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When Richard Polheber came to Sonoma County last fall to interview for Palm Drive Hospital's top post, the veteran hospital executive said he was surprised to see such a small region supporting so many hospitals.

Polheber had spent many years working in Tucson, Ariz., where only four hospitals served the needs of a metro-area population of about 1 million. Sonoma County, with less than half that population, has three major hospitals and four smaller district hospitals.

The math simply didn't add up, he said, and there was little chance a small hospital like Palm Drive could survive by duking it out with the area's heavyweights: Kaiser Medical Center, Santa Rosa Memorial Hospital and Sutter Medical Center.

"When I interviewed here, I told them I don't believe in competition," said Polheber, who is now Palm Drive's CEO, adding that he made it clear he was a collaborator, not a fighter.

And yet a highly competitive battle is being waged by Santa Rosa's three major hospitals, a fight for paying patients that is causing district hospitals across the county to forge alliances with larger hospitals, physician groups or community health centers.

The moves are driven by the growing pressure to contain operating costs, the evolution of the health care industry — from high-cost hospital beds to outpatient care — and significant changes in the way hospital services will be reimbursed under the new federal health care law.

Meanwhile, the race to capture the pool of patients with private insurance not already covered by Kaiser is heating up as Sutter Health moves forward with the region's first hospital in 20 years and Memorial Hospital continues to move forward with innovative medical initiatives and services.

For Sutter, the state-of-the-art, $284million facility could usher in a new era for what has been the oldest of the area's hospitals. That metamorphosis has brought worry and fear among some district hospital executives.

When asked if the new hospital would put other local hospitals out of business, Mike Purvis, Sutter's chief administrative officer, said, <NO1><NO>"not intentionally.<NO1><NO>" He added that <NO1><NO>small hospitals are at greatest risk because they are designed to operate under the old hospital model, a system that could be toppled by the Affordable Care Act and other health care trends.

In September, less than a week after Sutter Health broke ground on its county-approved medical center north of the Wells Fargo Center for the Arts, Healdsburg District Hospital, Palm Drive and the California Nurses Association filed a lawsuit against the county and Sutter Health. They claimed the new facility was poorly placed and would result in the "down-sizing or closure" of district hospitals and other medical facilities.

Evan Rayner, Healdsburg District Hospital CEO, would not comment on the status of the pending lawsuit. Purvis acknowledged the growing rivalry.

"It's a very competitive market," Purvis said. "And how it feels is I have to be on the edge of my seat."

The stakes for hospitals are high, as illustrated recently when a community adviser to the finance committee of the Palm Drive Hospital board publicly decried efforts to keep the 37-bed hospital open.

George Moskoff, a Sebastopol business consultant, and other critics said the hospital, six months after emerging from bankruptcy, continues to bleed money. They argue that although 60,000 residents live within the hospital district and subsidize its operations through a parcel tax, the majority are Kaiser-insured and another large portion are treated by physicians affiliated with Sutter Health.

Hospital officials and members of the Palm Drive Hospital board dismissed the criticism as unfair and extreme. They said the operating losses have been clipped by $2 million each year since 2007.

Tomorrow's partnerships

<MC>Last November, Healdsburg District Hospital announced that it was forming a partnership with St. Joseph Health System, the nonprofit health care system that operates both Memorial Hospital and Petaluma Valley Hospital. At the time, executives at the two hospitals said the pact would provide a framework for jointly recruiting physicians, developing integrated clinical systems, entering into new business ventures and conserving resources.

A key to understanding what that means lies in the way the federal Affordable Care Act seeks to overhaul the health care system.

The federal government has focused on hospital costs, transitioning payments toward a performance-based system. The new law financially rewards doctors and hospitals that can deliver improved care to Medicare patients for less money — and it punishes those who can't. It calls for greater collaboration and partnership among physician groups, hospitals and clinics to form what's known as "accountable care organizations" that share the responsibility for caring for Medicare patients, as well as the savings achieved.

When the government first enacted Medicare in 1965, hospitals were reimbursed on a cost-per-service basis. But after Medicare budgets ballooned, a new payment system was implemented in the mid-1980s, whereby hospitals were paid fixed, predetermined rates for specific medical conditions.

By the time the new Sutter Medical Center opens in 2014, almost 56,000 Sonoma County residents would become eligible for coverage under the new health care law, according to a new report by the UCLA Center for Health Policy Research. Hospital officials say the money to pay for the health coverage of 32 million people nationwide will come from reduced Medicare payments to hospitals.

"We're all going to be more focused than ever on the cost side of things," said Kevin Klockenga, president and CEO at St. Joseph Health System-Sonoma County.

At a health care conference in Santa Rosa late last year, Klockenga warned of more "hospital closures" and consolidation.

"A lot of independent hospitals will be joining up with systems and there will probably be systems emerging within systems as we go forward," he said. "It's all going to be required to be successful as we move forward."

Even before President Barack Obama's administration drafted the first statutes of the Affordable Care Act, local hospitals had been moving toward a more integrated approach to patient care.

Both St. Joseph and Sutter Health have been aggressively recruiting for their affiliated medical practice foundations, St. Joseph Heritage Healthcare and Sutter Pacific Medical Foundation.

Sutter's foundation contracts with Sutter Medical Group of the Redwoods, which has grown from fewer than 30 providers to more than 87 doctors and 15 nurse practitioners<NO1><NO> between 2006 and 2010. The Annadel Medical Group, which is affiliated with St. Joseph, has added 13 doctors in the past eight months and is expected to grow to 38 providers by the end of June, Klockenga said.

Though the exact details of the alliance between Memorial Hospital and Healdsburg District Hospital are still being hammered out, Healdsburg officials said the hospital hopes to benefit from Annadel's growth, as well as the pooling of unique medical services operated by the hospital.

"One of the ultimate goals is to better align physicians and hospitals in way that suits health care reform," said Evan Rayner, CEO of Healdsburg District Hospital.

Almost three years ago, after a 14-month courtship, Sutter Health and St. Joseph dropped plans that would have allowed Sutter to get out of the acute care hospital business in Sonoma County. The plan would have transferred Sutter's county contract for public medical services to Memorial Hospital.

Instead, layoffs followed at both the Sutter and St. Joseph facilities, Memorial's immediate expansion plans were put on hold and Sutter went back to the drawing board, mapping out a competitive strategy that included building a new hospital.

What the future holds

At the junction of Mark West Springs Road and Highway 101, a 10-foot-high mound of earth sits like the first stage of an Egyptian pyramid. The site eventually will give way to an 183,000-square-foot hospital with 82 licensed beds — all in private rooms — and a 24-station "universal care unit" that hospital officials say will expand the facility's overnight bed capacity to 116 beds.

Just south of where the Sutter Medical Center is being built, Kaiser's Santa Rosa operation — which includes the medical center on Bicentennial Way and the Stein Medical Campus on Old Redwood Highway — is the medical home to some 140,000 county residents. They make up 44 percent of county's population that is privately insured, according to Kaiser estimates.

Kaiser adds thousands of new members every year, though the number of members Kaiser or the government subsidizes is also growing. Since October 2009, Kaiser has added 6,600 members under the county's new managed-care Medi-Cal plan. Another 25,000 Kaiser members are on Medicare, and 4,202 kids are now enrolled in Kaiser's low-cost Child Health Plan.

Growth for the sake of growth is not the goal for the future, said Judy Coffey, senior vice president and area manager of Kaiser operations in Marin and Sonoma counties.

"I want to do the best for the members we have," Coffey said. "I don't want to bring in thousands ... and not give them good care."

At Sonoma Valley Hospital, new CEO Kelly Mather has spent her first six months examining ways to partner with a larger hospital and medical group and has looked farther south, into Marin County.

In December, the hospital joined the Prima Medical Foundation, a nonprofit group formed five months earlier by Marin General Hospital and the Marin IPA physicians group.

"Our best choice is to align with Marin General," Mather said.

Like Palm Drive, Sonoma Valley Hospital uses a significant portion of the tax it derives every year from the hospital district to cover operating expenses. She said the district generates between $3 million to $4 million in parcel taxes.

Mather said she hopes the new alliances, as well as a $31 million investment to build a new central utility plant, a new emergency department and surgery wing, will make the hospital more competitive.

"I'm hoping to get to the point where we're not going to be using the parcel tax," she said. "Our goal is to eventually make $2 million a year."

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