Cottage and Sansum merger talks announced

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(Reprinted from the Santa Barbara Independent.)

The two chief executives of two of the biggest health-care providers in Santa Barbara County formally announced this Monday what the South Coast medical community has been whispering for the past six months: Cottage Health System is officially exploring merger talks with the Sansum Clinic. Speaking to a packed house of doctors at Cottage Hospital’s Burtness Auditorium, Cottage CEO Ron Werft explained he had signed a letter of intent to incorporate Sansum — with its 23 clinics, 180 doctors, and 1,200 employees—into the Cottage Health System with its three hospitals and rehab institute. Taking the stage with Werft was Sansum CEOKurt Ransohoff.

By combining forces, the two CEOs said in an interview afterward, Cottage and Sansum can “do a better job” controlling costs while providing better integrated health care at a time when the number of insured patients throughout Santa Barbara County is expected to jump by 25,000 come January 1, 2014, when the Affordable Care Act goes into effect. At that time, the basic economics by which health care is financed in the United States will undergo a drastic sea change. Medical providers will find themselves reimbursed less on the traditional fee-for-service basis, but more by a set dollar amount per patient, otherwise known as “capitation.”

The strategy behind this shift is to give medical providers a powerful financial incentive to focus on the total health of the patients and not so much on procedures provided. To meet this new demand, existing medical institutions must better coordinate the delivery of services, and to that end, Werft and Ransohoff said they signed the letter of intent to come together.

Although Sansum will become part of Cottage, it will retain its name. “Most people won’t even know there’s a difference,” said Ransohoff. Those most likely to feel it, he added, are patients with complicated health challenges requiring numerous hospitalizations coupled with extensive follow-up treatment upon release. By fusing the two institutions, the objective is to offer better “continuity of care” under one roof, economies of scale, better coordination, and better bargaining power with suppliers.

Both Werft and Ransohoff took pains to stress, however, that the merger was not designed to achieve better bargaining power with the insurance companies. “It’s about building a better mousetrap,” said Ransohoff, “not getting leverage.” To the extent they secured better terms with insurance providers, they argued, that advantage would come out of the hides of local businesses that pay their employees’ insurance. “It’s not about driving costs down,” said Ransohoff. “It’s about containing cost escalation.”

Two years ago, Ransohoff noted, there were only two nonprofit health clinics in California not affiliated with a hospital; today, there’s only one: Sansum. Although Sansum weathered the recession reasonably well, most of its clinics are old and in need of serious renovations. In the next five years, Ransohoff said Sansum has $97 million in major capital improvements. Sansum couldn’t hope to pursue such ambitious capital programs while at the same time wooing young new doctors to address what threatens to become a serious shortage of primary care doctors, exacerbated by the implementation of the Affordable Care Act.

But by merging with Cottage — a fundraising juggernaut — it could. Likewise, Werft noted that the state’s most robust and successful health-care systems involve both hospital care and clinics for outpatient treatment. Earlier this year, Sansum explored hooking up with major health-care chains, like Dignity, Sutter, and UCLA, but opted for Cottage. The two institutions share parallel histories dating back almost 100 years, and practically speaking, proximity matters a great deal.

In recent years, Santa Barbara’s health-care landscape has been defined by consolidation, mergers, and attempted mergers. Three years ago, in fact, Sansum and Cottage engaged in a similar courtship dance, but they backed off in the face of intense concern by the South Coast’s independent physicians that they would be excluded from the emergency room referrals upon which their collective clinics so depend. What’s new? “Three years passed,” said Werft. “The Affordable Care Act survived a Supreme Court challenge. We all know now that change is going to happen.”

In that time, Sansum has fused with the Cancer Center and started construction for a new outpatient surgery center that can compete for many of the surgical procedures needing no overnight hospitalization. Sansum managed to snag a new high-powered chief financial operating officer, Vince Jensen, from the City of Hope, and Werft, always a deft political operator, saw the writing on the wall; time to try again. But for round two, he said, some of the more controversial “restrictions” included in the first merger proposal have been deleted in deference to the independent physicians.

The proposed merger can’t help but heighten public concerns about the “M” word — monopoly — since St. Francis Hospital folded several years ago. In that time, Cottage has taken over not just St. Francis’s patient load, but it absorbed the Goleta Valley and Santa Ynez hospitals, not to mention the Santa Barbara Rehabilitation Center. With Cottage undergoing a massive reconstruction project and helicopters flying patients in and out, the hospital’s profile has never been higher, and not always for the better.

Werft makes no excuses for Cottage’s success, explaining that at Cottage, the term used instead of monopoly is “sole provider.” And as a sole provider, he noted, Cottage has managed to preserve the health-care missions of all the institutions it’s absorbed, while cutting the costs to make them economically viable. In the process, he added, employees have been retained and reassigned even as their positions have been eliminated.

Even with the merger, Ransohoff added, Cottage and Sansum will both remain nonprofit organizations run by their independent boards of directors. (A portion of each board will also serve on a new super-board.) Each, he said, would be made up of citizen volunteers “responsive to the local community, telling us what to do.” If the merger is ultimately approved — October is the target date — Ransohoff stressed, Sansum is not going anywhere, and it will still be called Sansum.

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