Board of Supervisors
County of San Mateo

To: Honorable Board of Supervisors, County of San Mateo

From: Southern San Mateo County Task Force on New Hospital Construction
Re: Final Report on New Hospital Construction in Southern San Mateo County
Date: June 14, 2004

Executive Summary

This report presents the results of the Southern San Mateo County Task Force on New Hospital Construction. This summary highlights those results, including, first, factors driving new hospital construction, and second, Task Force recommendations.

There are four significant factors influencing new hospital construction: State law; the need to integrate new technologies and achieve new efficiencies; demographic changes; and economics.

Millions will be spent in rebuilding acute care facilities. Decisions made in the next few years will affect health care for multiple generations of San Mateo County citizens.

Given that background, the Task Force has identified four broad issues facing public leaders and hospital executives in Southern San Mateo County. Those issues are clarifying public interests regarding Sequoia Healthcare District funding; ensuring a workforce adequate in size and skill to meet future needs; providing access to affordable health care services, including particularly charity care; and monitoring the impact of future hospital construction or closure on health care access and cost.

This report discusses each of these issues in detail further below. In summary, here are Task Force recommendations regarding each of these four issues:

Sequoia Healthcare District

Workforce

Charity Care

Impact of New Hospital Construction

The rest of this report consists of the following parts: an introduction to the project; a discussion of key elements of community interest regarding hospital construction plans; Task Force recommendations; and an appendix listing supporting documents available on the County of San Mateo website.

Introduction

Background

State law (Senate Bill #1953, Statutes of 1994) requires all hospitals in California to meet new seismic safety requirements. The deadline for meeting these requirements has been extended to 2013, with additional changes required by 2030. In San Mateo County, only the San Mateo Medical Center already fully meets the standards set for both 2013 and 2030. To meet these new standards, Kaiser Permanente Redwood City and Sequoia Hospital are rebuilding their facilities. At the same time, the Palo Alto Medical Foundation is planning to build a first time acute care facility in San Carlos.

As hospitals embark on spending hundreds of millions building new facilities, the County’s prime concern is that separately planned projects meet the collective needs of the community. Specific community concerns include the following:

County leaders and the public want residents to have easy geographic access to quality health care within the County, or not have to travel great distances outside the County for care. All want this health care available at a reasonable cost. Accordingly, County leaders want to see fair competition among the hospitals serving Southern San Mateo County. Given economic and demographic realities, some constituencies are concerned that if one or more providers come to dominate the market, this could drive up costs for the public.

Description of the Project

Charter. To understand these issues, the San Mateo County Board of Supervisors on December 16, 2003 passed a resolution chartering the Southern San Mateo County Task Force on New Hospital Construction (for a copy of the resolution, please see Attachment #1). The objectives of the Task Force were to gather information, develop a set of policy recommendations, and share its findings with local government agencies and healthcare organizations. Its overall goal is to support well-informed decisions that assure quality health care for San Mateo County.

Membership. The Task Force was chaired by San Mateo County Supervisor Jerry Hill. In addition to Supervisor Hill, the Task Force included Supervisor Rich Gordon, Supervisor Rose Jacobs Gibson, and representatives of five of the eight communities affected, as follows:

Public Meetings. The work of the Task Force unfolded in five public meetings, which took place between February 4 and April 29, 2004. Meeting agendas are described below; notes for each meeting found in the appendix; and copies of all presentations are found in the attachments.

With the above introduction as background, we turn now to a discussion of what the Task Force learned about changing needs, hospital plans, and the key issues facing the County, taxpayers, and hospital executives.

Changing Needs

Even without the State’s seismic upgrade requirements, most hospitals would have to rebuild their facilities to deliver efficient, state-of-the-art health care in the 21^{st century.}

First, changes in technology and in the practice of health care make it expensive and inefficient to provide care in old structures. Such changes include the following:

Equally significant are demographic changes. As hospitals and the County consider the future, a central question is, "What will be the future need for acute hospital capacity in San Mateo County?"

Currently, the population of San Mateo County is about 707,000 people. Of that, about 76,000 people are hospitalized each year, which is about 11% of the County’s population.

Looking to the future, at the state level, by 2030 the population of California is expected to double. Locally, as of the last census in 2000, the population of San Mateo County was expected by 2005 to increase 6.7%, and by 2030, by 10.7%. However, the percent of the population that is over 65 is expected to more than double between the years 2000 and 2030, or a 108% increase. These County trends reflect national trends.

The overall population is aging. In the 20th century, longevity increased by 45 years. Seniors are accounting for a growing share of national acute care admissions. Nationally, the oldest of the old, those 85 and older, is the fastest growing segment of the population. For example, by 2010 the oldest old (85+) in San Mateo County will total about 17,000. Moreover, by 2030, those 65+ in San Mateo County will account for 27% of the total County population! The aging of the Baby Boomer generation and its impact on the make up of the population of San Mateo County will dramatically change the demand for healthcare in the County.

Conclusions

In summary, three conclusions stand out.

Hospital Plans

To meet the needs of a population changing in size and age, keep pace with changes in health care practices, and take better advantage of space and technology, planning is underway at all hospitals serving Southern San Mateo County. In many cases, these plans involve reconfiguring their number of beds. Please see below Table 1, "Licensed Acute Care Beds Now and Planned in Hospitals Serving Southern San Mateo County."

Hospitals in Southern San Mateo County

Kaiser Permanente Redwood City has a 5-phase plan through 2025. The first two phases are the most significant parts of the plan. Phase One consists of building a Clinical Services Building. Phase Two consists of building the Hospital and Central Utility Plant; the Administrative, Clinic, and Wellness Building; a parking structure; and a central open space and Redwood Creek walkway, all by 2011. By 2025, Kaiser projects that KPRC members will increase from 100,000 to 121,000, employees from 1,400 to 1,600; and physicians and providers from 185 to 201. Licensed beds will decrease from 209 to 192.

Table #1
Licensed Acute Care Beds Now and Planned
in Hospitals Serving Southern San Mateo County

Palo Alto Medical Foundation is planning to locate its new acute care facility in San Carlos. Palo Alto Medical Foundation’s plans include a full range of inpatient and outpatient services, including emergency services, cardiovascular services, and urgent care 365 days a year. These plans will enable them to provide integrated care for patients, and the new facility will add 110 new licensed beds within the County.

San Mateo Medical Center already meets the new seismic requirements, so no rebuilding is planned. It has 529 licensed beds, with 228 of those on the main campus. It currently has unused bed capacity.

Sequoia Health Services has just announced its building plans. It projects total licensed acute care beds will go from 421 to130.

Hospitals in Northern Santa Clara County

Neither Stanford Hospital and Clinics nor Lucille Salter Packard Children’s Hospital require major rebuilds. Both, however, are planning minor upgrades and expansions over the course of the next few years, primarily to improve patient services and conveniences. Stanford Hospital and Clinics serve approximately 190,000 patients from the eight southern San Mateo cities and employs 1,000 residents of those cities. Neither hospital expects any change in its total licensed beds.

In the event that beyond 15 years more beds are needed, all hospitals anticipate undertaking incremental expansions if and when required.

Discussion

In reviewing these plans, either individually or collectively, it is important to note the following. The current number of licensed beds in this community was based on the population 40-50 years ago. Since then, there has been a shift to outpatient care and shorter lengths of stay. Consistent with that, current hospital building projects are reducing beds and changing configurations of rooms to better serve current and future patient needs. The Task Force finds that the number of beds projected will be generally right-sized for the anticipated County population over the next 15 years.

Whatever the longer-term demand may be, in the shorter term the addition of another hospital serving Southern San Mateo County will affect each hospital’s market share. For example, Palo Alto Medical Foundation’s projected business model assumes the addition of 50,000 patient lives. Some of this growth may come from incremental population growth, but most of it would likely come from increased market share. The net result could be more hospitals but weaker hospitals.

While the bed numbers that hospitals are projecting appear to be right-sized, there are wild cards that cannot be predicted. Robust planning beyond 10 years is hard to achieve because of the uncertainty of the future of health care. Those uncertainties include the following:

Conclusions

In summary, the following conclusions stand out.

Having completed the above discussion of changing needs and hospital plans, we turn now to a discussion of the three key issues the Task Force identified facing taxpayers, hospital executives, and County leaders.

Sequoia Health Care District: Taxpayer Interests and Public Policy Issues

The purpose of this section is not to analyze District funding in detail, but instead to summarize key issues and present Task Force conclusions and recommendations.

Discussion

The District is funded by property tax revenue and now has (as of the close of 2003) assets of $64.7 million. When the District was formed, it both owned and operated a hospital. Today it does neither. The intended purpose of the tax supporting the District does not reflect the current reality of how that money is spent. In 2002, the San Mateo County Civil Grand Jury stated their belief that "District voters were unaware they were still being taxed to maintain a hospital that the District does not own."

Instead, the District uses taxpayer dollars to make grants to Sequoia Hospital and other community health organizations. These organizations include, among others, Children’s Health Initiative, Samaritan House Redwood City Medical Clinic, and Baccalaureate Nursing Program.

Catholic Healthcare West (CHW) has stated that they would like to continue to receive funds from the Sequoia Healthcare District, but that if CHW does not receive those funds, CHW’s rebuilding plans will continue to move forward without them.

The District’s current situation raises the following questions:

Conclusions

In summary, the following conclusions stand out.

Recommendation

The Task Force recommends the following:

Workforce: Future Workforce Supply

Most of the cost of operating a hospital is labor. If workforce shortages exist and hospitals compete for labor by raising pay, the cost of health care will go up. For example, in 2000-2001, operating costs for hospitals went up 8-9%, and labor accounted for 70% of the increase. Being able to compete for, recruit, and retain a workforce is key for any hospital. Hospitals compete in the recruitment of physicians; and in the recruitment and training of nurses and other licensed health professionals.

Physicians

The relationship of physicians and hospitals is symbiotic, so physician recruitment is a critical part of the success of any hospital. Several factors require hospitals competing in Southern San Mateo County to have a clear strategy in place to assure their ability to retain and recruit physicians.

First, recruitment of physicians in San Mateo County is a particular challenge for every hospital because of the high cost of housing. A typical single-family home in the County requires an annual income of about $133,000.

A second important factor affecting hospital planning is the aging of the physician workforce in the County. The average age of all physicians in the County is 52. However, in Southern San Mateo County hospitals, the average age is slightly lower. For example, at Kaiser Permanente Redwood City, the average age is 43. At San Mateo Medical Center, the average age of all physicians is 46. At Sequoia Health Services, the average age of primary care physicians is 47, and for specialists, it is 48. In the other three institutions serving Southern San Mateo County, the average age is similar; for example, at Palo Alto Medical Foundation, it is 43. As the general population ages, so too will the physician workforce.

Third, the hospitals serving Southern San Mateo County vary in their physician recruitment models. Kaiser Permanente and Palo Alto Medical Foundation have strong group practice models that allow them to recruit and retain their physician workforce. Packard and Stanford have academic affiliations, which essentially provide them with a captive audience.

Sequoia Hospital uses a traditional community physician model, which relies on community doctors in independent practice. While this model has been highly successful in the past, it may or may not work as well in the future. It may limit Sequoia’s ability to replace medical staff as they retire and to compete with other hospitals in a tighter labor market.

Another challenge facing Sequoia is that Palo Alto Medical Foundation has signed a letter of intent (LOI) with the cardiovascular group that has practiced at Sequoia for many years. The Sequoia Health Services cardiovascular program has accounted for 40% of the hospital volume and 90% of its profits. The LOI allows the physician group to continue practicing at Sequoia Health Services, but it could shift significant market share from Sequoia Health Services to Palo Alto Medical Foundation.

More than any other hospital, San Mateo Medical Center would feel the pressure of difficult workforce recruitment. They are tied to County compensation schedules, are heavily subsidized to provide indigent care, and hence would be unable to compete in a salary bidding war.

Nurses and other licensed health care professionals

The same challenges facing hospitals in competing for physicians also face them in competing for nurses and other licensed health care professionals. What makes the challenge harder is that workforce shortages already exist in these health care professions--both in the Bay Area and nationally--and are expected to become worse over the coming years.

Illustrative of the situation is the shortage in nursing. Nationally, the Health Care Advisory Board reports that (depending on whether one assumes conservative, moderate, or aggressive growth in the need for nurses) between 18% and 78% more Registered Nurses will be needed by 2010. California is already worse off than other states in that out of all 50 states, it ranks next to last in the number of registered nurses per capita.

This nursing shortage will become worse due to four factors.

Many more licensed health care professions also face shortages. In the Bay Area, in addition to the nursing positions, health care positions that are particularly hard to fill include the following: pharmacist, clinical laboratory scientist, medical laboratory technician, radiological technologist, radiation therapist, medical sonographer, X-Ray technician, nuclear medicine technician, personal and home health care aide, and office support professionals, including medical transcriptionist and medical records coder.

Again, as in the case of physicians, making these workforce shortages even more difficult to address in the Bay Area and San Mateo County is the high cost of housing. For example, a two-bedroom apartment in the County requires an annual income of $56,000.

Today, hospitals are managing with some difficulty to fill such positions. However, the addition of another hospital (Palo Alto Medical Foundation) in Southern San Mateo County will increase competition for these professionals. If hospitals have to pay more for these professionals, that will result in higher cost of care for all. The worst impact of rising workforce costs will be felt by San Mateo Medical Center, as it cannot compete with the private sector on compensation and most benefits. The retirement program available at San Mateo Medical Center is generous, but people have to be here long enough to get it. Many young nurses care more about salary than long-term retirement benefits.

Workforce Development Pipelines and Recruitment

In the face of these shortages, what are hospitals doing, and what more can they do?

Currently, hospitals use various approaches to attract, train, and retain the medical and health care professional staff that they need. Some, such as Palo Alto Medical Foundation, have strong vocational training partnerships with local community colleges. Some compete with sign-on bonuses. Some, such as Sequoia Health Services, recruit globally. While many hospitals have previously solved part of their nurse shortage problem this way, the shortage ahead will be local, national, and worldwide.

Given that, local training and education efforts become all the more important. Most schools have expanded their nursing programs, but it is still not enough. Inadequate to meet today’s needs, they certainly will not meet the anticipated future need.

Conclusions

In summary, the following conclusions stand out.

Recommendations

In light of the above, the Task Force recommends the following:

Access to Services

San Mateo County residents have access to outstanding medical care. The diversity and quality of the six major medical institutions serving Southern San Mateo County is exceptional. All six institutions made two different presentations to the Task Force, and the Task Force is especially appreciative of their support for its effort.

In looking at access, the Task Force looked at five areas: range of services available, geographic access, emergency room access, meeting multicultural needs, and access to charity care. Of the five, charity care is the area in which the County faces the most significant challenges. Comments on each of the five areas are as follows.

Range of Services

Together, the six major medical institutions serving Southern San Mateo County offer a rich range of choices in all aspects, including cost and types of care available, all of it high quality. Here are highlights of what each institution offers. For more detail, see the attached hospital presentations.

Geographic access

Southern San Mateo County residents have easy geographic access to hospital-based health care. When most hospitals were built, El Camino Real was the primary traffic corridor on the Peninsula. As a result, most hospitals were built in what have since become residential or suburban neighborhoods. Now the primary corridors are Highways 101 and 280, but all hospitals are easily accessible from both.

The Task Force discussed with hospital representatives the former Bay Meadows racetrack as a possible hospital site. This location has the advantage of being central to the entire County. The site is large enough either for the new Sequoia Health Services hospital, or for a combined hospital for the two Sutter affiliates, Mills-Peninsula in the North County and the new Palo Alto Medical Foundation facility in South County. However, this site does not fit hospital plans: Sequoia will use its current site, to serve its existing client base in and around Redwood City; and Palo Alto Medical Foundation will build in San Carlos, to serve existing and future clients in Southern San Mateo County.

Emergency services

Kaiser, San Mateo Medical Center, Sequoia, and Stanford all provide emergency room service. Lucille Packard does not. Palo Alto Medical Foundation does not in its clinic, but will in its new hospital. It should be noted that emergency services are not mandated to be part a hospital’s service offerings. Emergency departments are expensive to run, so there is no guarantee in the future that they would always be part of every facility. If a hospital has an emergency room, then by law it is required to provide emergency services to all patients who arrive there.

Meeting Multicultural Needs

All hospitals participate in regular 3-year assessments of community needs, and all have various programs in place to address needs significant in the communities they serve. For example, all hospitals have medical, nursing, and other health care professionals on staff that speak multiple languages, particularly those most common in the populations they serve. In addition, all have arrangements that allow them to provide interpretative services for emergency, clinical, and administrative needs.

More significantly, each institution has programs designed to address important needs of specific community groups, although the groups served vary from one institution to the next. For example, Kaiser provides support to the San Mateo County Children’s Health Initiative. Palo Alto Medical Foundation has a program focusing on diabetes in the Latino community. Sequoia has programs for kids in smoking and obesity, and one for seniors on fall prevention.

The above examples are only a few of many that all six institutions mentioned in their presentations to the Task Force at Meeting #5, April 29, 2004. For more detail, please see Attachment #13.

Charity care

As the Task Force did its work, charity care emerged as a far more significant issue than the Task Force realized when it began. Providing charity care poses the most significant challenges to the County in continuing to provide access to health care for all residents. These challenges come about as a result of the intersection of legal requirements, government funding limitations, rising costs, and increased workforce competition.

In looking at charity care, the Task Force identified three key questions:

Consistent with legal requirements, San Mateo County is committed to assure access to health care services for all residents of the County. California Welfare and Institutions Code Section 17000 defines the obligation of all counties and cities to provide medical care for residents without other means of support:

The citizens of San Mateo County have already committed to the current level of care and support in both bad times and good times, by virtue of rebuilding San Mateo Medical Center several years ago.

The term charity care as used here means unreimbursed care. It is not under-funded care, such as Medi-Cal. In San Mateo County, charity care has been born almost exclusively by the County. San Mateo Medical Center provides 95% of charity care in the County. To help provide this care, San Mateo Medical Center receives an annual subsidy from the County General Fund, which for the most recent year totaled $52M.

This status quo is not sustainable for San Mateo Medical Center. San Mateo Medical Center’s payer mix is 97% government funded. Given threats to County, State, and Federal government funding, and the County’s specific financial problems, the revenue stream is very much in jeopardy. In order for San Mateo Medical Center to continue, it will have to find new sources of revenue. Or, alternative means of funding must be provided: such alternatives might include additional taxes, cash support from private hospitals, in-kind contributions, etc.

Historically, as non-profit institutions, many with a religious affiliation, nearly all hospitals participated in providing charity care. Over time, this behavior has shifted. Today, most hospitals are maintaining their non-profit status by contributing to the community for the community’s benefit. Examples include participation in health fairs, community education, mobile vans, etc. They are doing this in lieu of any significant contribution to charity care, despite logging high profits and maintaining large reserves. For an indication of the relative magnitude of these net gains and fund balances, see Table 2, "Net Gain (Loss) and Fund Balance of Hospitals Serving San Mateo County."

Table #2
Net Gain (Loss) and Fund Balance of Hospitals Serving San Mateo County

Conclusions

With regard to access to hospital-based medical and health care services, particularly charity care, the Task Force reached the following conclusions:

Recommendations

In light of the significant crisis that will soon face the County in the area of charity care, the Task Force recommends the following:

Impact of New Hospital Construction on Hospital Market Share

What will be the impact of the addition of Palo Alto Medical Foundation’s new facility in the Southern County on the ability of existing hospitals to hold market share and remain financially viable?

While only the future will tell, we know some of the factors that will shape the answer to that question. Those already discussed above in this report include the following:

Another major factor, not discussed above, is the cost of providing care. Due to the special populations they serve, three hospitals have higher costs of care than the typical hospital. Those three are Stanford, Lucile Packard, and San Mateo Medical Center.

Stanford and Lucile Packard hospitals have exceptionally high patient acuity—they see the sickest of the sick. High acuity care is more expensive due to higher costs of technology, higher nursing ratios required in intensive care and post-surgical care, higher levels of experience of staff providing care, etc.

In addition, teaching programs such as those at Stanford and Lucile Packard are expensive. Not only are such programs core to the academic mission, but the community depends on these programs to train a portion of the primary and specialty care physicians who will be part of the County’s future. With more local competition, one of the results could be increased cost to the consumer in order to sustain these programs.

San Mateo Medical Center has high costs due to providing care to a specialized population. This is also a higher acuity population, often with multiple problems. This population requires multiple languages and multicultural competence, social services, and skills with homelessness, lack of literacy, infectious disease, victims of violence, and the severely mentally ill, etc. Of the three hospitals that have higher costs because of the populations they serve, San Mateo Medical Center is the only one that must rely on public funding. San Mateo Medical Center has begun efforts to generate more private-pay funding revenue. While difficult now, increased competition for the private-pay health care dollar could make it far more difficult for San Mateo Medical Center to generate such revenue and use it to remain financially viable.

Conclusions

In summary, with regard to the potential impact of new hospital construction on hospital market share, the Task Force has the following conclusion:

Recommendation

In light of the unknown impact of future developments on hospital competition and market share, and hence on health care access and cost in Southern San Mateo County, the Task Force recommends the following:

Concluding Summary

In final summary, the Task Force’s recommendations are as follows.

Sequoia Healthcare District

Workforce

Charity Care

Impact of New Hospital Construction

Appendix

The following documents are included in this report by reference only; they are not physically attached. Instead, they may be found on the County of San Mateo’s website, as follows: