CalPERS Gets Tough With Hospitals

It looks like a new era of hard bargaining is beginning between health plans and hospitals.

The California Public Employees Retirement System is leading this trend. As the third-largest purchaser of health care benefits in the nation, CalPERS is taking a hard line with hospitals identified as high-cost service providers in a Blue Shield of California report. CalPERS then dropped the hospitals from its Blue Shield of California HMO network, which could cause as many as 53,000 of CalPERS’ 1.2 million members to change primary care physicians or join a higher-cost preferred provider organization plan in 2005. CalPERS initially said it was dropping 38 hospitals from the HMO network, but later restored 10 of them.

CalPERS is aware of the potential service disruptions. “We know that people do not want to change family doctors and that this is important to them,” Clark McKinley, a CalPERS spokesperson, said. CalPERS says the network of hospitals and doctors that will remain in the Blue Shield HMO network should be able to absorb the members affected by the change.

To make sure that their health insurance will pay for hospital treatment, CalPERS HMO members will have to find new primary care physicians if their current doctors are affiliated only with one of the 28 hospitals slated to be dropped from the network. If a hospital is dropped from a health plan network, doctors can keep referring patients there, but health insurance will not cover the costs.

But CalPERS already has received letters of complaint and concern from state legislators whose constituents are concerned about having to find new primary care physicians.

The roster of dismissed hospitals includes 10 in the San Francisco Bay area, seven in Los Angeles, five in San Diego and four in Sacramento. The biggest impact is on Sutter Health, from which CalPERS dropped 13 hospitals. Four on the list are owned by Catholic Healthcare West. Cedars-Sinai, one of the most prominent facilities in the Los Angeles area, also is slated for elimination from the HMO network.

Hospitals account for one-third of all health care spending, so any steps that curb hospital spending can generate significant savings for employers, including the government agencies that purchase health care benefits through CalPERS. Because it ranks behind only the federal government and General Motors in health care spending, CalPERS is closely watched by other buyers both in government and industry for methods of controlling health care cost increases.

CalPERS claims the changes in its hospital network will save as much as $36 million in premiums for 2005, and as much as $50 million in the future in part because more HMO members will be treated at lower-cost hospitals.

CalPERS a Pioneer in Cutting Costs

Very few health care buyers have previously dared go down the road CalPERS is traveling, according to Tom Morrison, a senior vice president for Segal Co., a benefits consulting firm. “With CalPERS entering the fray, this issue makes a bigger splash — they get the publicity,” Morrison said.

Some health plans have begun experimenting with “tiering,” requiring higher copayments when a member uses a high-cost facility. But these efforts are still rare, according to Morrison.

CalPERS’ action should not be considered a surprise, but rather a logical step by a frustrated health care buyer, Morrison said. “It is the result of years and years of attempting to pull the outliers (high-cost institutions) into line with the rest of the hospital community and having no success,” he said. It was not just a case of some institutions charging a bit more than other hospitals, but instead being “extremely out of line,” Morrison said. “If you allow one hospital to charge 50% more and have a fixed budget, then you have to reduce benefits to everyone to keep that hospital in the network.”

Even with the smaller HMO network, CalPERS expects HMO rates to increase by 11.4% for 2005, more than three times the increase in the general cost of living. But it does represent a smaller increase compared with 2004, when HMO rates increased by 18.4% over the 2003 level.

CalPERS Worries About Defections

After last year’s HMO rate increases were announced, some small government agencies with an aggregate of about 27,000 workers withdrew from CalPERS in part because the leaders of these agencies felt that they could get better health insurance deals individually. CalPERS wants to stop any future defections, fearing they might grow into significant numbers.

“We hope many providers will get the message that we are serious about going after costs that are out of line with market rates,” McKinley said. “It’s a tactical move on our part that could have strategic payoffs down the road.” He noted that a couple of years ago, CalPERS dropped various HMOs after they proposed 35% rate increases. “The issue of cutting something out because you can’t afford it applies to everything, not just hospitals,” he said.

HMO Premiums on the Rise

HMOs are traditionally the lowest-cost health plans for consumers because they offer a more restricted network of doctors and hospitals. Patients must receive all their care from physicians and facilities within the network to help control costs. But HMO premiums have risen by 57% since 2002, and CalPERS felt compelled to take a tougher line with the hospital providers, which have generated about half the increases in premiums.

The hospitals slated for elimination from the HMO network say the CalPERS complaints are unfair and misleading, and hospital representatives say they resent the publicity that comes with the tag of “high-cost” hospitals.

Each hospital negotiates the best deal it can get with each insurance company, and the details of the contracts are closely guarded. It is all part of the continuing price struggle between hospitals and health plans.

Because every contract is different, it is unfair for CalPERS to label certain hospitals as high cost providers, according to Duane Dauner, president of the California Healthcare Association, which represents the hospital industry.

The hospitals might be high-cost providers in their dealings with Blue Shield of California for the CalPERS system, but they might be low-cost hospitals in contracts they sign with other health care system. “You cannot make an allegation that hospitals are high cost solely on the basis of Blue Shield contractual arrangements with the hospitals,” Dauner said.

Among the Sutter hospitals being dropped by CalPERS are a major trauma center and another facility where complicated organ transplants are performed. These institutions are expensive to run, treating very ill people with very costly medical conditions, Bill Gleeson, a spokesperson for Sutter, said. A healthy person might not mind choosing a low-cost facility if he or she had a minor surgery, noted Gleeson. “But what happens if you are diagnosed with cancer?” he said, indicating that the patient would want access to the Sutter hospital that is the pre-eminent cancer treatment facility. Assembling a network of hospitals based primarily on cost can result in “a race to the bottom by hospitals anxious to be in the most affordable tier,” he said.

Despite the complaints from the hospitals slated for elimination, CalPERS officials insist that there is no danger of a decline in quality and that its members will have access to first-rate hospitals.

CalPERS has drawn a line in the sand about hospital costs, a line that other big buyers of health care also may decide to draw as they address rising health care costs.

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