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As I said in my 1992 inaugural address, repeated in the opening section of this report, the true university must draw together and reinvent itself every day, and the days of a university are always "first days." At academic medical centers this has been true with a vengeance, and I am sorely tempted to exclaim: "Mercy! Mercy! I did not mean it literally when I said all days are first days!"

In the '80s, before my arrival, Stanford had separated its hospital from the medical school, leaving the faculty practice plan in the school. One of the reasons for giving Stanford University Hospital independent corporate status was the need to limit the university's exposure. Call this "First Day 1."

This step made it difficult to reconcile the priorities of the school with those of the hospital, especially as the institution was under pressure to contract on a basis that integrated inpatient with outpatient services. This is when "First Day 2" dawned.

In January of 1993, I convened a small working group to consider the consolidation of inpatient and outpatient services and the transfer of the faculty practice to the new integrated not-for-profit. "First Day 2" led to the formation of Stanford Health Services, which began operations on September 1, 1994.

"First Day 3" consisted of the implementation of this fairly ambitious undertaking. It was ambitious because only a reorganization of this kind makes you understand how Byzantine an institution a medical school can be after decades of incremental decision making. As somebody has said: If you want truly to understand something, try to change it.

As the marketplace became ever more of a jungle, we concluded that the crucial issue was the need for greater economies and greater market strength of academic medical centers. At this point, we began discussions with the University of California-San Francisco about merging our clinical activities. This is "First Day 4." It began in late spring/early summer of 1995. In parallel, we also negotiated integration of the Lucile Salter Packard Children's Hospital at Stanford, which, until then, was autonomous.

Since the summer of 1996, we have experienced "First Day 5," which covers the planning and go-ahead for the formation of UCSF-Stanford Health Care. A board has been constituted and a CEO, CFO, COO, and a Chief Medical Officer have been chosen.

In September, we approved the transaction, and after November 1, "First Day 6," the implementation phase will follow. I doubt, however, that we will be permitted to rest on the seventh day.

Stanford certainly has been willing to restructure and to take risks. Why? Because we are firmly committed to maintaining high-quality academic medicine in spite of the extraordinary exposures that have resulted from the marketplace and in spite of nerve-racking changes in government policies.

In 1959, under the leadership of then-President Wallace Sterling, Stanford relocated its School of Medicine from San Francisco to the university's main campus 40 miles south, where it had built, with the City of Palo Alto, the Palo Alto-Stanford University Hospital.

The move made sense for Stanford. The Santa Clara Valley was beginning to develop as a center of high-tech industries and President Sterling realized that the time was right for Stanford to become a major player in biomedical research. Beginning in the late 1940s, and through the 1950s, Stanford had begun to attract a small nucleus of notable medical researchers to the School of Medicine. By moving the school from San Francisco to the university's main campus, Stanford would be able to take the next step in becoming an active participant in the biomedical revolution. The move created many opportunities for significant collaboration between researchers at the School of Medicine and their counterparts in biology, chemistry, the other basic sciences, and various departments in the School of Engineering. In short, the richness of the physical, financial, and human resources at the main campus were exactly what the School of Medicine needed to transform itself from a respectable clinical institution into a leader in biomedical research.

The effects of the Medical School's relocation to Palo Alto are still felt today. The juxtaposition of Stanford's resources in the computational sciences to our School of Medicine allows researchers on both sides to carry out creative research and educational programs in the biomedical and biomechanical sciences. From collaborations of orthopedic surgery and mechanical engineering to projects combining chip technologies and molecular genetics, the capacity to create interdisciplinary excellences has been phenomenal.

Moreover, the 1959 move enabled the School of Medicine to become integrated with the rest of the university. Over the years, the medical school faculty has increasingly contributed to undergraduate and graduate programs beyond the Medical Center. No longer a distant stepchild, the Medical Center has become an active and contributing member of the greater campus community: The research it conducts, the education it imparts to its students, the clinical services it provides to the surrounding community, and the reputation it has developed as an esteemed academic medical center have all become intertwined with Stanford's overall identity.

However, while the benefits to the school, university, and community have been significant, the close relationship between the School of Medicine and the rest of the university has resulted in challenges with which Stanford is still struggling today. For example, difficult issues of faculty compensation and tenure confront all universities that have medical schools: The financial demands and institutional structure of medical schools usually result in appointment decisions and a faculty compensation structure that differ from those of the rest of the university. These issues are magnified when a school of medicine is closely integrated into its parent university--as is the case at Stanford, where medical school faculty members consider themselves to be identical, in terms of their status as professors and as members of the Stanford community, to their colleagues throughout the rest of the university.

The Medical School has also made the university vulnerable. Changes in the economics and delivery of health care have left universities such as Stanford in an uncertain and unfamiliar state, struggling to continue the mission of medical research, education, and patient care, while remaining financially afloat.

Academic medical centers can never compete on equal footing with other health care providers because they invest so heavily in a public good that for-profits cannot and will not afford. They are the repositories of the most advanced medical knowledge and treatment available. They quickly transfer lifesaving discoveries from their laboratories to the bedside. They educate and train the nation's future physicians. And institutions such as Stanford are the engines of the biotechnology revolution. Because of these extraordinary efforts, academic medical centers bear costs that competing health care providers escape. Without the support of extra-market funding sources--such as the federal government--academic medical centers cannot continue to invest in that form of human capital Americans otherwise prize so highly: health.

As an Association of American Medical Colleges task force on medical school financing recently reported, medical schools are vulnerable in the current economic environment of managed care, consolidation of providers, and price competition. The increased penetration and consolidation of managed care plans--especially in states like California--have the effect of capping hospital prices and directing patients away from higher-cost teaching hospitals to lower-cost health care providers. Moreover, managed care policies and other purchasers of health care services are extremely price conscious and unwilling to share some responsibility for the added costs associated with teaching and research. As a result, medical school faculty practices and teaching hospitals are now competing with other health care providers on an uneven playing field. As it stands now, Stanford Hospital is unable to cover the full costs on most managed care contracts.

By virtue of its location and position, Stanford has been on the front line in confronting this new health care environment. Managed care and the consolidation of for-profit health plans dominate the San Francisco Bay Area. More than 55 percent of the area's total insured population and 70 percent of the area's commercially insured under-65 population are enrolled in HMOs and preferred-provider plans. The area's Medicare population is increasingly moving into HMOs as well, with about 35 percent of Medicare beneficiaries now enrolled. Moreover, over the last decade, the California managed care market experienced the conversion of most HMOs from non-profit to for-profit status, as well as the extraordinary consolidation of health plans that has accompanied this conversion. In 1985, fifteen HMOs, most of them non-profit, competed in Northern California. A dozen years later, following many mergers, five giants--four of which are for-profit--dominate the market. Moreover, Stanford finds itself in a local health care economy with a considerable surplus of physicians and hospitals, where competition for "enrolled lives" is fierce. Stanford's market has more than 25,000 physicians, 80 percent of them specialists. At Stanford itself, specialists make up 96 percent of the medical faculty, a figure that does not bode well in a managed care environment where HMOs operate most efficiently with equal proportions of primary care physicians and specialists.

When I arrived at Stanford, one of the first things I realized was that the existing organization of the Medical Center--made up of disparate, decentralized institutions--was not structured effectively to respond to the fundamental changes taking place in the economics of health care. Thus, as I mentioned at the outset, I created and personally participated in a small task force to examine how the coordination and management of clinical services at Stanford could be improved, in order to respond rapidly and effectively to the changing market. In this effort, as throughout "First Day 2," Dean David Korn was crucial to its success, as has been his successor, Dean Eugene Bauer, subsequently. Other major contributors were Ken Bloem, Peter Van Etten, and, as a crucial volunteer, Isaac Stein, now a Stanford trustee and chairman of the board of UCSF-Stanford Health Care.

The end result of that examination was the creation of Stanford Health Services in 1994. SHS--a separate corporate entity with its own board of directors and president and CEO--integrated the business and clinical operations of Stanford University Hospital, the Faculty Practice Program that operated Stanford University Clinics, and the affiliated primary care groups. In January 1997, SHS completed an affiliation with the Lucile Salter Packard Children's Hospital on the Stanford campus.

The creation of SHS was necessary to improve the effectiveness, competitiveness, and economic viability of the clinical enterprise at Stanford. By eliminating the duplication inevitable with multiple service systems, SHS has streamlined operations, cut bureaucracy, and reduced paperwork. By lowering operating expenses, we have been able to lower our costs.

In the last two years, we realized that creating SHS was only the first step in strengthening our position in the changing health care marketplace. Like all universities with medical programs, we faced a number of options. Some academic medical centers have simply eliminated programs. Some are selling out to, or merging with, for-profit community-based delivery systems. Others--most recently George Washington University--are joining with for-profit hospital corporations and crossing their fingers that they will be able to retain their missions of public service. We decided a different response made more sense. Following an encounter (now known as "the walk in the woods") between then-Chancellor Joseph Martin, of the University of California-San Francisco, and me in the spring of 1995, we began, that summer, discussions with UCSF about merging our clinical activities.

The resulting new, non-profit private corporation, whose CEO is Peter Van Etten, former president of Stanford Health Services, is to unite the hospitals, clinics, and faculty practices at SHS and UCSF. The merger attempts to ensure highest quality teaching, research, and advanced health care in an increasingly competitive marketplace, and it is unprecedented on three levels.

First, it joins not just private and public hospitals, but private and public university medical centers. Although our two institutions have different cultures, we share missions and values, including providing the most advanced care in the world, teaching the doctors who will care for our children, and making lifesaving discoveries. And merged, our two institutions can pursue those goals more cost-effectively, through economies of scale and elimination of duplication--including de-escalating the equipment race, in which institutions are compelled to match their competitors MRI for MRI.

Second, the level of quality presented by the combination of UCSF and Stanford is, to use a term popular with today's students, "awesome." As a third-party review commissioned by the Regents of the University of California made clear, we will be more than the sum of our parts, going from leadership in six specialties each to leadership in twenty with our combined strengths. I am especially pleased about what this merger will do for the pediatric programs at Stanford and UCSF and the established excellence at Packard Children's Hospital. The combined program is expected to be the West Coast leader in specialty services for children.

And last, but by no means least, this partnership offers long-term potential, not just for outstanding patient care, but for joint projects between two leading medical schools. With closer coordination and cooperation in teaching, training, and research, we can strengthen even further our ability to move new medical treatments from the laboratory bench to the bedside. This translation of basic science discoveries into effective treatments thrives where the activities are side by side, in an academic medical setting.

Of course, nothing as complex and significant as the merging of two major academic medical centers is accomplished without serious difficulties along the road. Indeed, I have not been involved in anything more difficult in my professional life. The substantive issues that needed to be resolved were exceptionally complex. The two universities are very differently organized and, at times, interactions became quite strained. Furthermore, state politics made itself felt and menaced to thwart the undertaking.

The main political issue concerned the private nature of the merged corporation. Various developments threatened to bring us under legal regimes designed to hold government bodies accountable. Almost all participants in the negotiations were in essential agreement that, in order to survive in the extremely competitive existing health care environment, the merged entity needs to be private. I had emphasized this point from the outset and made it clear that, rather than enter into an arrangement that would be considered a "state government agency" or a quasi-state agency, Stanford would end negotiations and remain separate.

In meeting the perceived need for special public accountability due to the contribution of public assets by the University of California, Stanford has made substantial concessions while the parties have nevertheless succeeded in achieving private, non-profit corporation status for the new entity, or so it seems, as I write.

The two universities owe much gratitude to their faculties and staff for working imaginatively and in the spirit of cooperation to address our present dilemmas. On the faculties, in particular, many will have had and, indeed, will continue to have doubts about so radical and risky a step. Contrary to the frequently repeated cliché about risk-averse academics, the faculties eventually accepted the leadership provided especially by their deans, Dr. Bauer at Stanford and Dr. Haile Debas at UCSF.

Many American universities are conscientiously attempting to change the status quo in academic medicine and respond imaginatively, even daringly, to the challenges that have come our way. Indeed, what could be more daring than the cooperation of two universities--one private, the other public--that until yesterday thought of themselves mostly as competitors? We are truly seizing the present as made up of first days.

The size of the academic medicine establishment in the United States was not determined by natural law. The cutbacks we are facing do not interfere with God-given rights. However, it is also true that the United States' investment in the human capital represented by medical research and education has produced an extraordinary rate of return for health and the quality of life, not to mention the economy, in the United States and the entire world. It has taken decades to build up; it would take only a few years to tear down. As no less than the survival of entire institutions is at stake, it would be welcome if government were a more reliable partner than it often turns out to be.

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