Report 99128 Summary - August 1999

UCSF Stanford Health Care:

The New Entity Has Not Yet Produced Anticipated Benefits and Faces Significant Challenges

RESULTS IN BRIEF

In 1997, the University of California, San Francisco Medical Center (UCSF) and Stanford Health Services (Stanford) merged to create a stronger entity better positioned to face future health care challenges than each would have been separately. The success of the merger was premised, in major part, on two important goals:

  • Generating an additional revenue stream of about $50 million annually by combining the intellectual capital of the two prestigious medical institutions, thus creating a "world class" organization that would significantly increase its market share of highly specialized, and potentially lucrative, cases.

  • Lowering costs by about $30 million annually through consolidating duplicate services.
In the 22 months since merging, UCSF Stanford Health Care (USHC) has been unable to achieve these goals to the degree anticipated. First, the two entities have not combined their intellectual capital as planned since they have not fully integrated clinical programs. Also, USHC now estimates a loss of $46 million for its first two years of operation rather than a financial gain of $65 million as projected in the business plan-a difference of $111 million. Moreover, the overall case complexity level has remained about the same after the merger due, in part, to USHC's change in approach that focuses on increasing total revenue regardless of the type of case.

To address its deteriorating financial condition, USHC employed one of its consultants to create a financial recovery plan. To bring USHC expenses in line with those of other academic medical centers, the consultant identified cost savings targeted to total $170 million annually by August 2001. In addition, the consultant developed an inventory of other revenue and expense opportunities totaling an approximate $100 million annually for USHC to consider. These latter opportunities may not be fully achieved due to various political, managerial, community, and other concerns.

If it successfully implements the consultants' recommendations or identifies other opportunities totaling $270 million annually by the end of August 2001, the consultants estimate that USHC will show a modest $47 million profit in fiscal year 2000-01. These recommendations include many savings UCSF and Stanford would have needed to consider had they not merged and others that are dependent upon consolidating administrative functions only possible because they merged.

To estimate the approximate financial effects from merging, we allocated revenues and expenses between activities we considered related to the merger and those that would have existed without the merger. We estimate the merger contributed $19 million in losses during the first two years, but it may generate $140 million in profits in the next two years if portions of the $270 million in revenue enhancements and cost savings that we allocated to the merger are achieved.

Cost reductions will be necessary whether the entities remain together or separate. However, if the two institutions are not both strengthened by their affiliation to the degree that was initially envisioned, the justification for continuing the relationship may be called into question. Currently, UCSF and Stanford are considering whether to continue the present form of governance. They will need to determine if their objective is still to enhance their academic missions by combining intellectual capital or if they are only interested in reducing administrative costs. In addition, they will need to find a corporate structure that will allow them to maximize their return on the significant investment USHC has made in infrastructure for the consolidated functions of accounting, computer systems, marketing, and others. Regardless of its current financial difficulties, key indicators appear to suggest that USHC has maintained its commitment to patient access to quality health care and increased its support of community programs.

AGENCY COMMENTS

The UCSF Stanford Health Care generally agreed with our conclusions.


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