Local health care landscape changing rapidly

When the towering new Palomar Medical Center opens in early 2012 on an Escondido hilltop, visitors to the top floor will be able to gaze 19 miles west past Vista, Carlsbad and Oceanside to the sea.

That landscape is fast turning into a health care battleground as the region's three largest hospital systems fight for the hearts and pocketbooks of potential patients. At stake: the shape and quality of health care for North County's 860,000 residents.

In the short term, the tug of war will bring more modern medical services and better patient care, making North County less dependent on the traditional hospital base in and around the city of San Diego to the south.

The $917 million, 11-story Palomar hospital will feature the latest in medical design and patient amenities. Simultaneously, powerful San Diego-based Scripps Health is preparing a 15-year, $350 million project that will more than double the size of its Encinitas hospital and give it a major foothold in North County.

During this turbulent time in health care, hard choices loom for the leaders of North County's public health systems. Do they compete or cooperate? Merge or go it alone? Stay public or go private?

North County medicine differs from most of California because two of its three largest hospitals are run by public nonprofit districts, overseen by trustees elected by local residents. Tri-City Medical Center, with 397 beds, is owned by the Tri-City Healthcare District, while the Palomar Pomerado Healthcare District, or PPH, owns 298-bed Palomar Medical Center as well as 95-bed Pomerado Hospital in Poway.

Most other medical centers in the state are private nonprofit entities, including those in southern San Diego County, a landscape dominated by the Scripps and Sharp systems.

One lesson North County may provide is how effectively the two publicly owned hospital systems can joust with one another in an increasingly crowded marketplace.

As the new Palomar and Scripps medical campuses take shape, more questions are surfacing about whether Tri-City ---- handicapped by aging buildings, deepening financial woes and a divided board of directors ---- can keep in step with its rivals.

All three hospital systems are promising new satellite clinics around North County and are working hard to build up strong medical staffs.

Tri-City's new president and chief executive officer, Larry Anderson, insists that his turnaround program will make his hospital the dominant force in North County health care a decade from now.

"Tri-City will emerge as the leader of inpatient and outpatient services," Anderson said.

But Michael H. Covert, the PPH president and CEO, notes that his hospitals already have a strong base in Tri-City's territory and says his district plans to expand its reach.

"We're going to expand aggressively in all of North County," Covert said.

Chris Van Gorder, president and chief executive officer of private, nonprofit Scripps Health, based in San Diego, predicts heavy competition among physicians, physician groups and hospitals.

"I know society doesn't like to think of hospitals competing, but the fact is, we have to compete," Van Gorder said.

Public Hospitals Competing

The publicly owned Palomar hospital has long been drawing patients east from Oceanside, Vista and Carlsbad, historically Tri-City's territory, according to an analysis of state data conducted in May for the North County Times.

Now, Palomar's "hospital of the future," brimming with the latest in hospital design, will be the county's most advanced medical facility, literally overlooking Tri-City's turf like a giant, gleaming billboard attracting more doctors and their patients eastward.

Some health care experts wonder if the patients at these public health care districts might be better served if the two systems formed partnerships and shared resources instead.

"They're both district hospitals, and some sort of collaboration could work out really well," said Steve O'Kane, chief executive officer of the Council of Community Clinics in San Diego, which supports the myriad of clinics serving low-income residents throughout the county. Three of those clinics have cooperative agreements with PPH or Tri-City.

Ultimately, that decision rests with North County residents, who are responsible for electing the boards of the two hospital districts that would have to approve any large-scale cooperative scheme.

Among stand-alone hospitals, the trend toward mergers and partnerships is quickening nationally, according to an Aug. 17 article in Modern Healthcare headlined "The Urge to Merge" that lists such reasons as lack of capital, a constant need to upgrade buildings and equipment, and rising numbers of uninsured patients.

PPH already has sought such partnerships.

It has a contract with Kaiser Permanente that allows Kaiser to use beds in its new hospital, bolstering its income and saving Kaiser the cost of building a North County medical center. Closer to home, it has forged an agreement with an Escondido-based community clinic in which doctors paid by the clinic provide on-call services for all hospitalized patients, not just low-income and uninsured patients who typically seek care at the clinic.

Scripps' hospital in Encinitas is part of a Scripps network with three other hospitals on four campuses and 19 outpatient facilities.

But Tri-City continues to fight alone.

Tri-City Seeks Refinancing

Anderson, its new chief executive officer, is struggling to shore up the hospital's finances. As a first step, he's attempting to refinance bonds that are costing the hospital as much as $500,000 in unanticipated interest charges each month.

At the same time, he is challenging Palomar and Scripps with promises of new satellite clinics, some building renovation and a $600,000 increase in his annual marketing budget.

He has taken the unorthodox step of suing Scripps, claiming that it is attempting to "steal" Tri-City patients with unscrupulous practices ---- a claim that Scripps officials vehemently deny. Anderson approached PPH about joining the lawsuit, but the district declined, Covert said in an interview, adding that PPH has a good relationship with Scripps.

Although Anderson tried to team up with PPH in the Scripps suit, he has rebuffed other opportunities to form partnerships with the rival district.

In the end, the most far-reaching question is whether public hospital districts crafted in the 1950s primarily to serve rural areas have a future in urbanizing areas such as North County.

While private hospitals did not seek rural patients here a half-century ago, the now largely middle-class and affluent, insured population is highly attractive to Scripps and Sharp.

Nathan Kaufman, a national health care consultant based in San Diego who says he has worked with most hospitals in the county, said that he believes PPH may survive, in part because of the new hospital and partnerships such as the Kaiser contract.

But he does not believe Tri-City will be operating independently in 10 years.

"A new hospital is necessary but not sufficient for them to succeed," he said.

"To get a new hospital, you have to demonstrate stable, consistent management and financial performance, of which they have neither." Tri-City's best option, he said, would be to merge with Scripps.

UC Santa Barbara professor H.E. Frech III, who teaches health economics, cautioned that hospital mergers can lead to consumers paying more.

"A common argument made by health care economists," Frech said, "is that when hospitals that are close geographically merge, that they gain market power and they end up charging more." The prospect of a shuttered or diminished Tri-City, one of North County's largest employers, stokes worry among local health, business and political leaders.

System in Balance

"All the hospitals say that if we lose anyone in the system, it's going to upset the whole balance of care in the county," said Kristen Garrett, executive director of Community Health Improvement Partners, a collaboration of San Diego County hospitals, doctors, clinics and county government.

Anderson insists that Tri-City will indeed be operating 10 years from now.

He said he doubts whether PPH or Scripps Encinitas will have the money to finish their new campuses. The new Palomar hospital, he added, is not likely to be finished.

"They're $200 million to $300 million short," Anderson said. "I don't think they can find the money."

Told of Anderson's comments, Covert said his district does have the capital to finish the new building.

"He's obviously not familiar with the specifics of our project and our finances," he said.

PPH is fast emerging as the dominant health care provider in a region stretching from San Marcos north to Fallbrook, which has a small public hospital district, south to Poway and east to Ramona and the Pauma Valley.

Tri-City Medical Center in Oceanside is facing competition on its own turf from several health care entities. (File Photo/North County Times)

Its new campus, the largest hospital project under construction in the state, will stand prominently at the busy intersection of the Interstate 15 and Highway 78 freeways.

The new hospital's design won a citation in a national competition in 2007, with one judge exclaiming, "How do you deny a shining city on the hill?" It was featured last fall in the magazine "World Health Design" and touted for encompassing new technologies such as operating room robots, electronic records and patient monitoring.

Wall-width electronic LCD panels in every room will act like huge computer home screens, reporting vital signs and allowing bed-bound patients to chat with their doctors, order lunch and read their e-mail.

PPH marketers are underscoring the "hospital of the future" message by partnering with well-known high-tech firms. They teamed up with Cisco to create an elaborate "Second Life" feature in which viewers create their own avatars to tour the new hospital building, at VirtualPalomarWest.org.

In April, PPH announced another partnership, this one with 23andMe, a Silicon Valley-based company named for the human body's 23 pairs of chromosomes.

Tailor-Made Genetic Medicine

The firm's genome analysis kit provides customers with a road map of how genetic markers shape their personal risk of specific health conditions. It was named Time magazine's 2008 "invention of the year," PPH noted when it began selling them for $399 apiece at its sites at two North County Albertsons supermarkets. It marked the first time that a health care group had sold the kits, 23andMe reported.

Scripps, too, is marketing itself as an innovator. In April, it unveiled its affiliation with the new West Wireless Health Institute, a think tank of scientists and engineers founded with a $45 million grant from the Gary and Mary West Foundation and sponsored by Qualcomm. The institute is focused on providing doctors with new wireless technologies.

It has its own genomics program, Scripps Genomic Medicine, which conducts reviews such as the study announced in August of whether women's likelihood of breast cancer can be pinpointed by newly discovered DNA variants.

By necessity, Anderson has been more focused on Tri-City's basic financial issues.

Since his January appointment as interim chief, Anderson has exhibited his aggressive leadership style by weathering a doctors' revolt and reducing the large showings of unhappy staff members at public board meetings.

He persuaded state officials to give cash-strapped Tri-City until the year 2030 to meet seismic deadlines to upgrade two of its oldest buildings. The original deadline called for two parts of the hospital to be repaired or replaced by 2013.

Anderson said in a recent interview that he foresees Tri-City gearing up for major work on the hospital building in 2015, probably with a new bond campaign. In the meantime, he hopes to renovate some facilities.

One such project: converting unused multiple-patient rooms into 30 single-patient rooms to serve orthopedic patients, among others. That would help Tri-City compete with the new Palomar and Scripps Encinitas hospitals, which will feature entirely single-patient rooms, even in their emergency departments.

Anderson is using a newly approved $2.4 million marketing budget to tout features such as the Carlsbad Wellness Center and hand-held scanners that Tri-City nurses are using to assure that patients receive the right medication at the right time. Tri-City is only the third hospital in San Diego County to use the scanners, which rely on a bar code system, Tri-City officials said.

Interest Expensive

But innovation requires money, and Tri-City's ability to lead in other areas of technology will hinge on whether it can refinance $57 million in auction-rate securities it sold to refinance old bonds in 2007. The financial crisis in the national economy pushed its interest rates above 10 percent and at one time as high as 18 percent.

Tri-City saw its financial fortunes plummet late last year and this year after achieving an $11 million profit in the 2007-08 fiscal year. It finished the last fiscal year with a sharp loss, hampered by the high interest rates and a drop in surgeries and deliveries caused by the recent switch of a 65-member doctors' medical group from Tri-City to Scripps.

Executives announced at an August board meeting that Tri-City lost more than $1.8 million in July alone, nearly $500,000 more than anticipated.

To date, Anderson has failed to refinance the securities through three commercial lenders and San Diego County. He has now asked Orange County for a loan, a move that would need approval from that county's Board of Supervisors.

Some health care leaders believe that both PPH and Tri-City should consider merging to create a single hospital district.

But no one thinks it will happen soon.

More likely are joint alliances such as the one that PPH's Covert negotiated with Kaiser.

When the new Palomar hospital opens, Kaiser will have a "capacity guarantee" of more than 100 beds throughout the PPH system. Both PPH and Kaiser officials say that those patients will never edge out regular PPH patients. The deal will help PPH pay for the new hospital, and Kaiser is freed from building a North County hospital to supplement its facility in San Diego.

PPH has forged other partnerships. It is working with Rady Children's Hospital in San Diego to provide pediatric care at its two hospitals. Unlike Tri-City, it has physician residency programs. And the district spent $2.5 million to build a nursing school for Cal State San Marcos and leases it to them for $1 a year. The hospital hired some of its first graduates this spring.

Covert's Previous Co-Op

In an interview in May, Covert described a partnership he helped forge on Florida's Gulf Coast when he headed the public district that owns 850-bed Sarasota Memorial Medical Center.

Covert teamed up with the CEO of a neighboring health district, Lee Memorial Health System, based 90 miles away in Ft. Myers to explore ways to purchase goods and services for both public health systems.

The result is LeeSar, a highly successful joint program, and Cooperative Services of Florida, a shared buying co-op that did $126 million in sales last year. Not only has it reduced costs, but its joint warehouses also free up valuable space at both hospitals. Now LeeSar has started providing meal service for Lee.The project saved money for both systems, said James L. Nathan, Lee's president and chief executive officer.

Is North County ready for this kind of cooperation? Covert has mentioned LeeSar as the type of program that PPH and Tri-City could pursue together.

Early this year, PPH board Chairman Bruce G. Krider wrote his counterpart on the Tri-City board, suggesting that they meet to discuss possible joint efforts. A short meeting led nowhere, and Krider wrote again on June 15, suggesting that the two boards "rekindle that dialogue to explore ways we could work together in a constructive and mutually beneficial way…. All board members here believe we need to include a close working relationship with Tri-City to fulfill our fiduciary responsibility to the public."

Anderson responded on an Aug. 6 news show on KOCT-TV, the Oceanside cable station, saying that this was not the time for Tri-City to consider such cooperation, and that his district was preparing a letter to PPH declining the offer.

"Frankly, we've been very busy here working on our financing, our turnaround," Anderson told the North County Times in a later interview. "It's my opinion that anything we tried to do with Palomar now would be distracting from our efforts." He is not ready to pursue a LeeSar-style program, since Tri-City is happy with its purchasing arrangements, he said.

As for PPH's June 15 letter suggesting broader cooperation, neither Covert nor his board have heard back from Tri-City.

North County Times reporters Paul Sisson and David Garrick contributed to this report.

CORRECTION

Sunday's story mischaracterized the funding of the new West Wireless Health Institute. Although Qualcomm is the group's technology sponsor, the institute was founded and funded with a $45 million grant from the Gary and Mary West Foundation. We apologize.

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Deborah Schoch

Senior writer Deborah Schoch reports on hospitals and health care delivery, nursing homes, environmental health and food. Her most recent articles have examined patient safety andhospital infections. She was a founding writer with the Center’s pilot project. Schoch spent 18 years as a staff writer at the Los Angeles Times, covering public health and the environment. She was a member of the Times newsroom teams that won Pulitzer Prizes for breaking news in 1992 and 1994. Schoch graduated from Cornell University and was a Nieman Fellow at Harvard University in 1999-2000, studying science, law and policy. Her work at the Center has won several honors, including first place in the 2010 Awards for Excellence in Health Care Journalism, from the Association of Health Care Journalists. She sits on the AHCJ board’s Right-to-Know Committee, which works to improve access to public health records.

© 2014 California Healthcare Foundation Center for Health Reporting

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