CalPERS cuts 38 "high-cost" hospitals from its network

An effort by the largest purchaser of employee health care in California to cut costs by excluding dozens of hospitals from its largest HMO network has some physicians up in arms about the potential disruption to patient access to care.

Directors of the California Public Employees' Retirement System (CalPERS) voted May 19 to exclude 38 "high cost" hospitals from its basic HMO Blue Shield network beginning in 2005. The pension fund said the narrower network would save up to $36 million next year and $50 million per year thereafter.

In a written statement, CalPERS board President Sean Harrigan said premiums had increased more than 50% in the last three years that and almost half of the cost increases had been driven by hospital charges. He said the trend was unsustainable. "We have a fiduciary responsibility to make sure health care is affordable, and the time has come for this system to take this bold action," he said.

But physicians and other observers expressed concern that the move could disrupt established patient-physician relationships and might even leave some patients without access to specialized care.

"Some doctors will be affiliated with only one or two hospitals, and if those are knocked off the list, they no longer have a place where they can take their patients," said Jonathan Chang, MD, an orthopedic surgeon in the Los Angeles area.

He said the move also might be an economic hardship to physicians who only refer to hospitals on the list because they could lose patients. "From the physician's standpoint, we can only hope that this is simply a negotiating ploy so they can get hospital prices down," he said.

CalPERS insists that it structured the move carefully to avoid access-to-care problems. It said Blue Shield had given assurances that the 225 other hospitals and 25,600 physicians in the network could accommodate the 53,000 members affected by the move. And affected members who want to retain their physicians and hospital providers will have the option of enrolling in one of two preferred provider plans.

A spokesman for the pension fund, Clark McKinley, acknowledged that the action "is not a silver bullet" but was necessary as a means of doing something about escalating costs.

"This really is a powerful signal to providers that we are going to be more selective of who we take on through our HMOs. We're not just going to send our people to anybody. They've got to show us they provide good value," McKinley said.

The targeted hospitals include 13 owned by the nonprofit chain Sutter Health, which called the move disappointing. The state trade association for hospitals, California Healthcare Assn., went further, saying the action would be dangerous, possibly forcing trauma centers and research hospitals to close "because no one is willing to pay for their services."

Hospital leaders aren't the only people who might be upset by the action. Jack Lewin, MD, chief executive of the California Medical Assn., said the move could cause a backlash among CalPERS members.

"To a certain extent, CalPERS has stated that the bottom line has grown more important to them than preserving physician choice or the patient-physician relationships already established," Dr. Lewin said. "I predict that public employees will have some problems and some retaliation when this settles in."

Because of its size and reputation, CalPERS might inspire other major health care purchasers to take similar actions, said Paul Ginsburg, economist and president of the Center for Studying Health System Change. He said the move shows how much power employers or purchasers have in health care.

"This shows you how in many situations it's not just providers versus health plans. It's providers versus employers," he said. "The real way how managed care is going to evolve is going to depend more on employers and purchasers and providers than on health plans."