A decision by California's largest pension fund to exclude 38 high-cost hospitals from its statewide HMO network next year could prompt more healthcare purchasers to play hardball nationwide, industry observers said.
The California Public Employees' Retirement System-the nation's third-largest buyer of health benefits and long considered a bellwether for national healthcare trends-approved the move last week in an effort to cut up to $50 million a year from its ballooning healthcare tab. The decision is the latest in a growing backlash against fast-rising hospital costs, which have helped push healthcare inflation back into double digits in recent years (Jan. 19, p. 12).
"We need to send hospitals in this state the message that Californians will not be held hostage by those who are motivated by greed," Sid Abrams, chairman of CalPERS' Health Benefits Committee, said in a news release. Hospital charges have accounted for almost half of CalPERS' HMO premium increases, which averaged 25% in 2003 and 18% in 2004.
Of the 38 hospitals excluded, 13 are owned by not-for-profit Sutter Health, with which CalPERS has been embroiled in a bitter dispute over costs (April 26, p. 18). A study conducted for CalPERS found Sutter's prices to be 80% higher than the statewide average. Sutter has said its own analysis showed its rates were competitive. All five of Sharp HealthCare's acute-care hospitals in San Diego will also be dropped, as will the renowned Cedars-Sinai Medical Center in Los Angeles.
CalPERS spokesman Clark McKinley said some of the hospitals could be allowed back into the network if they agree to significant rate reductions by mid-June, when the system must complete its benefit plans for 2005. Enrollees can use the excluded hospitals if they switch to a more costly PPO option.
Peter Lee, president and chief executive officer of the Pacific Business Group on Health, said he expects other healthcare purchasers to follow CalPERS' lead. "CalPERS' decision reflects where many large employers and health plans are headed," Lee said. "The days of treating all hospitals equally, regardless of their relative cost, are over. Now it's about providing enrollees with a full range of (coverage) options but exposing them to the price differences."
The California Healthcare Association, however, called CalPERS' decision "fundamentally flawed," arguing that it doesn't address the real factors driving costs, such as underpayments by Medicaid, the growing number of uninsured, and new state mandates on seismic safety and staffing ratios.