San Jose's nondescript streets and laid-back atmosphere contradict its role as a hub in the hyperkinetic information technology market. Although the area is home to such corporate superpowers as Hewlett-Packard, Apple Computer and Cisco Systems, much of its high-technology economy is fueled by scores of Internet start-ups and venture capital firms.
But it's the big players that rule healthcare delivery in California's third-largest city. A handful of large systems, such as HCA-The Healthcare Co. and Catholic Healthcare West, dominate much of the San Jose region's healthcare delivery.
Columbia/HCA Healthcare Corp. (recently renamed HCA) entered the market four years ago with the purchase of four-hospital Good Samaritan Health System, and purchased 192-bed Alexian Brothers Hospital last year. It now controls slightly more than half of San Jose's 1,700 hospital beds. It also had a large chunk of the suburban market share south of the city but recently sold one of its facilities to CHW.
Both HCA and CHW have been willing to make bold moves to maintain their territories. They've shuffled around the region's hospitals like pieces on a chess board, not hesitating to close them or even sell them to nonhealthcare organizations.
"Competition is pretty vigorous," says L. Wade Rose, CHW's vice president of policy and planning for the Bay Area region. "Everybody has to be concerned with market share and margins."
There's a big reason for all the maneuvering: Area hospitals are being squeezed. Managed care's domination and preparations to meet looming seismic safety mandates have helped drive San Jose acute-care facilities into the red. Hospitals in the city experience an average loss of about 1%, compared with a nationwide average profit of 3.84%, according to SMG Marketing Group, a Chicago-based healthcare information and marketing consulting firm.
"Reimbursement here is fairly low compared with the rest of the Bay Area," says Alan Wills, vice president of strategic planning and business development at 440-bed Stanford Hospitals and Clinics. Operated by Stanford University in Palo Alto, the hospital has peripheral business within San Jose city limits.
Among the reasons reimbursement is low is the often tough competition among the hospitals. "They don't want to lose business to one another, so they haven't been very aggressively seeking rate increases (from health plans)," says Ken Steele, vice president of managed care for CHW's Bay Area region.
But that's changing. Many hospitals in the region have begun taking a harder line with payers to improve their cash flow, and payments are beginning to creep back up, executives say. CHW, for example, has been getting increases of 10% or more during the past year, Steele says.
In another instance, capitated contracts were recently abandoned at 242-bed El Camino Hospital in suburban Mountain View.
"The ratcheting down on money was just terrible, and we had to start getting money back into healthcare," says Richard Warren, who was El Camino's chief executive officer before stepping down earlier this month. The hospital expects to post an $11.5 million loss for fiscal 2000 ending June 30, Warren says, much of it attributable to the old payment structure. The state's seismic mandates may force a complete rebuild of the hospital at a cost of more than $150 million, he adds.
Like all other hospitals in California, El Camino has to meet stringent new seismic guidelines by 2008, with a plan of action submitted by next year. However, legislation is pending that would extend some of the deadlines and soften other requirements.
A rebuild wouldn't be a bad idea for some other area facilities as well. San Jose's squeaky-clean suburbs belie the fact that the city's hospital stock is aging--few major renovations have been performed since the 1989 Loma Prieta earthquake, which caused minor damage to most of the region's hospitals, according to the California Healthcare Association, the state's hospital lobby. The market is also relatively underbedded, with only 2.6 beds available for every 1,000 patient population, compared with a nationwide average of 3.3 beds per 1,000 patient population, according to SMG.
Plans to remodel. The county operates the region's newest hospital, while many private facilities are only now beginning to receive long overdue overhauls.
Nashville-based HCA recently announced planned renovations totaling $216 million in the next five years at two of the three hospitals it owns in San Jose: 333-bed Good Samaritan Hospital and 192-bed Regional Medical Center of San Jose. It will add 37 beds and a separate women's wing at Good Samaritan, and add 103 beds at Regional Medical Center.
Because of the high projected cost of seismic retrofitting at 327-bed San Jose Medical Center, HCA will close the facility in 2005. The planned closure of the hospital, which has served the community since 1923, drew criticism from advocates of healthcare for the city's older, low-income neighborhoods and labor unions concerned about preserving jobs. Union officials attacked HCA's investor-owned status and suggested it was only motivated by the need to make a profit.
Local HCA executives see it differently. They say the chain's extensive market coverage in San Jose forces it to act along the lines of a responsible, integrated provider network, especially since HCA has acquired three acute-care hospitals in the region from 1996 to last year.
"There hasn't been new investment in hospitals in a long time," says Rose. CHW operates one facility in San Jose, 257-bed O'Connor Hospital, and Saint Louise Regional Hospital in Gilroy, Calif., about 20 miles south of the city.
The issue of aging hospitals is slowly being addressed. In November 1998, Santa Clara County opened a state-of-the-art, $200 million hospital. With its visually striking exterior and art-laden corridors, and high-tech burn, neonatal-intensive-care and spinal-cord-injury units, it has quickly taken the lead as San Jose's cutting-edge acute-care facility.
Revenue from private payers has doubled since the new facility opened--a highly unusual circumstance for a public hospital. But private payer revenue still accounts for only 20% of overall patient revenue.
"We have to compete around the edges," says Robert Sillen, executive director of Santa Clara Valley Health and Hospital System, the public organization operating the hospital, Santa Clara Valley Medical Center. "If we're too successful competing (with the private sector) we'd be branded a communist conspiracy."
And there's little doubt the county's largess is going mostly to patient services: Sillen's office is in a threadbare, 1950s-era bungalow adjoining the hospital. Boxes are piled in the corridors, the water fountains don't work and stray cats wander around the perimeter.
A focus on profit. Some observers say that the Santa Clara Valley Health and Hospital System has fallen prey to what's increasingly becoming a trademark of San Jose's healthcare delivery: focusing on the bottom line rather than a higher calling.
"It's becoming more like the profit-making hospitals all the time," says Warren, the former CEO of public El Camino. "You have to wonder where one stops and the other begins."
According to Good Samaritan CEO William Piche and William Gilbert, CEO of San Jose Medical Center and Regional Medical Center of San Jose (which HCA acquired last year from Alexian Brothers Health System of Elk Grove Village, Ill.), the stark differences in the neighborhoods the hospitals serve mean much more attention has to be paid to the patient base than the bottom line.
"We have to bring a not-for-profit viewpoint to the table," Piche says.
For example, Good Samaritan's location in more-affluent southwest San Jose gives it an ever-growing base of neonatal cases. Many of Good Samaritan's maternity patients are older women with the money to spend on fertility treatments, meaning complicated multiple births are common. In August 1999 alone, the hospital delivered six sets of triplets. Uncompensated care is not a pressing concern, officials say.
San Jose Medical Center and Regional Medical Center, in older eastern San Jose, have a less affluent patient base, Gilbert says. "There's very little (patient) overlap, either culturally or ethnically," he says. Emergency-room visits to the hospitals run about 7,000 per month, double the number at Good Samaritan. The hospitals provide regional trauma services and combined deliver about three times as much charity care as Good Samaritan--upward of $1.8 million annually, Gilbert says.
Charity-care debate. However, Sillen scoffs at the charity-care figures. During an interview in his office he whipped out 1998 charity-care data from the state's hospital monitoring agency, the Office of Statewide Health Planning and Development. According to the OSHPD, the two HCA facilities and the former Alexian Brothers hospital contributed only 1.6% of the charity-care dollars provided in Santa Clara County for that year. "(HCA) is full of (it) . . . They don't do any charity care except what they obviously can't avoid," Sillen says. "We still provide 80% of the charity care in the area."
To avoid antitrust litigation over HCA's purchase of Alexian Brothers Hospital last year, the Alexian Brothers system agreed to donate $4 million to CHW's O'Connor Hospital to compensate for any loss in charity care provided after the sale. O'Connor performed about 0.5% of the region's charity care in 1998, according to OSHPD statistics.
Given those numbers, Sillen remarks that "the only practical operative distinction between CHW and (HCA) is their legal status."
The region's other major charity-care contributor, Stanford Hospital and Clinics, contributed about 16% of the charity care in the region, according to OSHPD statistics. Stanford Hospital is considered a peripheral player in the San Jose market.
Observers are mixed as to whether Stanford's recently aborted two-year merger with the University of California San Francisco Medical Center caused it to lose focus on the surrounding market. "I don't consider them nearly as formidable a competitor as in the past," Warren says. But other local players say Stanford hasn't lost a step.
Even Stanford's Wills acknowledges that the merger sapped some energy from the hospital's strategic efforts. "It's easy to say that during the few years of the merger our focus was inward," he says.
Strategically, San Jose is considered more important for Stanford's affiliated children's facility, 162-bed Lucile Salter Packard Children's Hospital. Wills notes that unlike Stanford, Lucile Salter's service area extends for several hundred miles. "In those terms, I see San Jose as being in our backyard," he says. As a result of networking efforts, Lucile Salter's pediatric surgeons operate at HCA's San Jose hospitals, and some services are also performed at the Santa Clara Valley Health and Hospital facility.
But Stanford's aligning with San Jose providers has historically been difficult because of the competition. "It's difficult to work with one without having the others react," Wills observes. "The further we are from San Jose, the easier it is to have relationships." In Gilroy, for instance, Stanford and Lucile Salter Packard have several provider outreach sites.
Things are getting touchy in Gilroy itself. Silicon Valley's real estate boom of the past decade has driven more families seeking affordable housing to the once sleepy farming town mostly known for being the world's largest grower of garlic. The changing demographics in part have sparked wheeling and dealing among the town's providers.
HCA acquired the former 93-bed South Valley Hospital in Gilroy as part of its Good Samaritan buyout in 1996 but sold it to CHW last September. CHW already owned another facility nearby, 55-bed Saint Louise Hospital in Morgan Hill, Calif. Shortly after the deal, CHW shut Saint Louise, even though it was built in 1989, and merged its operations into South Valley, which was built at nearly the same time. It was renamed Saint Louise Regional Hospital. CHW then sold the old Saint Louise Hospital campus to San Jose Christian College, which plans to convert the 37-acre campus into classrooms, dormitories and offices. The CHW purchase caused a furor in Gilroy over the loss of reproductive services in the community. CHW says a dozen hospitals in the region offer such services.
CHW's Rose notes that old-time rivalries between Morgan Hill and Gilroy drove construction of separate hospitals. Once opened, the facilities only preyed upon each other's market share, and they lost about $30 million combined during the past 10 years, according to CHW officials. Local hospital operators can no longer afford such a strategy in the region's competitive environment, which is why CHW didn't hesitate to shut Saint Louise and sell to a party with no interest in reopening.
"We're pretty comfortable with what we do," Rose says.