospitals incurred merger-related costs of $19 million during the first two years of their merger, turning a $27 million loss as competitors into a projected $46 million loss as collaborators.
Before their November 1997 merger, the hospitals had predicted that such a consolidation would result in $65 million in profits in fiscal 1998 and 1999. Those anticipated profits never materialized, largely because the merged system failed to deliver on promises to eliminate duplication and cut costs.
The report by California State Auditor Kurt Sjoberg concluded that 1,350-bed UCSF Stanford-created by the merger of two University of California San Francisco hospitals and two Stanford University hospitals-"has been unable to achieve the clinical and financial goals of the merger to the degree anticipated."
That failure has largely resulted from the system's inability to combine medical staff and clinical programs at the four hospitals, the audit said.
The system includes the Lucile Salter Packard Children's Hospital at Stanford, in Palo Alto, Calif.; Stanford (Calif.) Hospital and Clinics; UCSF/Mount Zion Medical Center in San Francisco; and the University of California San Francisco Medical Center.
Over the first two years of the merger, UCSF Stanford is expected to lose a cumulative $46 million, including a $66 million loss on revenues of $1.5 billion for its fiscal year ended Aug. 31.
By breaking out merger-related and nonmerger-related activities, the state auditors determined that the system's hospitals would have lost $27 million over the past two years without a merger, because of the Medicare spending limits imposed by the Balanced Budget Act of 1997, declining managed-care reimbursements, year 2000-related computer costs and other factors.
Although the merger resulted in some savings, including $17 million in operating expenses through last month, merger-related administrative and legal costs have soared to more than twice what was originally estimated: $79 million, compared with an estimated $36 million.
The cost of unifying UCSF and Stanford's computer systems jumped from an original estimate of $25 million to $126 million, a fivefold increase.
Further, instead of gradually reducing staff size, UCSF Stanford added nearly 1,000 employees during its first year and a half of operation, many to integrate financial and information technology systems.
Sjoberg's report said the merger could still generate $140 million in financial benefits-and $47 million in profits-during the third and fourth years of the merger if officials can execute a turnaround plan recommended by the Hunter Group, a consulting firm based in St. Petersburg, Fla.
That plan calls for eliminating 2,000 jobs, boosting revenues and ending inpatient care at Mount Zion.
If the plan isn't followed, the merger's rationale "may be called into question," the audit noted.
State legislators mandated the audit in mid-July because of concerns about mounting losses at the private, not-for-profit system (July 26, p. 18).
Last month, the system's two top executives-Chief Executive Officer Peter Van Etten and Chief Operating Officer William Kerr-resigned, and Hunter Group executives temporarily took charge of the system.
In a statement appended to the audit, UCSF Stanford officials said the audit "confirms the tremendous financial pressures on our academic medical centers and UCSF Stanford's potential to respond if the merger is given sufficient time to succeed."