Risk that 'nobody will have access to pediatric specialty care'

Since 1999, Christopher Dawes has served as president and CEO of Lucile Packard Children's Hospital at Stanford, a 300-bed hospital in Palo Alto, Calif., affiliated with Stanford University that has 47 outpatient sites throughout the Greater San Francisco Bay Area. It's scheduled to open two pavilions and new diagnostic facilities in 2017, at a cost of $1 billion. Dawes previously served as chief operating officer of the hospital. Before that, he held senior management positions at Pacific Presbyterian Medical Center, San Francisco and Santa Clara Valley Medical Center, San Jose, Calif. He sits on the boards of the National Association of Children's Hospitals and Related Institutions, the California Children's Hospital Association and the Santa Clara Family Health Plan. Modern Healthcare reporter Bob Herman recently spoke with Dawes about issues raised by Medicaid expansion, narrow-network health plans and high prescription drug costs. This is an edited transcript.

Modern Healthcare: Has California's Medicaid expansion increased the number of patients at Lucile Packard and Stanford Children's Health who are on Medi-Cal?

Christopher Dawes: The number has not increased very much. About 42% of the patients we see are covered by Medi-Cal. The big issue for us and other children's hospitals in California is that, according to a recent Kaiser Family Foundation report, providers treating Medi-Cal patients are only paid about 53% of Medicare rates. California ranks 48th among the states in terms of what it pays for Medi-Cal recipients. So our challenge is that we're not paid by the state the full cost of providing care to these children. We have a significant deficit on that population, and we have to make up that deficit through our commercial patients, which represent about 55% of our patients.

This is a very big issue in California because over the next few years, they're estimating that about 50% of kids will be covered by Medi-Cal, and access becomes an increasing issue. We accept anybody regardless of their ability to pay, but that's not true across the whole state.

MH: Has your organization had problems with narrow-network health plans excluding your children's hospital?

Dawes: The trouble with narrow networks is that they're basically built around price and a limited number of providers. For routine adult care, that may or may not work. But when you're looking at kids with cancers and prematurity and so forth, it's a huge issue. If we simply have networks defined by low price and a thin cohort of providers, virtually nobody will have access to pediatric specialty care.

MH: Have there been any networks that Stanford has been excluded from?

Dawes: We have not been excluded yet. We have been put in different tiers. We negotiate pretty hard with payers to ensure that we're always in tier 1. That hasn't always happened. What that means is that kids whose parents are covered by a particular insurance product may be denied access to us. We follow up on those vigorously. But as of today, there hasn't been a narrow network created that we've been excluded from. Still, we're anticipating that to be the case over the next few months or years, because narrow networks are picking up some popularity.

We're kind of in a unique spot because we're in Silicon Valley, and the high-tech firms are trying to attract and retain a limited resource of engineers. So they have a tendency to offer more robust benefit packages than you would find in other industries. They are very interested in offering benefit plans that include us. If you look at other children's hospitals in California and other states, it's become a much bigger issue for them.

MH: What are you and other children's hospitals doing about this narrow-network issue?

Dawes: The California Children's Hospital Association has legislation pending, both at the state level and federal level, to create geographically based networks of care for kids with complex and chronic illnesses. The children's hospital would be a key component of that, but in addition, you'd have rehab and other services that these kids with special needs require. The networks would go at risk for managing a population of kids with special-care needs. We would have within that network all the resources required to care for these kids. On the federal level, we would accept a rate of increase on an annual basis that will be lower than the current rate of increase for Medicaid. So the government would save money, the kids would be better served, and the providers would have assurance that they would receive a sufficient revenue stream to support the needs of these kids.

MH: Have you noticed any pickup in high-deductible plans?

Dawes: We're seeing a lot more benefit plans that have much higher deductibles. It's making the consumer much more aware of costs. From a macro perspective, I think that's a good thing. A lot of the population we serve is fairly sophisticated, and many of the companies are providing tools to their employees to help them determine quality and cost for various providers.

We're seeing consumers get a lot more sophisticated in making their choices. They're getting a lot pickier, they're asking more questions, and that is definitely impacting us, and we're responding. We're looking carefully at our prices, particularly for ancillary services, so we can be more competitive.

One of the issues is we're an academic medical center, and we price our services based on our cost structure, which is quite extensive given that we're doing training and research and delivering services to very complex patients.

When our more routine patients come through, we've been very thoughtful about trying to price more thoughtfully for those patients, so they're not shouldering the burden for the larger expenses of our entire enterprise.

MH: How has increased prescription-drug spending affected your health system, and what drugs in particular are causing the most financial pressure?

Dawes: Being a leading-edge academic medical center, we have a tendency to use the latest drugs and innovations. We have lots of clinical trials going on as well. Drugs in support of hemophilia patients have been a substantial issue for a number of years, because the cost on an annual basis can be in the hundreds of thousands per patient. So the cost of prescription drugs, and particularly new drugs, is a major issue for us. The cost of medications always is a substantial part of our cost structure and usually goes up. When the cost of living goes up 2%, drugs invariably go up in the 6% to 9% range, and sometimes double digit.

MH: Are you able to negotiate discounts or rebates with drug companies?

Dawes: We have in certain limited cases. Our clinical trials allow us access to drugs at a lower cost. Outside of clinical trials, we have very good relationships with a lot of the pharmaceutical companies, and we work hard to try and get the cost down. A lot of our drugs are purchased through group purchasing with other children's hospitals. But we still find ourselves in a position where many drugs are extraordinarily expensive, and it's very challenging for many families.