Hospital Choice Grows Costlier

Taking aim at escalating hospital bills, California’s biggest insurers are pushing new health plans that make it significantly more expensive for consumers to use hospitals that insurers consider too pricey.

These health plans are the first broad attempt in the nation by the insurance industry to group hospitals on the basis of cost, and to apply that to establish co-payments and deductibles.

Under one HMO option offered by PacifiCare, members who go to a hospital on PacifiCare’s preferred list pay nothing out of pocket. But those who use other facilities in the network are required to make co-payments of $100 to $400 a day.

About half of PacifiCare’s 230 contracted hospitals in California are on its A-list, including academic institutions such as UCLA Medical Center, but that list includes none of the specialty children’s hospitals in Los Angeles and Orange counties.

Consumer groups expressed concerns that higher co-payments will steer people to hospitals that are overcrowded or provide lower-quality care.

“I’m afraid it could exacerbate a system that puts the people with the biggest health problems and the poor in certain kinds of facilities,” said Ron Pollack, executive director of Families USA, a consumer group in Washington, D.C.

Insurance company executives, mindful of the backlash against managed care, stressed that they are not restricting access with these new tiered plans. Rather, they said, it highlights hospitals that are more expensive and leaves it up to consumers whether they want to spend extra for them.

In concept, such health plans are similar to tiered prescription drug programs, in which people pay more out of pocket for brand-name drugs than generic substitutes. Both are part of a trend of greater sharing of medical costs, which are surging, led by rising hospital charges.

Health insurers say tiered pricing will narrow the big and often inexplicable variation in hospital charges, while preserving choice for patients. But it is far from clear whether this will be widely accepted or effective in slowing the pace of rising medical costs. Only a couple of insurers in other states have recently tried something like this, with mixed results.

“It’s going to cause a lot of confusion, because patients don’t have a lot of information to make a decision about the quality and the value of what they’re spending their money on,” said Bart Asner, a pediatrician and chief executive of Monarch HealthCare, a large independent physicians’ association in Orange County. Health insurers are now developing quality measures to include in their tiering of hospitals, but Asner and others said there is no agreement on how best to measure quality.

“I think we’re entering into an era that is far more complex than anything we’ve anticipated,” Asner said of the new plans.

Dozens of companies in California have already signed up for hospital tiering plans, and many others are considering them because they can reduce an employer’s premium increases by as much as 20%.

Blue Shield of California this spring imposed a tiered hospital co-payment arrangement for almost a million members insured through small and mid-size employers; only large employers were given the option of whether to accept tiered payments. The co-payments would not apply to emergency room admissions.

“We thought this was a fair and appropriate way to deal with” rising costs, said Ken Wood, Blue Shield’s chief financial officer. He said focus groups overwhelmingly preferred tiering to the other options considered: raising premiums even more for everyone, reducing benefits or dropping high-cost customers.

Wood said he has had few consumer complaints. Steven Fisher, deputy director at the state Department of Managed Care, which regulates health insurers, said Friday that so far it has received one complaint about hospital tiering: a Blue Shield member in El Dorado County who said there was no local hospital without the co-payment. (That county has two hospitals, and neither is on Blue Shield’s preferred list.) Fisher said that complaint will be investigated and that the department will review how these plans are working overall in six months.

Besides Blue Shield and PacifiCare, Health Net is rolling out similar plans in New York and California this year. Blue Cross of California, Cigna and some other national insurers are expected to follow suit next year.

Kaiser Permanente operates its own hospitals and thus would not employ a tiered pricing system.

The strategy of tiering comes as many hospitals are struggling with higher labor costs, new technologies and capital spending for seismic retrofitting. But consolidation in recent years also has strengthened the hand of some big hospital operators, enabling them to negotiate bigger payments from insurance companies.

Health insurers, meanwhile, have been able to pass on those higher hospital costs to employers and are enjoying some of the strongest profit growth in years. But as in the early 1990s, when health premiums soared and led to the proliferation of managed care, medical insurers are facing increasing pressure from employers to hold down costs.

Chris Wing, president of Health Net of California, said that about 20% of his contracted hospitals charged as much as double the average cost for comparable services at other hospitals, and that 10% billed triple or more. Health Net would not describe how it arrived at those percentages but said the average daily cost for inpatient services last year ranged from about $3,000 to more than $10,000--with academic institutions generally at the top of the list.

Hospital industry officials scoffed at such figures, saying it was virtually impossible to determine the actual cost of services and draw comparisons when hospital charges reflect quality, the specialties they offer and fees that are negotiated with insurers.

“There is no one dollar figure to compare apples to apples,” said Jan Emerson, a spokeswoman for the California Healthcare Assn., which represents nearly 500 hospitals and health providers in the state.

Critics also point out that what may be too pricey in one insurance company’s eyes may not be to another. Indeed, a number of hospitals in PacifiCare’s more expensive group made Blue Shield’s preferred list. By Blue Shield’s method, only 15% of the hospitals fell into the too-costly category, compared with 30% for Health Net and about 50% for PacifiCare.

“It’s rather inconsistent; there is no industry standard,” said Brian Hagadorn, executive director of managed care for Children’s Hospital of Orange County, which didn’t make PacifiCare’s select list. He said the facility is not overpriced for “the level of service complexity and special services we provide.”

At least one health insurer, Blue Shield, has tried to apply a consistent formula. Blue Shield has developed a cost index for each hospital, taking into account geographic differences and types of facility. To make Blue Shield’s preferred list, a hospital’s cost index cannot exceed 125% of the average of hospitals in its region.

Hospital operators are waiting to see how tiered pricing might affect their patient count. But some are clearly concerned. After Blue Shield announced its preferred list, three hospitals that didn’t make the cut called the insurer to discuss price reductions, said Blue Shield, which declined to identify them.

In most rural areas, however, tiering isn’t likely to have much effect, simply because there aren’t enough hospitals there to split into groups. Even in urban centers, there are limits. Jamie Robinson, a health economics expert at UC Berkeley, said that companies such as Sutter Health, the dominant hospital operator in the Oakland-Berkeley area, have the clout to tell a health insurer that it either adds all of its hospitals to the preferred list or none at all. In fact, all of Sutter’s hospitals are on Blue Shield’s top list.

Sutter declined to comment for this article, as did Santa Barbara-based Tenet HealthCare, the biggest for-profit hospital operator in Southern California.

For many consumers, whether tiering becomes an issue may come down to where they live. Which hospitals in their area are on the insurer’s preferred list? And which ones are their doctors affiliated with?

The staff at California Public Employees Retirement System, the state’s biggest purchaser of insurance, weighed hospital tiering as an option in its recent renewal negotiations. Allen Feezor, CalPERS’ health administrator, said there was a concern over how tiering would affect the doctor-patient relationship. What would happen, he asked, if a member’s referring physician did not have admission privileges to hospitals on an insurer’s preferred list?

“It would subject me to a penalty, perhaps $200 a day, for going to his hospital,” Feezor said. “It’s an issue of patient care continuity. How do you justify the bind you put the enrollees in, in regard to their doctors?”

In the end, CalPERS rejected the tiered pricing plan, instead accepting an average 25% hike in its HMO premiums next year, about a third of which will be passed on to its 1.2 million members.

Many employers cannot afford or are unwilling to absorb such hefty premium increases.

Verteq Inc., a Tustin supplier to the semiconductor industry, is fairly typical of the bind that smaller companies face. Through much of the 1990s, Verteq covered the annual premium increases for its employees, largely for competitive reasons, said Catherine McLaren, human resource manager. But in the last couple of years, as premiums jumped by double digits, Verteq asked employees to pay more of the cost. When insurance renewals came up this spring, McLaren said, it didn’t take long for the firm to go with PacifiCare’s new plan, called Select Hospitals.

“That one stood out,” she said, noting that it cut her company’s premium increases by 20%.

McLaren, a Fountain Valley resident, said she was happy with the choice. All her favorite hospitals are on the preferred list. But Jeanne Moore, a product marketing manager at Verteq, wasn’t thrilled. Moore, who lives in Corona, said she has only one hospital in Riverside County that she can use without the $100 daily co-payment.

Fortunately, Moore said, she has a high regard for that hospital. But it’s still just one place, she said. “If you have only one hospital, that means you don’t have a choice.”