The case against consolidation

Pub date May 3, 2011
WriterSarah Phelan

With officials predicting that San Francisco will spend $500 million annually on health care costs for city employees and retirees, the Board of Supervisors Government Audit and Oversight Committee held an April 28 hearing to analyze why hospitals costs are higher in Northern California than Southern California, and why costs have escalated in the last decade.

A panel of experts outlined a list of cost drivers and identified hospital consolidation as the major culprit — a finding that fueled concerns that costs will skyrocket once Sutter Health, which operates the California Pacific Medical Center that took over St Luke’s in 2005, builds a 555-bed hospital on Cathedral Hill. The board will consider approving the project as soon as this summer.

Ellen Shaffer, codirector of the Center for Policy Analysis, said that the city’s recently approved Health Care Services Master Plan (“Critical Care,” 11/23/10) provides San Francisco with leverage to collect and analyze data and make informed health choices.

Shaffer noted that since 1960, when there were 26 hospitals in San Francisco, facilities consolidated so frequently that by 1990, only 12 hospitals remained. And by 1998, the three largest hospital networks controlled 43 percent of hospital beds — compared to 18 percent just four years earlier.

“Today in San Francisco, the most expensive of the northern counties hospitals get $7,349 per patient per day on average,” she said. “In Los Angeles County, the figure is $4,389.”

David Hopkins, a senior advisor at the Pacific Business Group on Health, said that Sutter Health, which reported a 30 percent increase in net income in 2010, already controls 44 percent of hospital beds in San Francisco. Catholic Healthcare West controls 28 percent, and UCSF controls 26 percent. “Insurance companies say Sutter’s size and dominant position give it an upper hand in contract negotiations,” Hopkins observed.

Healthcare planning and policy consultant Lucy Johns said technology is another key cost driver. “It’s a medical arms race,” Johns said. “Every hospital wants the latest everything.”

Jane Sandoval, a registered nurse at St Luke’s, said that what residents and workers need is access to affordable healthcare, not luxury care at overpriced rates.

“We’d rather have enough staff and the ability to care for all patients than work in a facility that’s likened to a five-star hotel,” Sandoval said. She noted that State Insurance Commissioner Dave Jones filed suit April 13 to intervene on behalf of the plaintiff in a whistleblower suit against Sutter Health, which has been accused of fraudulently charging insurers millions of dollars for anesthesia services that either weren’t provided or were billed higher than typical rates.

Anne McLeod, senior vice president of health policy for the California Hospital Association, an industry trade group, claimed that Northern California’s higher hospital prices are primarily due to higher labor and living costs in the Bay Area. “Wages are a huge component of hospital costs, and they represent the fastest growing component of costs,” she said.

But Glenn Melnick, a professor of health care finance at the University of Southern California, said that even if a hospital was airlifted from Los Angeles to San Francisco, its costs would still be 38 percent higher after adjusting for local differences. “When hospitals consolidate into large systems that dominate a specific region, that hospital system has the power to demand contracts from health plans that include high reimbursement rates for their services and limit the ability of health plans to offer low-cost products and share the data consumers need to compare costs across providers,” Melnick said

Sup. David Campos, who called for the hospital costs hearing, observed that the cost of creating jobs includes health care benefits. “So to the extent that things like hospital consolidation are increasing costs, the hospitals themselves are implicated,” he said.

But CPMC media relations manager Kevin McCormack noted that CPMC/Sutter has invested more than $7 billion since 2000 on technology, facility construction, and improvements to address medical needs and state seismic safety requirements.

“Sutter Health appreciates its role in ensuring that health care is affordable. And we realize that holding the line on prices without compromising quality will require additional cost reductions,” McCormack said. “To this end, doctors and nurses and support staff throughout our Sutter Health network are working aggressively to substantially reduce expenses.”

He denied that Sutter had engaged in inappropriate anesthesia billing practices. “The lawsuit paints a false and inaccurate picture,” McCormack said.

He also said that plenty of competition remains in Northern California. “The decision by the California Public Employees Retirement System in 2004 to shift a significant number of members away from Sutter-affiliated hospitals to other providers demonstrates there’s plenty of healthy competition,” McCormack said.

But Campos said the hearing clarified that, while there are different factors why costs are going up, one of the most important is hospital consolidation. “We need to ensure that we understand that, even in face of higher labor and cost of living costs, hospital costs in Northern California are still 30 percent higher than Southern California,” Campos said.

Noting that CalPERS excluded Sutter from its network, Campos added: “We need to follow suit in terms of saying that we’re only going to do business with hospitals that are responsive to our concerns and follow best practices.”