CalPERS Considers Plan To Eliminate Coverage at 45 Hospitals

CalPERS on Wednesday "jolted the health care industry" by announcing a plan to save about $72 million in premiums by eliminating coverage for its beneficiaries at 45 of California's most expensive hospitals, with about $53 million of the projected savings resulting from ending coverage at 15 Sacramento-area hospitals owned by Sutter Health, the Sacramento Bee reports. CalPERS, the nation's third largest purchaser of health care with 1.2 million beneficiaries, "singled out" not-for-profit, Sacramento-based Sutter Health because the pension fund's trustees said that prices at the health system's hospitals were 80% higher than the average costs at hospitals statewide. According to the Bee, CalPERS officials say that Sutter uses its market dominance in some areas to require insurers to include all of the chain's 26 hospitals to maintain agreements at an individual facility. The Bee reports that CalPERS initiated action against Sutter after Blue Shield of California -- a health plan that contracts with CalPERS -- audited the cost and quality of care at facilities owned by Sutter, Tenet Healthcare and Catholic Healthcare West. CalPERS officials hope to use the audits to create an "exclusive, pared down hospital network" for its HMO members in 2005, the Bee reports. Blue Shield officials said that based on the results of the audit, Tenet and CHW agreed to negotiate a deal for 2005 that would allow CalPERS to end coverage at some facilities owned by the chains while retaining coverage at others. However, Blue Shield officials said that Sutter refused such an agreement. "For CalPERS' exclusive network to be effective in 2005, Sutter would need to agree to changes in its contract with us allowing for some hospitals to be eliminated," Paul Markovich, who handles the CalPERS account for Blue Shield, said. "Sutter has not agreed to this or shown any willingness to discuss this," he added.

The Bee reports that the proposal to eliminate coverage at the 45 hospitals currently is not scheduled for a vote, but trustees are expected to discuss the issue in March, in time to vote on any changes before setting HMO premiums for 2005. CalPERS President Sean Harrigan said that the pension fund should take "every aggressive action possible" to stop Sutter from using its "monopoly hold on some markets" to demand higher prices. He added, "Every citizen in the state of California should be outraged by Sutter." CalPERS officials also said that they might seek legislation to regulate hospital prices or ask the state attorney general to explore antitrust actions against Sutter. If the plan to eliminate coverage at the 45 hospitals is adopted, as many as 100,000 CalPERS members statewide -- including 40,000 in the Sacramento area -- might have to find new primary care doctors and hospitals.

Pat Fry, chief operating officer for Sutter, said, "I am frankly astounded by CalPERS. I don't understand how charges of being a monopoly can be made against us when we have repeatedly told them we are willing to sit down and negotiate with them." Sacramento-area doctors and hospital executives said that there are not enough primary care physicians or hospital beds for all of the CalPERS members who might be forced to leave Sutter, the Bee reports. William Sandberg, executive director of the Sierra Sacramento Valley Medical Society, said, "It would be a catastrophic problem for CalPERS members here." David Divine, personnel director for the city of Folsom, which buys health care from CalPERS, said, "I just don't know how you balance the savings against the reality that patients will have a harder time seeing the doctor." However, Peter Lee, president of the Pacific Business Group on Health, said, "CalPERS is doing the right thing in raising (this) debate about whether hospitals are cost effective," adding, "If they follow through, it could help us get to a health care system where hospitals are forced to compete for business based on the quality and price of care." Joshua Raskin, a managed care analyst with Lehman Brothers, said, "If CalPERS went ahead, it could tip the scales in favor of health plans in negotiating rates with hospitals, which could have the effect of lowering insurance premiums for workers and employers" (Rapaport, Sacramento Bee, 2/19).