March 10, 2004

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Palo Alto Online

A healthy empire

by Karen Coleman

The red-tiled roof and mission-styled architecture of the proposed Palo Alto Medical Foundation building in San Carlos connote a caring, tranquil environment. Health care providers in San Mateo County, however, find the images less than comforting.

Representatives of the Palo Alto Medical Foundation recently presented their ambitious plans for a new campus in San Carlos. The proposed 478,000-square foot building, a state-of-the-art structure fully visible from Highway 101, would house 180 doctors and 110 hospital beds.

The medical foundation has also optioned a backup site in Redwood City, should things fall through in San Carlos. Officials hope to have a final location decided upon by mid-April.

Yet, despite talk of improved health services and a desire for community support, some north county and health care officials fear the proposed expansion will drive alternative providers out of business. Currently the medical foundation, Sequoia Hospital of Redwood City and Kaiser Permanente have pending proposals for new or expanded facilities -- all located within five miles of each other.

"We're right at the crossroads," said San Mateo County Supervisor Jerry Hill, who put a task force together in response to the competing proposals. "The decisions made in the next year or two will affect health care in the county for generations."

Not surprisingly, Dr. David Druker, the president of the medical foundation, speaks of his organization's plans in less alarming tones. He insists the proposed expansion is driven by the demand of existing patients who travel throughout the Peninsula and Fremont to see doctors affiliated with the foundation.

As stated in the foundation's application for the new site, San Carlos and points north are already home to 32,000 patients. Druker estimates the San Carlos facility could serve as many as 50,000 patients.

"When you've got a good product and people want it, you're going to get bigger," Druker said.

Emblematic of its success, the foundation's plans extend far beyond San Carlos. New or existing buildings are under construction in Palo Alto, Los Altos, Mountain View and Fremont. Although formal proposals have not been drawn up, Druker also envisions a new campus in Sunnyvale and facilities ultimately reaching San Jose.

All told, the foundation will spend more than its estimated worth of $435 million on current projects. Of that amount, $300 million is dedicated to a San Mateo County campus.

"That's about all we can handle. We have a lot on our plate," Druker said.

The foundation currently employs 550 doctors and 2,500 staff members who see 500,000 patients in 28 offices, which includes a clinic in Redwood Shores. Druker predicts the foundation's medical practices will grow 5 to 7 percent a year.

The medical foundation, which also supports research and education arms, is the busiest and second largest in the nonprofit, Sacramento-based Sutter Health system.

The foundation's success is partly due to its focus on outpatient services, a specialty that has grown in importance and profitability as managed care has grown more prevalent. In this sense, the foundation is like Kaiser Permanente because its staff are employees rather than independent doctors with admitting privileges.

"Outpatient is becoming the substantive substitute for inpatient," said Wanda Jones, a management consultant who is the founder and president of the New Century Healthcare Institute in San Francisco.

With fewer medical services requiring overnight hospital stays, organizations that focus on treatment, research and education to keep patients out of the hospital are on the right track, she said.

Jones waved off assertions that the foundation's expansion into San Mateo County would drive out competition.

"It's as if the incumbent had a God-given right not to be bothered by competition," she said. "If [a hospital] succeeds, that means it's wanted and people are willing to pay for it. If it fails, it is not providing a service people are willing to pay for."

She said growth won't necessarily overtax the market, even for hospitals, because San Mateo County will continue to expand and its active and numerous Baby Boomer generation will need more medical care as they age.

Druker also asserted that the foundation's increased presence in the north county will not lead to any anti-competitive situations. The prominence of Kaiser Permanente, he said, practically ensures continued competition.

The Redwood City Kaiser hospital "keeps us all honest," Druker said.

Such assertions provide little comfort to wary San Mateo County residents, especially when it comes to the status of longtime Redwood City health-care provider Sequoia Hospital.

"Speaking only anecdotally, I know that people here love Sequoia Hospital," Hill said. "Their relatives have been going there for years, they were born there. It has a lot of community ties and relations."

Established in 1950 as a taxpayer-supported community hospital, Sequoia Hospital is a more traditional institution that employs staff to run the facility for independent doctors who admit patients.

The hospital, which faces a state mandate to retrofit or rebuild its facilities, recently suffered a setback when a group of 20 renowned cardiologists decided to leave Sequoia once the medical foundation opens its north county facility.

Glenna Vaskelis, president of Sequoia Hospital, likens the possibility of increased competition to a see-saw, with hospitals on one side and patients, doctors, workers and money on the other.

It "could turn the market topsy-turvy," she said.

More hospitals, Vaskelis said, would upset the current balance between healthcare needs, resources services and providers. She added the addition of a new medical foundation facility could stretch an already tight pool of doctors and nurses.

Recruitment is particularly hard because of the high local cost of living and a new state law that requires hospitals to have a minimum number or nurses on staff -- a law that does not affect an outpatient facility like the medical foundation.

Vaskelis said her hospital plans to rebuild its nearly 54-year-old Alameda de las Pulgas building to meet seismic safety requirements, changing patient needs and expectations. The current building has room for 421 beds, space that is better used today for the private rooms and modern equipment patients expect. All hospitals are licensed for far more capacity than they use, she said, noting that Sequoia usually houses around 90 to 115 patients a day.

"We've got plenty of bed capacity, now, so it was a little surprising that [PAMF was] going to enter the market. We do understand that they may have their business reasons for building a hospital," she said.

Since the mid-1990s, Sequoia Hospital has been operated by the Sequoia Healthcare Service, a nonprofit corporation formed by the public Sequoia Healthcare District and a large nonprofit medical company, Catholic Healthcare West, that is similar to Sutter Health in size and function.

Vaskelis said Sequoia expects to complete plans for the hospital by April. It will include about 130 beds, cardiac and obstetrics facilities, and an emergency room.

Addressing Vaskelis' concerns of an overcrowded market, Druker said the medical foundation did not set out to destabilize other healthcare operators. In fact, the foundation made its own internal decision to expand and "never really thought about what other institutions might be doing.

"We would not be raiding other facilities" to staff the new San Mateo County campus, he added.

Druker said recruiting shouldn't be a problem for the medical foundation. It usually attracts doctors who don't want to struggle for survival as solo practitioners but also brings in those that don't want to be pinned into a single HMO like Kaiser.

"We've had very little difficulty recruiting employees," Druker said.

Representatives for Kaiser Permanente, which plans to rebuild its own site on Veterans Avenue in Redwood City, also shrugged off the possibility of increased competition.

Assistant Physician-in-Chief Timothy Wong said the Redwood City facility would be relatively insulated from local hospital growth because Kaiser is a closed network that shares few patients and professionals with other institutions.

"We really have a pretty insular population in terms of our membership," he said.

The new Kaiser facility would include 192 beds, slightly fewer hospital beds than the current one building. Wong said the company expects the facility to accommodate 201 doctors and health-care providers and 121,000 members.

The question, however, is if all three can survive within such close proximity. No one has clear answers, leaving time to be the deciding factor.

"I think the health care environment in the next couple of years will be challenging," said Vaskelis. "I think all of us have to be prudent as we look to the future and decide what we're building and how much we put into the buildings."

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