While federal investigators pry deeper into Tenet Healthcare Corp.'s aggressive billing tactics, the California Public Employees' Retirement System has launched its own investigation into alleged overpricing by another dominant hospital chain, Sacramento, Calif.-based Sutter Health.
Local representatives of the Service Employees International Union last week persuaded CalPERS to look into Sutter's billing practices after an analysis of state discharge data found that inpatient charges at five of the not-for-profit company's Northern California hospitals were up to 53% higher than the regional average.
CalPERS, the nation's second-largest purchaser of healthcare after the federal government, launched an investigation into Tenet last December, after a similar request by SEIU Local 250. The pension fund, which covers 1.1 million members and has substantial access to hospital pricing data through its self-insured PPO, now says it plans to release a combined report on Tenet and Sutter in May.
"Our board has directed staff to look into the SEIU's report," confirmed CalPERS spokesman Clark McKinley. "It was a very thoughtful report and one that our board appreciated, so we'll be acting on that as we get the data."
Sutter spokesman Bill Gleeson disputed the accuracy of the report and called it part of a continuing "corporate campaign" by SEIU Local 250. The 85,000-member healthcare labor union-which publishes on its Web site a "Scam Sheet" detailing Sutter's alleged misdeeds-has repeatedly clashed with the company over staffing issues and has opposed a number of its planned acquisitions. The SEIU represents about 4,000 Sutter employees, according to the union.
"Some of the data is incorrect and most of it is without proper context," Gleeson said. "They came up with a wild and wacky (report) that attempts to paint us with the same brush as Tenet."
The SEIU, however, was emboldened by Sutter's disclosure in a Jan. 23 bond document that five of its 26 hospitals may face a federal probe as part of the Centers for Medicare and Medicaid Services' recent efforts to crack down on hospitals suspected of "gaming" Medicare by overbilling for high-cost procedures, known as outliers.
The CMS began auditing for-profit Tenet in October 2002, when the Santa Barbara, Calif.-based hospital chain disclosed it had nearly doubled its Medicare outlier payments over the past two years by inflating its retail list prices for services. In February, the agency expanded its probe to include all other hospitals that either received outlier payments equaling 80% or more of their total Medicare reimbursements in October and November 2002, or received outlier payments exceeding 20% of their total Medicare reimbursements last October and November and boosted their list prices more than 20% from 2000 to 2002 (Dec. 9, 2002, p. 14).
Gleeson said an internal review of the five hospitals revealed that they met the second threshold for possible investigation, but that none of the hospitals have been contacted by federal auditors. He added that Sutter simply mentioned the possibility in its bond statement "as part of full disclosure" and is confident that, even if the hospitals were to be audited, "any analysis would show that the charges were appropriate for the care provided."
The five hospitals are the Davies campus of 669-bed California Pacific Medical Center, San Francisco; 48-bed Sutter Davis (Calif.) Hospital; Memorial Medical Center, Modesto, Calif., and Memorial Hospital Los Banos (Calif.), both facilities of 306-bed Memorial Hospitals Association; and 655-bed Sutter Medical Center, Sacramento, Calif.
Nationwide, the CMS has flagged about 120 hospitals for audits, according to a spokeswoman for the agency. All the audits are scheduled to start by July 31 and should be completed within a year. "It's a very small number of hospitals within the entire (U.S.) system," and many of them ultimately could be cleared if their higher-than-average outlier payments are determined to be justified, the spokeswoman said.
The SEIU, however, said its data analysis revealed a possible "pattern of overpricing" by at least five Sutter hospitals.
In 2000, the most recent year for which data are available, patient charges at Memorial Medical Center averaged $44,713, or 53.3% higher than the $29,161 average for almost all Northern California hospitals, excluding Tenet, Sutter, Kaiser Permanente and Shriners Hospitals for Children facilities, SEIU's report showed (See chart).
The SEIU's analysis also found that in 2001, Sutter owned two of the state's five most profitable, private-sector hospitals on a per-bed basis. Thirty-six-bed Sutter Tracy (Calif.) Community Hospital ranked No. 1 with a $438,099 profit per staffed bed, while 172-bed Sutter Roseville (Calif.) Medical Center ranked fifth with a per-bed profit of $237,267. Rounding out the list were three Tenet hospitals, including 188-bed Redding (Calif.) Medical Center, where federal agents are investigating allegations that two cardiac surgeons performed unnecessary surgeries to boost reimbursements (Nov. 4, p. 5).
In addition, nine Sutter hospitals had total profit margins exceeding 10% in 2001, compared with a 3.5% statewide average for all not-for-profit hospitals, SEIU's study found. Sutter's Tracy and Roseville facilities, for example, had profit margins of 31.1% and 24.9%, respectively. "Sutter is among the most offensive in terms of making decisions based on the bottom line," said Sal Roselli, president of SEIU Local 250.
Sutter disputed the allegations, pointing out that its own, more recent analysis of regional billing trends found the company's charges to be "absolutely in line" with those of other Northern California hospitals.
According to a study conducted by HealthWorks, Morgan Hill, Calif., Sutter's inpatient charges per discharge averaged $38,424 during the first nine months of 2002, far lower than the $92,580 averaged by Tenet hospitals in the region. Sutter also came in lower than Daughters of Charity Health System, which averaged $40,253, but slightly higher than Catholic Healthcare West, HCA and St. Joseph Health System, which averaged $34,030, $32,006 and $30,787, respectively. The study also showed that Sutter has increased its charges at an average rate of 12.4% since 1996, in line with other hospitals, which averaged 8.5% to 17%. Tenet's charges rose an average of 23.8% over the same period.
Sutter has gained financial strength recently partly through acquisitions that have boosted its market share and allowed it to wield greater bargaining clout with insurers. According to Moody's Investors Service, Sutter's operating margin hit 5.3% last year, up from 1.3% in 2001.
Gleeson said the company needs to maintain a consolidated operating margin of about 5%, so it can continue to fund a $3.5 billion capital-improvement project. While some of its hospitals are meeting or exceeding their business goals, eight others accounted for $105 million in combined losses in 2002, he pointed out. "That's the beauty of our system, which operates like a family," Gleeson said. "Were it not for the strong performance of some of our hospitals, those that are struggling would have to curtail critical services or even potentially close their doors."