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The decision will force at least 53,000 fund members, 33,000 of them in Sacramento, to choose between maintaining low rates by switching to other physicians and hospitals in the HMO plan or paying more to retain both in a preferred provider organization next year.
"The time has come for this system to take a bold action," Cal-PERS President Sean Harrigan said. "We have an opportunity to change the dynamics in the marketplace so that health-care costs are more affordable for all Californians."
In a showdown with Northern California hospital giant Sutter Health, CalPERS trustees decided to sever ties with 11 Sutter facilities. Company spokesman Bill Gleeson called the decision disappointing and "extremely unfortunate."
"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."
In a widely watched decision by the medical industry, the CalPERS Health Benefits Committee voted 8-1 to cut 36 of the state's most expensive hospitals out of its health maintenance organization. While not bound by the decision, the committee counts nine of 13 trustees as members. The full 13-member governing board of CalPERS is expected to ratify Tuesday's decision today.
The committee members said more hospitals could be restored to the list if they lowered their prices. Indeed, Cal-PERS had earlier targeted 38 hospitals, but two Sutter facilities were taken off the list after price adjustments.
Instead of making the changes for 2005, committee member Charles Valdes, who voted against the proposal, and Trustee Robert Carlson plan to urge colleagues to wait until 2006, to allow members enough time to prepare for the shift.
"I don't like the disruption," Carlson said. "I look at our members being squeezed. We are doing some harm for our members."
CalPERS, which provides health benefits to 1.2 million members, estimates it could cut health spending by about $36 million next year. Much of the savings would come by dropping coverage at the Sutter hospitals, including four in the Sacramento area.
The change won't affect Medicare patients or those receiving active care such as pregnancy and cancer treatment. The latter would not have to switch until care is complete.
Moreover, trustees on the Health Benefits Committee pointed out that members could stay with Sutter if they switch to the PPO plan. PPO coverage costs more for individuals - roughly $20 to $50 for a regular doctor's visit compared to a $10 co-payment under an HMO plan, for instance.
A Roseville city official said Tuesday that the PPO coverage is significantly higher for family coverage and would be too expensive for many employees.
CalPERS' action could inspire a trend among health-care buyers that would require workers to shoulder a greater portion of the cost if they want more expensive hospitals and doctors.
Experts say CalPERS' decision sends a signal to major hospital chains.
"CalPERS is pretty influential. ... This definitely could be a warning shot to other hospitals if they want to raise prices," said Joanne Spetz, a health economist with the University of California, San Francisco.
As one of the nation's largest purchasers of health care, CalPERS has spent months wrestling with ways to curb high hospital prices for its 1.2 million state and local government members. Hospital fees are the biggest factor in rising health-care premiums.
In the past, CalPERS has used its enormous buying power to bargain with major health insurers. But recently, the nation's largest public pension fund has been unable to use its clout to drive down health insurance rates.
As a result, CalPERS has turned its attention to high hospital costs - negotiating with hospital chains and backing state legislation proposing sweeping changes in the health-care industry.
In recent weeks, the dispute between CalPERS and Sutter spilled into the public arena as the pension fund took out newspaper ads to dispute information in letters that Sutter sent to members.
CalPERS has argued that Sutter's prices were 60 percent to 80 percent above the fees of other hospitals. Sutter officials say the fund wouldn't release its figures for the hospital chain to verify.
Last month, the two agreed to let Cal-PERS drop coverage for Blue Shield HMO members at some Sutter hospitals or maintain coverage for members at all of its facilities at a discounted rate.
CalPERS members, upset they could lose Sutter, flooded union and CalPERS officials with calls. Labor unions were divided on the hospital plan - some applauding the smaller network and others urging trustees to wait another year.
"There's not enough time for the members to understand why the board is moving to a narrower network," said Neal Johnson of the Union of California State Workers.
Jan Emerson, spokeswoman for the California Healthcare Association, said CalPERS took a swipe at only one contributor to rising health-care costs.
"They're attacking the symptom," Emerson said. "They are taking a too narrow view."
But CalPERS trustees said Tuesday they needed to take a stand now and, specifically, send a message to the Sacramento-based Sutter Health to cut its prices.
"Almost half of health-care costs are driven by hospitals. Sutter is certainly an outlier in this area," Harrigan said.