http://www.sfgate.com/ Return to regular view Power play on health care
Sutter Health, CalPERS face critical decision
Victoria Colliver, Chronicle Staff Writer
Thursday, May 13, 2004
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A battle is playing out between the state's largest purchaser of health care and the biggest hospital chain in Northern California. It's a conflict that illustrates a major power shift that has taken place between those who pay for health care and those who provide it.
The California Public Employees' Retirement System has long thrown its weight around to bring down health care costs. The pension fund's wrath used to be directed at health insurers. Now it has turned toward doctors and hospitals -- and most specifically Sutter Health.
In a decision that could affect as many as 53,000 members, CalPERS' board could decide by next week whether to drop 38 hospitals from its network, including 13 Sutter hospitals that CalPERS claims charge too much for services. Alternatively, the board could opt to keep all the hospitals, but require Sutter to cap its rate increases, which may not be as painful for the members but would result in lower cost savings.
A decision would resolve one of the thorniest issues in the pension fund's efforts to control 2005 health care costs, a program that will ultimately be decided at a June meeting.
Sean Harrigan, the president of CalPERS' 13-member board, doesn't know which way things will go at Tuesday's health committee meeting. But he knows that the giant pension system is no longer in the driver's seat. "We really don't have the kind of bargaining clout we once enjoyed," he said.
Whatever the decision, this latest game of health care hardball underscores a change that has been building during the past decade.
CalPERS long showed how a big institution that paid the medical bills of thousands of people could control the health care marketplace. Its clout helped keep premiums low in the mid 1990s. But hospitals and doctors, struggling under low reimbursement rates from managed-care contracts, started banding together in large systems that commanded higher rates.
"There's been so much consolidation on the provider side, especially among hospitals, that they are in many cases an oligopoly," Harrigan said. In addition to Sutter, he named such other major chains as Catholic Healthcare West and Tenet Healthcare Corp. "They believe they don't have to seriously bargain over price."
Struggling with rates
In recent years, as health care premiums have skyrocketed nationwide, CalPERS has struggled with rates. Even after whittling the number of health maintenance organizations it offers from 14 in 1997 to three, the fund's HMO premiums have still increased 57 percent during the past three years.
Unable to continue strong-arming the HMOs, the board turned its attention to the high price of hospital care, which accounts for the largest piece of the health care dollar. It's easier to require members to switch their HMO than to tell them they can no longer go to their longtime doctor or to the nearest hospital.
The list of hospitals on the chopping block has been revised several times, but the most recent count included 38, of which 22 are in Northern California and 16 in the south.
While only 13 of the 38 are operated by Sutter, CalPERS has said that the bulk of the estimated $25 million to $50 million in annual savings would come from eliminating the Sutter hospitals. The savings range is broad because transitional costs and a possible increase in emergency room use by displaced members would reduce the savings in the early years.
For the first time in CalPERS' history, fund officials and one of the principal insurance companies it uses, Blue Shield of California, are sitting down at the bargaining table with a provider network, in this case Sutter. Blue Shield officials have argued that Sutter's costs are 60 to 80 percent higher than comparable hospitals. Sutter disputes that claim.
Sutter spokesman Bill Gleeson described the chain's charges as "fair and equitable." He referred to a report prepared by health consulting firm HealthWorks Inc. of Morgan Hill, which uses state government data to show that Sutter's billed charges and net revenue per patient are competitive with other hospital networks in the area.
Charges aren't relevant
Paul Markovich, senior vice president with Blue Shield, said Sutter's figures are based on charges that aren't relevant. He said what matters are the agreed-upon rates in the contract with Blue Shield, which he contends are out of line.
Gleeson said Sutter has no way of comparing its rates with other hospitals because Blue Shield will not reveal that information.
CalPERS has sponsored a bill to require Sutter Health and the state's other not-for-profit hospitals to disclose detailed information on their pricing, contracts and internal operations. SB1509, authored by Sen. Dede Alpert, D-San Diego, would also prohibit hospital chains from forcing payers to contract with all of a network's hospitals or none, a practice known as global contracting.
Industry watchers say the CalPERS/Sutter dispute has larger implications for employers. Purchasers of employee health care look to the fund, which is the nation's third-largest buyer of health care, as an indicator of what will happen in the private sector.
"The negotiations we're seeing now are far less the end but the beginning of moving toward a health care system that doesn't treat all hospitals alike, either in terms of cost or quality," said Peter Lee, head of the Pacific Business Group on Health, a large employer health care purchaser.
Health care futurist Wanda Jones says CalPERS' earlier tactic of squeezing hospitals and doctors is now coming home to roost.
"Any schoolyard bully knows if you push somebody hard enough, they're going to go pump iron and come back and deck 'em," said Jones, with New Century Health Care Institute in San Francisco.
E-mail Victoria Colliver at vcolliver@sfchronicle.com.