CalPERS Cuts 38 Hospitals

By Lisa Girion

May 20, 2004 12 AM PT

Times Staff Writer

The California Public Employees’ Retirement System voted Wednesday to oust 38 hospitals from its Blue Shield HMO network because they were deemed too pricey -- a step expected to influence healthcare purchasing decisions nationwide.

Directors of CalPERS, the nation’s third-largest buyer of employee health benefits, said they had taken the action to keep a lid on premium hikes.

The pension fund, which provides medical benefits for 1.2 million public agency employees and retirees, expects to save up to $50 million a year by eliminating the hospitals, including Cedars-Sinai Medical Center and City of Hope National Medical Center in Los Angeles.

An analysis commissioned by Blue Shield found that some of the hospitals, particularly those operated by Sutter Health in Northern California, were proposing rates for the coming year that exceeded the statewide average by as much as 80%. Sutter said its own analysis showed its rates were competitive.

The move will require up to 53,000 CalPERS members -- including at least 33,000 in the Sacramento area -- to find new hospitals and new doctors among the health maintenance organization’s remaining 225 hospitals, or switch to a more expensive plan. The decision does not affect CalPERS members who get healthcare through Medicare.

The decision is a first for CalPERS, but part of a trend toward holding down healthcare cost increases by “tiering” -- offering a range of coverage options with a corresponding range of fees and allowing consumers to select and pay for what they want.

“This is, in many ways, a bellwether action by CalPERS, which marks the future of where many large employers and health plans are going,” said Peter Lee, chief executive of the Pacific Business Group on Health, a coalition of large California healthcare purchasers. “Unlike managed care of the ‘90s, which was about limited choice, this is about CalPERS allowing their enrollees to have a full range of choices but not having every employee subsidize individual consumers who want to make more expensive choices.”

With premium increases exceeding 50% for the past three years, CalPERS board President Sean Harrigan said the system had little choice but to eliminate hospitals with rates higher than others in local markets.

“Almost half of our cost increases are driven by hospital charges,” Harrigan said. “We have a situation today when some members can no longer afford to pay their premium. We have a fiduciary responsibility to make sure healthcare is affordable, and the time has come for this system to take bold action.”

Many hospitals opposed the decision, saying it failed to take into account other factors driving up their costs, such as a state law mandating that hospitals complete seismic upgrades within the next few years and another law requiring hospitals to staff more nurses per patient.

“We think this is a huge mistake,” said Jan Emerson, spokeswoman for the California Healthcare Assn., which represents many of the state’s 750 hospitals. “Hospitals don’t just decide, ‘OK, we’re going to only provide these pharmaceuticals and we are not going to have the latest technology and we’re not going to take the uninsured.’ Our costs and what we charge for services is based on all these external factors that we don’t have that much control over. And we have to cover our costs.”

Cedars-Sinai President Tom Priselac said the independent nonprofit hospital provides a higher volume and wider array of complex services, such as high-risk obstetric care and organ transplants, than any other institution in California. The hospital maintains a slim 3% operating margin.

“This is being portrayed as having to do with the cost-effectiveness or efficiency of hospitals,” Priselac said. “Yes, hospital care is expensive. But it’s not expensive because hospitals are somehow gouging the public.”

State employees also opposed the narrower hospital network. “We felt that the disruption was not worth the savings,” said California State Employees Assn. President J.J. Jelincic.

In a second decision Wednesday related to rising healthcare costs, CalPERS adopted a regional pricing scheme for the 460,000 employees of cities, counties, schools and special districts who obtain medical coverage through the system.

Premiums will vary according to costs in each of five regions. Greater competition among hospitals and lower labor costs make CalPERS’ Southern California healthcare expenses as much as 40% lower than those in the north.

As a result, enrollees in the Los Angeles region could pay premiums as much as 19% less than the statewide rate; Northern California members could pay up to 11% more, CalPERS said. CalPERS opted for regional premiums in an effort to staunch the defection in recent years of municipalities and other government employers in Southern California to commercial insurers that offered better rates.

CalPERS is scheduled to make its final decisions on its constellation of benefits and rates for 2005 in mid-June. Hospitals that meet Blue Shield’s rate demands by then can get back on its network list, spokesman Clark McKinley said.

The list of hospitals eliminated by CalPERS includes 13 in the Northern California Sutter chain, which has no plans to return to the negotiating table because it believes its last offer was “very generous,” Sutter spokesman Bill Gleeson said.

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Cutting out hospitals

Here are the Southern California hospitals that the California Public Employees’ Retirement System plans to eliminate from its Blue Shield HMO network next year.

Los Angeles County

Cedars-Sinai Medical Center

City of Hope National Medical Center

Presbyterian Intercommunity Hospital

St. Mary Medical Center

St. Vincent Medical Center

USC University Hospital

West Hills Hospital

Orange County

Hoag Memorial Hospital

Riverside County

Desert Regional Medical Center