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San Diego Healthcare on Life Support

Radio communications pioneer Thomas E. Sharp found a lasting way to honor the memory of a son killed in World War II: He donated $500,000 for a community hospital. That 1950 gift made possible the construction of the Donald N. Sharp Memorial Community Hospital in Kearny Mesa, the nucleus of today's Sharp HealthCare system.

For decades after the hospital's 1955 opening, the story of Sharp was one of nearly unbroken progress, success and growth. With hospitals and medical centers around the county, it now controls about one-quarter of the San Diego healthcare market. But today, the elder Sharp's legacy is jeopardized by the most critical challenge the system has ever known: the struggle to survive in the environment of managed care. As it seeks a new model, the financially troubled Sharp system finds its basic values questioned as never before.

Sharp's preferred solution, to sell half its assets to a new corporation equally owned by it and the giant Columbia/HCA Healthcare Corporation, is on hold as of press time. The two seek to convince California Attorney General Dan Lundgren and Deputy Attorney General James R. Schwartz that the deal is in the interest of San Diegans. They also must combat suggestions in local newspaper stories that the deal was cut secretly and in haste.

Michael W. Murphy, current Sharp HealthCare president and CEO
No evidence of malfeasance has been uncovered; Sharp CEO Michael Murphy insists the governing board has been evaluating options, including a relationship with Columbia, for more than two years. However, whether this deal is the best of all options remains to be determined.

Under the leadership of former CEO Peter K. Ellsworth, Sharp spent more than a decade building what is called, in health-speak, an integrated delivery system. This meant Sharp no longer would be just a hospital or even a group of hospitals; it would encompass medical groups, home healthcare services-even health insurance. The idea was to control as many aspects of healthcare as possible, forming one tightly interwoven, efficient system with the clout to survive competition.

The first step was taken in 1985 when the Sharp Foundation bought the Rees-Stealy Medical Group. The move was highly controversial among doctors, some of whom considered it a threat to their independence. Sharp also began acquiring more hospitals, such as Community Hospital of Chula Vista in 1989 and, under a 30-year lease, Grossmont Hospital in 1991.

It's important to note that all of San Diego's healthcare providers are in some turmoil, including UCSD Medical Center, ScrippsHealth and several independent hospitals. It's hard to follow the whole story without a scorecard. But per- haps the easiest way to view the cloudy big picture is to an- alyze Sharp's situation-starting with its rocky alliance with Grossmont.

Unhappy Grossmont

Grossmont's affiliation with Sharp marked a troublesome turning point for both entities. Six years later, the passions have not cooled. Sharp's current critics see that fracas as a precursor of the controversy over the Columbia deal.

For Sharp, Grossmont provided access to the fast-growing East County. But Grossmont held a special place of pride in the hearts of East County residents. A public district hospital, it was created by the voters and governed by an elected five-member board of directors.

Peter K. Ellsworth, former president and CEO of Sharp
In many ways, Grossmont District Hospital was in a strong position in 1991. Not only was it the major hospital for East County, its budget consistently ran in the black. Why, then, did Grossmont need Sharp?

The answer from Grossmont's then-CEO Michael Erne: Managed care would cut the revenues of stand-alone hospitals such as Grossmont.

To survive, Grossmont needed to be part of a bigger network the HMOs and other healthcare insurers could not bully.

Grossmont's doctors objected; 60 percent of the medical staff voted to oppose the affiliation. Erne's arguments won the day, though. The district board approved the affiliation by a 4-1 vote, with only the late Dr. Basil Maloney dissenting. Grossmont's assets were leased to Sharp for 30 years. (Legally, the assets cannot be sold, as they are public property. For the same reason, Grossmont's elected board continues to exist, its main function being to oversee the lease.)

Most Grossmont-based doctors and employees acquiesced to the decision as a fait accompli. One who did not is Dr. Dennis Wilcox, whose father helped found Grossmont District Hospital.

"The reason I felt so strongly was that it was a ploy to take control over patients by this huge hospital conglomerate," Wilcox says. "Their [stated] reason for putting an affiliation together with Grossmont Hospital was to help the hospital out of dire straits. And in retrospect, more people are realizing that the hospital was put into dire straits" by the lease.

Wilcox feels that Grossmont Hospital's administrators wanted to join Sharp HealthCare because it would provide them with more career opportunities-as well as "an ego boost." When some of their decisions went awry and cost Grossmont money,

this was cited as evidence that Grossmont couldn't go it alone; Wilcox says blame was shifted from those who made bad decisions to the convenient scapegoat of managed care.

One problem, Wilcox says, is that Grossmont's administrators, before and after the lease, spent too much money on buildings that turned out to be underutilized. "They underwent an $80 million building project in the midst of a free-fall in terms of reimbursements for hospital charges," he says. "These people do not know how to run a business."

Wilcox says he was "ostracized" by Sharp for his outspokenness. He now practices mainly at Alvarado Hospital.

But by 1996, Grossmont's elected board had joined the critics' ranks, as pro-affiliation members left the board or were defeated. The trigger was Sharp's tentative deal with Columbia, announced in late 1995. Sharp planned to continue to operate Grossmont as a nonprofit directly under the terms of its lease agreement. However, most of Sharp's assets would be transferred to a new, for-profit entity equally owned by Columbia and Sharp.

Besides being somewhat confusing to picture, this arrangement created a two-tier system, with for-profit and not-for-profit operations. Grossmont's board feared that Sharp's for-profit subsidiary would dump charity cases onto nonprofit Grossmont, thus fattening the bottom line of the for-profit entity. Sharp's then-CEO Ellsworth denied this would be the case. Nevertheless, the board voted 3-2 to warn Sharp that it would sue if the Columbia deal went forward.

Local legislators also intervened. State Senator Steve Peace (D-Chula Vista) and Assemblyman Steve Baldwin (R-La Mesa) announced legislation to tighten safeguards against conflicts of interest in deals between nonprofit and for-profit entities. They also introduced legislation to free Grossmont of its lease if a deal could not be worked out with Sharp and Columbia to let Grossmont take part on equal terms in the new system.

"At that point," recalls Grossmont board member Jim Stieringer, "the Sharp people came to us with an offer. They said, 'We'll give you a letter freeing you from your lease on the first of January [1997] if you'll ask Assemblyman Baldwin to withdraw his legislation.'" Besides resolving the conflict of interest, the new arrangement offered to the board would mean a Columbia-Sharp partnership would give Grossmont an estimated $53 million (over the 30-year lease) to fund medical care for the needy.

With tongue in cheek, Stieringer adds, "Under the current lease, we are receiving $1 a year from Sharp. And $53 million for 30 years was significantly better."

Although the letter's offer was not contingent on the Sharp-Columbia deal going through, Stieringer says that was the intent. So Grossmont is standing pat while Sharp and the attorney general try to resolve their differences.

Questions of Fairness


By their account, Sharp officials had no idea the attorney general's office would oppose the Columbia deal. But similar ventures have led to threatened and actual lawsuits in other locales, including other cities in California. The lightning rod is Columbia's status as a publicly held, for-profit corporation with $20 billion in annual revenues.

In community after community, residents have asked if local healthcare needs were to be sacrificed to swell the returns for Wall Street investors. Despite Columbia's reputation as an operator of high-quality hospitals, the answers haven't always been favorable. And the publicity has been decidedly negative. For instance:

  • Michigan's attorney general filed suit last June against a proposed joint venture between Columbia and Lansing-based Michigan Capital Medical Center.

  • That same month, the Texas attorney general requested that St. Luke's Episcopal Hospital in Houston reveal details of its affiliation talks with Columbia.

  • Last spring, California Deputy Attorney General Schwartz launched an investigation into alleged wrongdoing by trustees of the Good Samaritan Health System (GSHS) in Santa Clara County, sold to Columbia in January 1996. (The investigation ended quietly in November with no charges filed.)

If the Sharp-Columbia deal here does go through, Good Samaritan's stormy experiences might serve as a lesson in what to avoid. Santa Clara's county supervisors and public health advocates grilled GSHS officials for deficiencies in the system's plans to use a $56 million endowment created

by the sale. Good Samaritan wanted to use some of the money to fund three patient programs-cardiac rehabilitation, perinatal education and diabetes education for pregnant women-but backed off after complaints. The issue wasn't the programs but their sponsor's status as a for-profit hospital.

Schwartz also weighed in: "We can express to them a concern that the [trust] money not be spent to subsidize a for-profit hospital, and particularly Columbia," Schwartz was quoted in the April 30 San Jose Mercury-News.

This controversy added to the ongoing conflict over the repeated, painful cuts in the numbers of nurses and other Good Samaritan employees.

"I have been a nurse in local hospitals for 21 years, and I promise you that 'high-quality care' is very much a thing of the past," wrote Roxann Kontzer in a letter published in the September 10 Mercury-News. "Registered nurses have been replaced by unlicensed personnel, providing 'care' at cheaper salaries. Staffing nightmares abound; in fact, the crisis is worsening as nurses become increasingly disheartened due to the inept and myopic management of administrators who seem to be in over their heads."

The Long Road to Columbia


Sharp CEO Michael Murphy says he is committed to answering all of Schwartz' concerns about the Sharp-Columbia deal. And Murphy specifically rejects any suggestion that Sharp's governing board, the San Diego Hospital Association (SDHA), was not adequately informed.

"Before there was ever anything done of any significance-where we would actually enter into a letter of intent or anything of that nature-that was all shared with the board of directors," Murphy says.

Murphy places the genesis of the deal in late 1994, when Sharp was enduring yet another round of cuts to trim a recurring deficit. At that point, he says, Sharp's management and the SDHA decided Sharp had to find a new model to survive the managed-care onslaught.

"That included an evaluation that took place over a seven- to eight-month period in early 1995," Murphy says. "During that time frame, we evaluated all the options that were available to us, looking at what was happening in our marketplace and where we thought the marketplace was going." The alternatives: to remain a stand-alone nonprofit entity; to ally with nonprofit partnerships in San Diego; to ally with nonprofits from outside the area; or to seek partnerships with for-profit companies.

Also during that period, Murphy points out, Columbia began expanding in California-and indeed in San Diego, with the purchase of the parent company of Mission Bay Hospital, Health Trust Inc.

In August 1995, SDHA instructed Sharp management to consider nonprofit and for-profit options and to send out requests for proposals. "That process took four and a half months," Murphy says, "and came down to where we actually seriously considered two for-profit proposals"-from Tenet Healthcare Corporation and Columbia/HCA.

One reason Columbia was preferred, Murphy says, was that its offer would leave more cash for a foundation Sharp would set up to fund care for the needy. Also, it was critical that any deal give Sharp the ability to sell its 50 percent equity interest in the new entity, if needed, and that this equity be adequately valued. Both potential partners' financial strength and trustworthiness were also criteria.

"It's real key to note that, at that point, what the SDHA board emphasized was the development of a partnership with a for-profit entity. We always approached this as developing a partnership," Murphy says. To make sure there were no misunderstandings, Sharp prepared a document outlining what it expected to get out of a partnership, which was sent to anyone who replied to the request for proposals.

In November 1995, the SDHA board decided that Columbia's response was the best and agreed to sign a letter of intent with Columbia. But nailing down the details took a lot of work, Murphy says, so it wasn't completed until August 1996.

What Next?

If the deal ultimately doesn't go through, Murphy says Sharp will pick up where it left off, with the other options it had worked through before choosing Columbia. And Sharp's condition has improved, he notes: Two months (as of December) into its new fiscal year, Sharp was out of the red.

As for Grossmont Hospital, Stieringer says that board has four options if the Columbia deal fails: (1) Do nothing and simply remain under the current lease with Sharp-an alternative he calls unlikely. (2) Grossmont could ask Sharp to follow through on its letter and release Grossmont, which could then solicit bids for a partnership-including a new relationship with Sharp. (3) If Sharp refuses to release it, Grossmont could once again turn to the state legislature for help. (4) Grossmont could sue Sharp.

Stieringer hopes the last two alternatives won't be necessary, especially with Murphy-who is Grossmont's former chief financial officer-at the Sharp helm. "One of the reasons we feel comfortable giving Sharp the opportunity to work out its differences with the attorney general is because of Mr. Murphy," Stieringer explains. "Speaking solely for myself, when I came on the board, Mike Murphy was the only official from Grossmont or Sharp who would give me the information I asked for. He was always very honest, very forthcoming. And I have 100 percent confidence in him, a confidence I did not have in his predecessor."

But local physicians like Ned Chambers say Sharp shouldn't be looking outside San Diego for salvation, but to residents and "front-line" doctors, the primary-care physicians who work in the neighborhoods and see patients first. Chambers is a member of the Family Health Network, a group of community-oriented doctors who deemphasize hospital stays when possible and encourage in-home healthcare-for instance, by making house calls. Hospital administrators at Sharp and other systems have a common flaw, he says: They invest too much in "bricks and mortar" and not enough in innovative healthcare.

"They say we have to consolidate because we can buy Q-Tips at a cheaper rate," says Chambers. "Administrators regard these integrated systems as the center of the whole medical universe, and that's not correct. All healthcare should be oriented toward serving the public."

Chambers maintains that the high overhead of a big organization and the emergency departments, trauma centers and other hallmarks of large hospital systems more than offset any savings. "In other industries, we've seen companies like Southwest Airlines grow by focusing on service," he adds. "The healthcare industry hasn't learned that lesson yet."

One way or another, can administrators redesign a model to provide good-and cost-efficient-healthcare service? Let's hope so. It was, after all, the primary intention of Thomas E. Sharp and the founders of Sharp Memorial Community Hospital.

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