CalPERS Votes To Drop 38 of Most Costly Hospitals From HMO Network
In a move that is "expected to influence health care purchasing decisions nationwide," the California Public Employees' Retirement System on Wednesday voted to drop 38 of the most costly hospitals in its Blue Shield of California HMO network beginning in 2005, the Los Angeles Times reports. Officials for CalPERS, the third-largest purchaser of health care in the nation, said they voted to drop the hospitals in an effort to "keep a lid on premium hikes," according to the Times (Girion, Los Angeles Times, 5/20). Almost 35% of CalPERS' $3.9 billion in annual health care spending can be attributed to hospital costs (Appleby, USA Today, 5/20). Clark McKinley, a spokesperson for CalPERS, said that the organization's HMO premiums have increased 57% since 2002 (Berestein, San Diego Union-Tribune, 5/20). Nearly half of the cost of the premium increase was "driven by hospitals charges," according to Sean Harrigan, president of the CalPERS board. An analysis commissioned by Blue Shield indicated that some of the hospitals being dropped had proposed rates for 2005 that exceeded the statewide average by as much as 80% (Los Angeles Times, 5/20). Blue Shield Senior Vice President Paul Markovich said that its CalPERS hospital costs increased by more than 60% on a per-member basis over the two-year period through 2003 (Rundle, Wall Street Journal, 5/20). Sutter Health said its own analysis showed that its rates were competitive (Los Angeles Times, 4/20). On Wednesday, CalPERS and Blue Shield said they would give dropped hospitals 30 days to negotiate prices closer to the statewide average before the decision is finalized. McKinley said it is unlikely that all 38 hospitals voted out of the network will be dropped in the end, depending on how many decide to negotiate lower prices (San Diego Union-Tribune, 5/20). "We will try to bring more hospitals in" and "will continue to talk with Sutter," Harrigan said (Griffith/Chan, Sacramento Bee, 5/20). CalPERS is scheduled to make final decisions on benefits and rates for 2005 in mid-June (Los Angeles Times, 5/20). McKinley added that the California Department of Managed Health Care will have to approve all changes before they become final (San Diego Union-Tribune, 5/20).
The move to drop the hospitals is expected to save CalPERS $36 million in 2005 and $50 million annually after that. Of the hospitals dropped from the Blue Shield HMO network, 13 are part of Sutter, five are part of Sharp HealthCare, five are part of Catholic Healthcare West, three are part of Daughters of Charity and two are part of Tenet Healthcare. Most of the savings are expected to come from the Sutter hospitals, whose costs are "60% higher than its Northern California peers," according to Sid Abrams, chair of CalPERS' Health Benefits Committee. CalPERS' decision also could force as many as 53,000 members statewide whose physicians are affiliated only with excluded hospitals to find new providers (CalPERS release, 5/19). The Bee reports that observers disagree on whether patients will be able to find alternative providers easily in "an already stressed health care system." Bill Sandberg, executive director of the Sierra-Sacramento Valley Medical Society -- where a large percentage of the affected patients live -- said, "There isn't enough capacity [at local hospitals] to pick this many patients up this quickly" (Sacramento Bee, 5/20). CalPERS members who are Medicare beneficiaries will not be affected by the decision. Members who are currently undergoing treatment for a serious illness with providers who are dropped will be able to continue treatment. Members whose providers are dropped but who wish to keep their physician or hospital will be able to enroll in one of two preferred provider plans offered by CalPERS (CalPERS release, 5/19). On Tuesday, the health committee recommended a preliminary rate increase for 2005 for its Choice Basic PPO plan of no more than 7.7% to make it more affordable for members (CalPERS release, 5/18).
Harrigan said, "The time has come for this system to take a bold action. We have an opportunity to change the dynamics in the marketplace so that health care costs are more affordable for all Californians" (Chan, Sacramento Bee, 5/19). Abrams said, "If we continue to be held hostage to high-priced hospitals, many more people will be priced out of our program and forced into the growing ranks of the uninsured" (USA Today, 5/20). He added, "Our goal isn't to exclude hospitals or limit options for our members" (Wall Street Journal, 5/20). But hospital industry officials said CalPERS has misplaced the blame for rising hospital costs, USA Today reports. "CalPERS is attacking the symptom, not solving the problem," Jan Emerson of the California Healthcare Association, a hospital industry group, said (USA Today, 5/20). She added that CalPERS has "neglect[ed] to talk about" the fact that "hospital costs are in a great degree driven by external forces," such as state mandates for seismic retrofits and nurse-to-patient staffing ratios (San Diego Union-Tribune, 5/20). Sutter spokesperson Bill Gleeson called the decision "extremely unfortunate," adding, "We made a generous offer that would have reduced CalPERS' projected costs while preserving member access to our entire network. We were led to believe by CalPERS staff that our offer achieved their cost-savings parameters" (Sacramento Bee, 5/19). Tom Priselac, president of Cedars-Sinai Medical Center in Los Angeles, one of the hospitals being dropped, said, "This is being portrayed as having to do with the cost-effectiveness or efficiency of hospitals. Yes, hospital care is expensive. But it's not expensive because hospitals are somehow gouging the public." J.J. Jelincic, president of the California State Employees Association, said, "We felt that the disruption [to members] was not worth the savings" (Los Angeles Times, 5/20).
The Journal reports that the decision by CalPERS "is likely to reverberate nationwide because" the organization has long "been a pacesetter in the health care benefits arena" (Wall Street Journal, 5/20). "This is, in many ways, a bellwether action by CalPERS, which marks the future of where many large employers and health plans are going," Peter Lee, CEO of the Pacific Business Group on Health, said (Los Angeles Times, 5/20). According to USA Today, the move "could start a shift back to the smaller networks of hospitals common in the early days of managed care before backlash led most employers to offer a wide range of doctors and hospitals." Paul Ginsburg, president of the Center for Studying Health System Change, said the decision "could give more employers backbone in being willing to restrict their networks to avoid some high-priced facilities" (USA Today, 5/20). The vote also "sets a favorable precedent for insurers like Blue Shield," which have "blamed rising hospital costs for driving up the premiums that they in turn pass along to employers," the Union-Tribune reports (San Diego Union-Tribune, 5/20). "CalPERS is pretty influential ... This definitely could be a warning shot to other hospitals if they want to raise prices," Joanne Spetz, a health economist with the University of California-San Francisco, said (Sacramento Bee, 5/19).
In related news, the CalPERS board on Wednesday also voted to adopt a plan that would divide its membership into five regions and charge different rates for health coverage based on where members live (Los Angeles Times, 5/20). The move is part of an effort to retain members after public agencies representing 37,000 members withdrew from CalPERS at the beginning of the year, in part because they had negotiated lower health insurance premium rates with other health plans (California Healthline, 5/19). Competition among hospitals and lower labor costs has kept health care costs in Southern California as much as 40% lower than those in Northern California. As a result of the new pricing plan, members in the Los Angeles area could see their CalPERS premiums lowered by as much as 19% (Los Angeles Times, 5/20). Northern California members could see their premiums rise by as much as 9% to 11% (Silber, Contra Costa Times, 5/20). Abrams said, "Without regional pricing, Blue Shield tells us that 100 predominantly southern agencies and 100,000 enrollees might leave the CalPERS program in 2005 -- raising premiums statewide by as much as 3%. We needed to equitably and reasonably factor in the relative differences between the regions, and this plan does that" (CalPERS release, 5/19). KQED's "The California Report" on Thursday reported on the CalPERS' board vote (Margolis, "The California Report," KQED, 5/20). The complete segment will be available online in RealPlayer after the broadcast.This is part of the California Healthline Daily Edition, a summary of health policy coverage from major news organizations. Sign up for an email subscription.