California's largest purchaser of healthcare benefits continued its campaign to curb soaring hospital costs last week, unveiling controversial new legislation that hospitals argue would expose them to unnecessary scrutiny and strip them of their hard-earned bargaining clout.
Sponsored by the California Public Employees' Retirement System, the bill would force Sutter Health and the state's other not-for-profit hospitals to disclose detailed information on their pricing, contracts and internal operations in addition to the financial data they already make public. It would also prohibit hospital chains from forcing payers to contract with all their facilities or none at all, a strategy known as global contracting.
Hospital pricing has been under the microscope since last year when Tenet Healthcare Corp. was accused of inflating its charges to collect more money from Medicare and private insurers. Experts say CalPERS' bill may set the stage for similar legislation in other states as consumers, employers and insurers nationwide continue to push for greater transparency in healthcare.
"Hospital costs represent a large share of health plan premiums, and it is neither in the public's interest nor in the interest of healthcare reform to keep this information hidden any longer," state Sen. Dede Alpert said in a news release. Alpert co-authored the bill with fellow Democrat and Senate President Pro Tem John Burton.
The bill comes as CalPERS weighs whether or not to drop 15 Sutter hospitals and 26 others from its statewide HMO network next year as part of a broad effort to slash $53 million from its annual expenses. After months of wrangling over rates, Sutter-which has long relied on global contracting-agreed April 8 to let CalPERS choose between excluding some of its highest-cost facilities or accepting a marked discount for use of its entire 26-hospital chain. It rejected a third option that would have allowed its hospitals to be tiered based on relative cost.
"The fact that Sutter made a concession this year doesn't eliminate the need for structural reform," said CalPERS spokesman Clark McKinley. "The bill would create greater pricing transparency so that we can make sure we're getting fair rates in the future, not only from Sutter but from all our providers."
McKinley said Sutter's prices have been found to be 80% higher than the statewide average, but current financial-reporting laws don't provide CalPERS with enough information to independently determine why. "We can't just take something like that on face value," he said, adding that hospital-related costs are the largest driver behind CalPERS' HMO premium increases, which averaged 25% in 2003 and 18% in 2004.
California hospitals are already required to submit financial data to both the Internal Revenue Service and the Office of Statewide Health Planning and Development. And starting in July, they will have to make public their previously confidential charge masters, or price lists for medical procedures, under a bill passed last year.
But Alpert's bill would also require not-for-profit hospitals to disclose to state agencies such things as their rate agreements with physicians and insurers and how money flows to any for-profit subsidiaries they may own.
Sutter argues that these additional disclosures would not only put hospitals at a serious disadvantage during contract negotiations but would also create a mammoth administrative burden. Outlining all its internal money transfers alone would require Sutter to file thousands of pages each year while doing very little to help CalPERS better understand the factors driving rising healthcare costs, Sutter spokesman Bill Gleeson said.
"We believe in transparency; we already report reams of financial information each year," Gleeson said. "But we think (the bill) goes too far by compelling excessive disclosure of propriety information. It's anticompetitive."
Hospitals also fear that the bill, by prohibiting global contracting, would strip them of one of their biggest bargaining chips. In the early 1990s, CalPERS and insurers were able to wrest rock-bottom rates from hospitals by threatening to move their large memberships to competing providers. To fight back, hospitals began to consolidate into larger health systems that payers could scarcely afford to exclude from their networks.
"Only in the past few years have hospitals been able to financially get onto a level playing field," said Jan Emerson, spokeswoman for the California Healthcare Association. "This bill would reverse that trend, making it more difficult for hospitals to negotiate fair contracts with HMOs."
Emerson said allowing payers to negotiate contracts on a hospital-by-hospital basis would also ruin the efficiency that health systems have achieved through integration. "Services and facilities within a system are organized to work together cohesively and in an integrated manner," she said. "To allow health plans and purchasers to pick and choose among services or facilities from a particular system destroys this cohesion and guts the ability of hospitals to efficiently provide high-quality integrated healthcare."
Alpert's bill is scheduled for a hearing by the state Senate's committee on health and human services on April 28. CalPERS is expected to vote on changes to its HMO network within three weeks.