Opponents gear up for battle over health care

• Watch Weekly journalists discuss this issue on an episode of “Behind the Headlines.”

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On May 22, Palo Alto officials found themselves in the middle of a high-stakes battle that no one in City Hall signed up for, one that could have an impact on anyone providing or receiving health care in Palo Alto.

That’s when a packet of more than 3,500 signatures arrived at the desk of City Clerk Beth Minor, ensuring that Measure F would appear on the November ballot.

Depending on whom you talk to, Measure F will either ensure quality health care in Palo Alto or force doctors, dentists and optometrists into permanent exile from the city.

It will either burden Palo Alto taxpayers with a new bureaucracy that could cost up to $2 million a year to administer or save them money by containing staggering health care costs.

Proponents say the initiative’s aim is to pressure Stanford Health Care, which they claim is plagued by high infection rates, to shape up. Opponents say it seeks to pressure Stanford Health Care, one of the nation’s leading medical institutions, to stand down while the measure’s chief sponsor, the Service Employees International Union-United Health Workers, organizes employees at Stanford facilities throughout the Bay Area.

There is one thing that everyone agrees on: If it passes, the measure will transform both Palo Alto’s local health care and City Hall, which today struggles to administer a simple business registry but which next year may find itself in charge of regulating the complex health care industry.

Formally titled the “Palo Alto Accountable and Affordable Health Care Initiative,” Measure F would limit how much local hospitals, medical clinics and other health care providers can charge patients and insurers for medical care. While it would not set a flat rate on any particular service, it would limit charges to no more than 115 percent of the “reasonable cost of direct patient care.”

The city would review all charges every year to ensure compliance. Hospitals that charge beyond the 115 percent “reasonable cost” threshold would be required to rebate the excess cost and pay fines.

The stated aim of the union initiative is to “provide for the orderly regulation of hospitals and other health facilities … in the interests of public health, safety and welfare, by providing certain minimum standards and regulations regarding their operation.” The measure imposes “reasonable limits on prices” and allows medical institutions to petition for exceptions during times when they absolutely need to charge beyond the 115 percent cap.

The initiative is also extremely appropriate, the union contends, given Stanford’s high costs and disappointing record on infections. Stanford Health Care, they note, is ranked 71st out of 107 hospitals, according to Vizient, a company that ranks medical institutions based on quality measurements. That underwhelming ranking was cited by Stanford Health CEO David Entwistle at a November 2017 town hall.

“When you look at all the amazing things we do, there are still opportunities for improvement,” Entwistle said, according to Stanford Medicine News Center.

That appears to be the only thing the two sides agree on. Sean Wherley, spokesman for SEIU-UHW, dismissed arguments from Measure F opponents that the initiative is a union bargaining chip. Stanford Health just signed a new three-year agreement with its health-workers union last December, Wherley told the Weekly, and the union is not engaged in any “active organizing” in any Stanford facility. Any arguments that this is a negotiating tactic is thus moot, he said.

Rather, he said, this measure aims to address a festering problem that the union has been trying to spotlight and solve for years: Stanford’s infection rates.

The issue also came up in January 2017, when SEIU-UHW was engaged in negotiations and publicly called on Stanford to make improvements after Medicare penalized Stanford (and 768 other hospitals) for high rates of hospital-acquired infections. The penalty, which was based on 2016 data, gave Stanford a score of 7.85 on a scale of 1 to 10 (with 10 being the most severe). Among the biggest problem areas were surgical-site infections (in which Stanford scored a 10) and clostridium difficile infection, a bacteria-caused infection commonly known as “C. diff” (Stanford received a 9).

Wherley said the union has been trying to get Stanford to take care of the problem for several years, with little success.

“This is about improving patient care and preventing patients from getting gauged in the process,” Wherley told the Weekly.

The cost of doing business

The union measure won’t be settled until Nov. 6, but it has already achieved the seemingly impossible: It has unified Palo Alto’s normally polarized City Council, which this week concluded a meeting of bitter disagreements and personal insults by unanimously voting to oppose Measure F. Though council members regularly laud the concept of “local control” and take pride in their city being a national leader in biking, solar panels and electric vehicles, no one behind the dais wants to see City Hall get into the health care business.

At the council’s June 11 meeting, Vice Mayor Eric Filseth said the measure appears to constitute a “very large, unfunded mandate for the city to regulate health care in Palo Alto — a task for which we have neither the expertise nor bandwidth.”

Even Mayor Liz Kniss, a retired nurse and champion of the council’s 2018 “healthy city, healthy community” priority, acknowledged in June that health care is “hardly the issue we normally deal with” — and implied that she’d like to keep it that way.

“This is not something we normally do, it’s not something we are staffed to do and, I think it would put a substantial burden on our city,” Kniss said.

City Manager James Keene displayed the same can’t-do spirit when he stated frankly at the June 11 meeting, “We’re not equipped to handle this.”

“We need to recognize that this has been dropped on us, really,” Keene said.

City officials don’t have a clear idea of how exactly Measure F would impact the city budget, but they’re fairly certain that setting up a new bureaucracy won’t be cheap. In June, the council directed staff to conduct an analysis of the measure’s impacts on Palo Alto. This week, it received back a memo that stated the “complex implications of the measure are such that we were not able to design and undertake that detailed analysis.”

One could get some idea of the potential costs, however, by looking at a study commissioned in Livermore, where a similar measure, known as Measure U, will appear on the November ballot. The analysis conducted by Henry W. Zaretsky and Associates estimated that Measure U would cost the city about $1.9 million annually, which includes $1.35 million in salaries for new staff (a program director, a health care finance director, a “finance team” of three analysts, a medical-billing specialist, an information-technology technician and legal counsel) and the rest for overhead costs.

The program would also require $750,000 to $1 million in startup costs to account for recruitment costs, software, office furniture, computers, vehicles and consulting costs, according to Zaretsky, raising the overall first-year costs to $2.8 million.

Should there be litigation, the report notes, the costs are likely to be higher.

The report notes that administering the complex program proposed in the measure “will require a highly skilled and well-paid staff of regulators.”

“For the most part, such a staff will have to be recruited externally since current city employees are unlikely to have extensive backgrounds in health care,” the report states.

Doctors united

Palo Alto’s elected leaders aren’t the only ones who find themselves unexpectedly — and unintentionally — united by the SEIU-UHW measure.

Since the measure landed on the ballot, Palo Alto’s hospital executives and physicians also have joined forces to oppose Measure F through both lobbying and litigation.

Doctors from Stanford Health Care and Palo Alto Medical Foundation, as well as local dentists and others with small practices, have spoken out against the measure in recent weeks, urging the council to oppose the measure. On Sept. 10, Entwistle argued before the council that the measure, far from improving health care, will hurt the ability of health care professionals to serve patients.

“If you do your job well, this will prevent you from doing your job well and the city will have to add resources to administer this,” Entwistle said. “This does nothing to impact quality of care. It actually puts patient safety at risk. It does not make patient care more accessible.”

Specifically, opponents of Measure F point to the measure’s definition of “reasonable costs of direct patient care,” which includes salaries, wages and benefits of non-managerial personnel who provide care, pharmaceuticals and supplies, facility costs, laboratory testing and “depreciation and amortization of buildings, leasehold improvements, patient supplies, equipment and information systems.” It does not, however, include such things as salaries and benefits of management and supervisors, as well as legal fees, audit fees, travel, dues, subscriptions and other expenses that hospitals need to operate, notes Duane Dauner, who spent 32 years as the head of the California Hospital Association and who now leads the “No on F” and “No on U” campaigns. By his estimation, these excluded factors constitute about 4 percent of a hospital’s costs.

Dauner does not dispute the union’s assertion that Stanford and other hospitals often charge patients more than the direct cost of care. He notes, however, that such a practice is necessary for them to meet their obligations, which include coverage of Medicare and Medi-Cal patients, as well as those with no insurance at all. Private payers, who typically make up about 35 percent of total patients, currently pay about 150 percent of the cost of providing care, Dauner said. However, Medicare only covers 90 percent of the health care costs, while Medi-Cal pays 70 percent. He estimated that Medicare and Medi-Cal patients make up about 60 percent of patients.

Other patients, including the uninsured, veterans and members of the military, pay about 30 percent of the health care costs.

Because Stanford and other hospitals don’t get fully compensated by Medicare and Medi-Cal, they have to swallow some of the costs. Thus, even after charging private payers at 150 percent of the total cost, the revenues that the hospital takes in typically exceed costs by only about 3 percent. If Measure F passed, hospitals would have to charge private payers no more than 115 percent of the “direct costs.” As a result, hospitals would see their revenues fall about 11 percent below costs.

Hospitals like Stanford Health Care don’t have the option of relocating from Palo Alto, Dauner said.

“So what can they do? They’d have to reduce salaries, they have to reduce the number of employees, they have to forego buying equipment and keeping up with technology and things that are necessary to provide modern-day quality care,” Dauner told the Weekly. “It pinches the hospital financially so they can’t provide those services.”

Unlike Stanford, small clinics and individual practitioners can move. And many will opt to do just that to avoid the onerous auditing and reporting requirements created by the measure, Dauner said. Like other opponents of Measure F, he argued that Palo Alto residents will be left with fewer medical services if the measure passes, even as more of their tax money goes toward administering the new program.

“What happens to the people who live in Palo Alto and who now have to drive to Menlo Park or Mountain View? Their access to care has been compromised because they have to go farther to get to their doctor or their dentist or their optometrist,” Dauner said. “They have to drive further distance, take more time, spend more money, to get to services already available.”

James Stephens, a dentist whose practice has been operating in Palo Alto for the past 36 years, concurred. If the measure is approved, he would probably have to move to Mountain View to continue to provide the type of care his patients expect, Stephens told the council this week.

“The truth is, this ballot measure will limit my ability to have a viable dental practice because of my ZIP code,” Stephens said.

Chris Lee, a pediatric dentist with a practice in Palo Alto, also criticized the measure, which he argued is too broad to accommodate the real-world nuances of medical care.

“Providing quality services is complicated, and dental billing isn’t as simple as drill, fill and bill,” Lee told the council.

He said he occasionally encounters children who aren’t entirely cooperative with a stranger trying to stick a needle or a drill in their mouths. At those times, he might have to take more time to complete the necessary procedure and incur more costs, at times well beyond what insurance would cover.

“Measure F doesn’t do much to account for all these extenuating circumstances that make it so hard for us to take care of our patients and keep our doors open without having to worry about having to justifying every single cost in a black-and-white way,” Lee said.

The SEIU-UHW believes the opponents’ arguments vastly overstate the added burden. Wherley noted that Stanford Health Care is an organization with $234 million in operating profits and reserves for $700 million. Even despite these resources, Stanford is struggling to fix its patient-infection problem.

Furthermore, Measure F does nothing to prevent Stanford from spending more money on health care — just not charging more than 115 percent of reasonable costs, Wherley said.

“If they need to invest more in care through better staffing, newer equipment and new facilities, they can do that,” Wherley told the Weekly.

It’s true, as SEIU-UHW maintains, that Measure F still allows hospitals to invest more into patient care. It’s also true, however, that if hospitals do that, there is little to keep patients’ bills from concurrently spiking, provided the bills remain within the 115 percent threshold. Thus, while the official “Yes on Measure F” argument claims that the measure will “bring our high health care costs under control” and “ensure” that patients can’t be gouged, the reality is somewhat more complex.

Things are also tricky when it comes to medical practitioners who unlike Stanford don’t have swelling cash reserves. While the official argument in favor of the measure focus on Stanford Health Care’s costs and infections rates, that argument has little to do with the hundreds of medical practitioners who are not affiliated with Stanford but who will also be covered by Measure F (the measure does include exceptions for various health care providers, including children’s hospitals, dialysis clinics, clinics that specialize in reproductive rights and clinics operated by the federal Department of Veterans Affairs or most other public entities).

Wherley noted that the union doesn’t have access to the financial records of the various medical practitioners outside Stanford. Even so, he expressed skepticism at the suggestion that doctors and dentists will skip town if Measure F passes.

“They can raise the threat of leaving, but the reality is that a 15 percent margin is still comfortable enough that you can operate efficiently and take a profit at the end,” Wherley said.

The Zaretsky study draws different conclusions. If the program in Measure U is implemented in Livermore, the report states, providers would either leave the Livermore market or, if they are unable to do so, they would “likely cut costs in a manner that will lessen access and compromise the quality of patient care.”

If health care providers exit from Livermore, that would “adversely impact local businesses and reduce tax revenue,” the report states. It could also lower real estate values, though the report notes that this “could be welcome relief for buyers and renters.”

Meanwhile, new health care providers, the report states, may be reluctant to enter the Livermore market.

For some voters, these consequences could be justifiable if the measure does what it sets out to do: lower health care costs and improve patient care. The SEIU-UHW acknowledges that implementing Measure F won’t be cheap, but the union argues that some of the administrative costs would be offset with fines for violators. And if it does cost the city some money, that’s a price worth paying for lower health care bills.

“Does it cause some new responsibilities for the individual providers? Yes. But in return, people in the city of Palo Alto will know that they are being charged a reasonable amount for their care,” Wherley said.

Several Measure F proponents made a similar argument on June 11 to the council. Anna Toledano, a graduate student at Stanford University, said she has chronic acid reflex and has not seen a gastroenterologist in over a year because of the four-month wait for an appointment at the hospital clinic.

“The ballot measure will not harm Stanford Hospital’s already lackluster ability to provide care to us, as Stanford Health Care’s crafters of rhetoric claim,” Toledano said. “Instead, it will serve to alleviate exorbitant patient costs that I myself had to bear numerous times in my three years in Stanford and hope not to bear in the three years to come.”

Even the generally critical Zeretsky report concedes that the program could have positive benefits, with implications well beyond the two cities where it is now being considered.

“If the program proves successful and results in health care cost savings without compromising access and quality, it would obviously have a positive impact on the community and would likely be replicated in other areas,” the report states.

Law and orderlies

Over the summer, Stanford Health Care, Palo Alto Medical Foundation and the California Hospital Association joined forces and filed a legal challenge with the hopes of keeping the initiative off the ballot. In letters and court filings, they argued that the measure is unconstitutional because it infringes on existing contracts, that it is overly vague, and that it is pre-empted by and federal and state regulations.

The American Medical Association, which filed an amicus brief in favor of keeping the measure off the ballot, also cited the onerous burden on Palo Alto’s Administrative Services Department, which would be in charge of regulating local health care providers if Measure F passes. The department “normally deals with parking tickets and revenue collections — not complex health care issues or questions requiring expertise in hospital administration,” the amicus brief states (a perhaps less-than-generous description for a department that is also charged with economic forecasting, pension reforms and the annual construction of the city budget).

The petitioners also argued that health care is already regulated by state and federal laws, including the Knox-Keene Act (which pertains to regulation of health care service plans), the California Insurance Code, the Affordable Care Act and the federal Employee Retirement and Security Act (ERISA).

These arguments failed to convince Santa Clara County Superior Court Judge Mark Pierce, who declined in an Aug. 1 ruling to keep Measure F from appearing on the ballot. In doing so, however, Pierce made it clear that his decision does not imply that the concerns from the hospitals are “inaccurate or otherwise invalid.” Rather, Pierce wrote, “such contentions appear speculative and premature at a point in time before election.”

“Therefore, whether the initiative will be confiscatory as applied can be determined only after the election, assuming the measure is passed by voters and thereafter implemented by the city of Palo Alto,” Pierce wrote in his ruling.

Given the high stakes, the measure is highly likely to face a legal challenge from Stanford Health Care and other medical providers if it passes. Dauner noted that there’s plenty of precedent for the SEIU-UHW initiatives to end up in court. In 2012, the union spearheaded Measure M in the El Camino Hospital District, which capped the salary of the hospital executives at twice the California governor’s salary. The measure narrowly passed, with 51.91 percent of district voters supporting it. The following year, the Santa Clara County Superior Court deemed the measure unconstitutional, effectively killing it.

Dauner said the union also tried to push statewide measures to cap costs in 2012, 2014 and 2016, though none of these ever ended up on the ballot. In 2016, the union withdrew its measure right before the deadline after the court ordered it to do so. Then, as now, the measures were about union negotiations, Dauner said.

“The denial (in 2016) was based on the fact that they violated all of their agreements with us and that therefore it was illegal for them to try to make an end-run around the agreements,” Dauner said.

But as union officials point out, cost-cutting efforts like the one at El Camino aren’t the only types of measures that SEIU-UHW pursues. Wherley noted that the union had run a statewide initiative to improve dialysis clinics throughout California and filed a lawsuit to improve access for care for Medi-Cal patients. The union also has an effort underway across the country to grant expanded Medicaid access in seven states, he said. Much like those efforts, Measure F is a way to improve health care, not to attain personal gains, Wherley said.

“We do have a history in going beyond the pure interests of the union and bring forward measures to serve the interests of the wider community,” Wherley said.

UPDATE: Read the Weekly’s editorial on Measure F: No, no, no on Measure F (Sept. 21)

Find more coverage of Palo Alto races and measures, including upcoming election events and videos of voter-education events here.