Back to the Table of Contents Page

Back to the Weekly Home Page

Classifieds

Palo Alto Online

A merger gone bad

Barely two years later, then-Stanford President Gerhard Casper made the announcement that Stanford was pulling out of the merger, which had created a sea of red ink.

The merger was officially dissolved March 31, 2000. In 29 months, UCSF Stanford Health Care lost $176 million, a debt borne equally by the two partners.

Dr. Eugene Bauer, vice president of Stanford Hospital, says the failed merger has little to do with Stanford Hospital's current fiscal troubles. However, if Stanford hadn't lost $88 million in the enterprise, the hospital would be in the black today.

The merger seemed to make sense. UCSF and Stanford ran premier academic medical centers that competed against each other for complicated cases, including heart and other transplants.

Faculty physicians at both were committed to their work, which included teaching the next generation of medical practitioners.

And having a unified front should have reduced some administrative costs and might have been helpful in negotiating contracts with large insurance companies.

So went wrong?

A simple factor like distance -- the distance from Palo Alto to San Francisco -- may have played a role, said Dr. John Kastor.

Kastor, a University of Maryland cardiologist, has written a book that closely examines three hospital mergers ("Mergers of Teaching Hospitals in Boston, New York and Northern California," University of Michigan Press, publication date June 29, 2001).

The physical distance meant that "no third culture emerged," Kastor recently told the Weekly. "People said they worked for Stanford or UCSF."

The structure of the UCSF Stanford board reinforced that separation, Kastor said. Seven directors were from Stanford, seven from UCSF, and three were neutral. "But there were still some strong loyalties for their institutions," he said.

But why did the merger lose so much money?

Some say the merged entity offset potential savings by hiring more people (1,200) than had worked at the four hospitals before the merger. Part of that was to staff up for Y2K, and part to replace UCSF's antiquated computer system.

However, other facts may provide more telling reasons for the merger's failure. In the fiscal year before the merger, the four hospitals had a combined operating gain of $36 million, Kastor wrote in his book. Of that operating gain, $27 million was at UCSF and $9 million at Stanford.

Kastor writes, "The apparently superior status of UCSF, however, included subsidies from the state of California, which would disappear with the transfer of ownership of the UCSF hospitals to UCSF Stanford Health Care."

By the end of fiscal year 1999, three-quarters of the losses of UCSF Stanford Health Care emanated from San Francisco, Kastor wrote. UCSF/Mt. Zion lost so much money it was closed as a hospital.

In his book, Kastor quotes Dr. Judith Swain, chairman of the Department of Medicine at Stanford, as saying that if Stanford had known of the losses ahead in San Francisco, "we'd never had gotten into it."

Today, the merger that began with such high hopes is seen as a failure, despite both parties' best intentions..

One person who has affinity for both places is Dr. William Mobley, chair of neurology at Stanford. Mobley formerly worked at UCSF. His first day at Stanford was Nov. 1, 1997, the date of the merger.

"I knew both groups (of physicians) and loved them both," Mobley said. "There was disappointment that it didn't work out."

The two entities have gone their own ways, each dealing with the difficulties of providing medical care in a tough financial environment.

At Stanford, Bauer says there is "relief we're out of the merger, relief our destiny is in our own hands, and anxiety about the challenges ahead."

-- Don Kazak