Stanford Health Care plans to mount a legal challenge to block a union-backed initiative that would cap how much medical institutions in Palo Alto can charge for patient services, according to a letter that Stanford's general counsel submitted to the city earlier this month.

On Monday night, the Palo Alto City Council will consider whether to do the same.

The measure, which is being spearheaded by the Service Employees International Union-United Healthcare Workers West, would prohibit local medical facilities -- including Stanford -- from charging patients more than 15 percent of what it costs them to provide care. Known as the Palo Alto Accountable and Affordable Health Care Initiative, the initiative received more than 3,500 signatures (it needed 2,407 valid signatures to qualify). Earlier this week, the Santa Clara County Registrar of Voters verified that the initiative has more enough signatures to get on the November ballot.

If approved by the voters, the initiative would require hospitals to issue an annual rebate to payers for services "in excess of the acceptable payment amount of these services," which is defined as 115 percent of the sum of "reasonable cost of direct patient care." The initiative would also require all hospital and medical clinics to submit to the Administrative Services Department information about the "reasonable cost" of patient care for each patient to whom services were provided that year, as well as information about every instance in which a rebate or a reduction has not been issued in full (as well as reasons).

The union has argued that the initiative will limit overpricing and incentivize improved quality of health care. Some health care providers, the union alleges, charge patients as much as 600 percent above cost -- overcharges that get passed on to consumers in the form of higher premiums, co-pays and other out-of-pocket expenses.

The initiative's stated aim is to provide "orderly regulation of hospitals and medical claims."

"The prices charged to patients and other payers have far-reaching effects on consumers purchasing insurance and taxpayers supporting public health and welfare programs," the initiative states. "Investments in quality of care improvements can benefit patients and caregivers, and ultimately result in lower overall health care costs."

"For these reasons, this Chapter seeks to impose reasonable limits on prices that hospitals and clinics may charge and encourages further investments in health care quality improvements," the initiative states.

But Stanford charges that the union's bid to rein in prices is illegal and unconstitutional. In a letter to Palo Alto City Attorney Molly Stump, Stanford's Chief Hospital Counsel Sarah DiBoise wrote that the hospital believes the initiative is "facially invalid and an improper exercise of the initiative power."

"If the Palo Alto city clerk certifies the sufficiency of the signatures submitted in connection with the Initiative and the city council votes to place the initiative on the ballot, Stanford intends to challenge the validity of the measure," DiBoise wrote. "We hope that, rather than place the Initiative on the ballot, the City of Palo Alto would join us in that effort to stop this unconstitutional and otherwise unlawful measure from appearing on the ballot."

The SEIU rejects these arguments. Stanford's threatened legal challenge is a "desperate attempt to stop an initiative they don't think they can defeat at the ballot box," SEIU spokesman Sean Wherley told the Weekly in an email.

"It's a typical attack we've seen with other initiatives: challenge it up front to try to keep if off the ballot, and when that doesn't work challenge it in court after it passes," Wherley wrote. "We are confident that the ballot initiative is constitutional and is not pre-empted by existing state and federal law."

The union has submitted similar initiatives in Redwood City, Pleasanton, Livermore and Emeryville. So far, Emeryville is the only city that has opted to legally challenge the initiative on due process and pre-emption grounds. Emeryville had also requested a stay from the court that would allow its City Attorney to not submit a ballot title and summary.

On Monday night, before its regular meeting, the Palo Alto council will meet in a closed session to consider whether it should follow Emeryville's example or consider other legal options. City staff, for their part, see some reasons for concern about the SEIU initiative. A new report from the offices of City Manager James Keene and City Clerk Beth Minor argues that the measure "raises significant issues as to its legal validity based on federal and state law pre-emption," the SEIU's assertions about the measure's legality notwithstanding.

"Health care pricing and reimbursement are complex areas of regulation that are addressed by several federal and state laws," the report states. "Cities cannot regulate by local ordinance in those areas that the state has fully occupied either expressly or impliedly, or where the local ordinance would conflict with state law."

There's also the more practical question of who will enforce the law. The initiative charges the Administrative Services Department with gathering the information and implementing the new regulations. But officials readily admit that the city currently does not have expertise or experience in the realm of health care. If the measure was to pass, the city would need to "establish and identify funding for an administrative structure to implement this program," the staff report states.

Because this would be a new function for a local government, it's not clear how much it would cost to take on the new responsibility and how much it would take to set up the regulatory framework, according to staff.

Wherley countered that the costs to cover the initiative can be offset through funds that the city will assess against violators. It's up to the citizens of Palo Alto, he said, to decide "if they want their city to take a lead in ensuring quality and affordable health care."

Then there is a broader concern about what the initiative would do to medical practitioners in Palo Alto. According to DiBoise, Stanford's preliminary calculations indicate that the initiative's implementation would result in a revenue decline of between 20 to 25 percent, which she said is "many times greater than Stanford's margin."

"As a consequence, Stanford would have to implement cuts to its staffing and benefit levels, facilities, and/or programs to avoid violating the statute and incurring still greater expenses in the form of finds and interest on rebates required by the Initiatives."

In the new report, city officials raise concerns about the impact that the measure would have on the local medical sector, which they say is "a significant part of Palo Alto's Vibrant Economy." If they realize the types of revenues that Stanford expects, some will likely leave the city, the staff report states.

"To the extent that this type of result would apply to other providers, and the uncertainty inherent in navigating this new system, it is possible, if not likely, that a fair number of providers would elect to relocate their practices," the staff report states.

And while the SEIU maintains that the measure would reduce costs and improve accountability, city officials are concerned that in doing so, the measure may also deprive residents of options. The report notes that staff cannot at this time quantify the impact of the initiative on residents. The report notes that residents who use affected medical providers "could experience a decrease in their health care costs."

"If these service providers left Palo Alto, however, those cost reductions would not occur and city residents would need to travel further to obtain medical services," the city report states.

The SEIU, however, rejects this argument as a "scare tactic" from an opposition that "does not want to address the real issues."

"In essence they are saying that they're willing to uproot themselves if they can't continue to price gouge," Wherley said.