>> we cannot comment on the billing practices, nor the legality of it. supervisor campos: the reason i ask, we look to the industry to act responsibly, and we have faith in the industry to act responsibly. you are an association that represents that industry and you have here a complaint that makes very serious allegations about a very prominent member of that industry. the way that it is described, this is something that is happening in the industry. so i would imagine, as a representative of the industry, you would know whether or not these types of agreements are taking place. >> i appreciate your concern on the issue. yes, sutter is a valued member,

as well as all the rest of the hospitals, but we believe that hospitals will act in the best interest and built and act in accordance to law. we would like to see the facts play out. we are not in a position to make a comment on that particular case. supervisor campos: if you are a consumer watching this hearing and paying attention, can your association guaranteed to those of us who are patients, who are paying for these costs, that those types of agreements are being entered into by hospitals and insurance companies? >> cha is not in a position to make any guarantees on behalf of any hospital. supervisor campos: ok, well, thank you very much. the one thing i would say -- hopefully somebody in the city's attorney's office is watching.

we will send a copy to the second amended complaint to them. there are some very serious issues indicated here. if we are talking about the city's costs in the coming year being projected close to half a billion dollars, and these practices are going on, then our city attorney's office needs to be aware and decide if any action needs to be taken on behalf of the city. let me now call the next presenter, dr. glen melmeck. he has traveled very far to be with us today. he is a professor at the university of southern california policycalifornia, chf policy planning. >> thank you for calling me for this important issue. i am afraid this is going to be one of a series of meetings that you will have in the future,

given the high cost of health care, the complexity, the need to address those issues. i am also happy to be here -- originally, i was thinking of not coming, but your charming and persuasive staff was able to change my mind. also, i am ablhappy to tease my northern california professors. southern california is represented well here. happy to be here. i will be talking about health- care competition. the key themes i will be addressing, price competition can work in health care. has benefited california health- care consumers. that consolidation and other actions have reduced that competition and it has led to higher prices and increase spending as a result. policies are needed to restore

competition, to the competitive structure of the health-care system. research shows that hospital price competition benefiting california health care consumers, in terms of increased efficiency, lower prices, and ultimately, lower health insurance premium growth. the way that health care price competitions, one of the main factors, that has been used by health plans representing consumers, employers, negotiate with health care providers selectively to negotiate their inclusion in health plans, and that one of the factors included in that negotiation is the price. so the ability of health plans to selectively contract from a range of different providers created this environment of price competition, which

encouraged providers to compete both on price and cost efficiencies. that has held cost and prices down for quite a while in california. however, the market is very dynamic and there have been responses to that pressure. in some parts of california, we still see fairly intense price competition. in other parts of the state, providers acted, over time, in response to this competitive pressure, to increase their power over the market. a number of ways have been used to gain power over the market. consolidations, mergers, reduced capacity is, and the formation of large systems. another mechanism is differentiation. providers are able to build their -- build a reputation to the point where they become a must have provider that must be included in a health plan's that

work and gives them pricing power in their negotiations. economists generally do not like market power because it can be used to harm consumers, in terms of raising prices, lowering quality and reducing service. furthermore, market power can be used from one area to extend it to others, to further reduce the competitiveness of the health care system. here is that a little bit of data. some of it may overlap with the previous speakers. this slide shows california data between 1999 and 2009, and it shows a price increases to explain most of the increased spending in california during that time period. population grew by 15% but hospital spending grew by 111%.

the variables listed below are indicators of how much care people use in california and how much that has changed over time. the most global measure we have is adjusted patient days, at the bottom, and it chose utilization increased by 9% over that time period. supervisor campos: could you explain the net hospital revenue number? >> that is taken from reports filed by hospitals every year. it is the total amount of revenues they collected from all sources, for each year. it is added together for those years. what that shows is hospital collections, in terms of hours, hospital spending, as consumers and the government, and grew by 111%, but the amount of volume

grew by only 9%. as you can see, most of the increase over that time period is driven by higher unit prices. this is a theme that you have heard today. some more data that brings home the bad news. prices are higher in northern california, even after adjusting for a couple of things. one issue that was talked about earlier was the difference in input costs. it costs more to pay workers in california than somewhere else. the first line shows a cost difference factor that is developed from a study which shows the relative differences for los angeles, sacramento, and san francisco. you can see san francisco is 123% the cost in los angeles,

input costs for hospital care. sacramento is 108% of the cost when you add it together. the next two sets of numbers are payments for hospital day, taking into account in patient and outpatient care. the top line shows medicare in los angeles paid on average 2000 $234,000. if you adjust for cost, that number goes up. as you can see, los angeles pays less relative to the rest of the state for its input cost. the most important statistic from this exhibit are on the right-hand side, in italics. the medicare actual san francisco over los angeles is 31% higher. some medicare pays, per day in san francisco, 31% more than los angeles, 22% more in sacramento.

-- more than sacramento. but if we take away those cost differences, it is 106% vs 112%. so the important thing there is those big differences are not necessarily crippen -- this is just a simple test -- by differences in the availability of high-tech services. supervisor campos: going back to the point that was raised by the prior speaker, labor costs being a main driver of the cost differentiation between northern and southern california, what does this show about that? >> certainly, there is a big difference. for san francisco, it is 123%, so it is 23% hired to run a hospital here than it does in los angeles. the cost of running it.

the same hospital from los angeles, move it here, same staff, everything, 23% more. so there is a cost of living difference reflected in those prices. but as you will see, the bottom half of this slide, we are looking at commercial prices. what do health plans pay? los angeles, commercial plans on average $4135,0035,000. that is before you adjust for cost differences. the next slide takes into account that if the mover hospital from los angeles to san francisco, it costs more. again, looking at the right hand side, that difference of 170% to 140% drops, but not to 0. it is still 38% higher in

sacramento and san francisco. supervisor campos: even after adjusting. >> right, for those input costs. this gives you some order of magnitude of the difference in prices after you have adjusted for input costs. so hospital market power and consolidation. providers can use market power to stifle innovation and competition. one of the practices is prohibiting contract thing for narrow networks. one of the reasons that competition was effective early on in california -- still is in some places -- is large employers have a choice. they can buy from this provider or that provider. with the formation of large systems and other systems, the

amount of choice that they have now has gone down. the ability to stimulate price competition to control the growth of prices, make care more efficient, that vigor has gone away. this release of price data employers -- to me, it is still astounding that we are still here. the largest employers in the state, but for calpers, are not able to know what they pay for a day of hospital care for one of their employees. the health plan is not allowed to share the data with them. so the lack of transparency in the system, in part, through these contracts, really reduces the ability for the system to create more efficient and innovative products to restore that price competition. there are other types of stifling language in the contracts. it was mentioned earlier with

the department of insurance complaints. the other issue is emergency services. i did not put the data up there, but the average charge for an emergency room in sacramento is $16,000 a day for an emergency patient, for an average patient. so that is the bill charged that the hospital has on their books. if the health plan does not reach an agreement with the provider, they face these prices that are oftentimes double the market price. that is another factor that has made the market more competitive and has contributed to rising prices. finally, what can be done? policies to restore competitive

market structure? we should allow for systems -- integration systems to make things more efficient, but force systems to negotiate independently. so that health plans and consumers have more choice. also, providers must be forced to share data with the purchasers. we need more information to lubricate the competitive aspects of the system. other restrictive language in the contracts need to be cleaned up so that it does not stifle innovation and competition. finally, probably a topic for future hearings, the formation of these aco's, which run the risk of further enhancing market power, here in california, rest of the country, contributed to higher prices as well. thank you. supervisor campos: thank you,

doctor. i do not know if we have anymore questions. i do want to ask you something briefly. we were talking about the number beds and how that relates to consolidation. i wonder if you have any thoughts on the type ofbeds bede are talking about actually matters. whether they are tertiary or secondary beds. does that make a difference? >> it kind of does. different services in the market. let's say a provider has a monopoly in three or four services, and another does not have that. that will possibly endow them with market power that can be used to raise prices, and that would lead to other potential stifling language as well. supervisor campos: thank you. now we are moving into the last

phase of this. i want to thank everyone patients. i know this is complicated stuff. -- patience. our last speaker is the director for the west bay health systems agency. catherine dodd. we also have the chief office of health office administration for calpers. the focus of this last set of presentations are options for action to protect payers, consumers, the public interest from the actual and potential negative impacts of increasing costs, specifically, a market consolidation. >> thank you very much, mr. chairman, members of the committee. i am grateful for this chance to talk to you, and to hillary, for

making it easy for me to do. i have been listening with a great deal of interest and pleasure, realizing you have been told a great many things that i will not have to repeat. so i will focus on a very wide but singular aspect of the question of system performance and the role of view, as legislators, that will involve. there are some major issues. we just talked about some of them but it repairs being -- bears repeating. this is a market that is almost worthless as quality assurance or price protector. it is so shrouded in secrecy, and in many cases, blatant dishonesty on the part of some of the parties, that it is very

difficult, if not impossible, for a purchaser of benefits for a patient user of benefits to know the value or price of the service that they have been rendered. that means the market is blind. you do not have informed purchasers, you do not have informed patients. to a large degree, many of the providers themselves are ignorant about the economic dynamics in the settings in which they work. so full disclosure of the financial arrangements in these systems is absolutely essential. i will give you one example of a current problem that has been completely ignored but is a repetition of an old problem in california. we have had, over the years, since the passage of medicare and medicaid, cycles of problems, fraudulent business organizations, delivery system

units, that had to be ultimately arrested -- brought to a halt by legislation. one of these was actually the legislation -- the result of legislation that created a requirement for organizations to be a meticadical beneficiary, ty had to be a non-profit. this had been aimed at what had been booming for profit organizations. this ran up a lot of bill and then left town without paying providers. that non-profit, however, created something else. it created subcontracting relationships between the nonprofit organizations, people they knew, cousins, friends, an assortment of interlinking relationships that bread another layer of very profitable subcontractors. we believe -- my colleagues and

those and i have been working with -- believe that this is also flourishing in the hospital industry. nonprofit hospitals have been able to arrange self-dealing contractual relationships in their subcontracts that have not been fully examined or exposed. they have never been satisfactorily audited. state agencies responsible for this are understaffed, and in general, do not have license to investigate it. it has happened before in california. every opportunity is there for it to happen again. i want to turn to one other issue that has come up that is very interesting. that is this ruling that is contractual agreements that prohibit hospitals from -- health plans from inquiring about the validity of claims that are paid. in a prior organization, we had an investigator, a nurse years

of experience, as both an investigator and witness. lawsuits for fraudulent billing. we asked her to go through a sample of claims from members of the organizations groups in central california. she did not represent a health plan, so she did not trigger the problem. to get her into the situation, we had to first file claims with the trust fund, identify them as questionable claims. that opened the door for her to get in. she found, in no time -- rampant. it was not even a little bit here and there. she found false billing practices that pointed to huge

volumes of fraud. almost immediately. she brought the information back and nobody acted on it. we got no cooperation whatsoever from the carrier, and the trust funds themselves backed away, hearing they would be in conflict with their own members, if they discovered fraudulent billing in the care they were receiving. there is no adequate policing or structure to protect the purchasers in this situation, in this market. the delivery system you are hearing about is broken. that is causing such problems. the only thing that is worse than the delivery system is the purchasing system. the purchasing system has been systematically stripped of information, as was mentioned,

since 1983. when i was director of the hsa here, we had access to the books at the hospitals. we have access to a great deal of information. all of that was shut down when ronald reagan went down the health planning a party at the federal level. they immediately set in motion a wave of restrictions on access to information. but there is still some information that you can use. that is what i am now going to tell you about. you have heard references to quality issues being a factor in cost. that may be some of the dimensions. the institute of medicine, in 1999, reported, after exhaustive digging through mountains of data, about 40% of health-care spending is wasted on unsafe or ineffective care. this was -- it goes up and down

from place to place, but generally, nationally it was about 40%. in that 40%, chronic care errors and mistakes account for 20% of total cost. if you can imagine any other expense, in operation of a business, that was 40% waste, and was identified as being whist year -- waste year after year with such little action, somebody would be fired. but the problem is, there is no one in charge of health care quality. there is no one in charge of health care period. there is occasionally affected organizations established that take up a piece of it, but there is no over all maintenance of accountability. and that is part of the problem that you will have an opportunity to address, add this

planning review unfolds. one result of that has been, efforts have been started up in several places around the country to identify waste, reduced the rates of error, and develop systems of accountability. one of those systems of accountability is known as potentially avoidable complications analysis. it is a software system developed in the public demand by a nonprofit research and development organization. it was developed with philanthropic support from robert johnson, and the commonwealth fund, and is within the public domain. it is fully transparent and was developed from the court did efforts of a very highly skilled team of clinicians and researchers around the country. what it does is take claims and

sort them out in a way that you can see, for every individual patient, for groups of patients, you can see what services they got that conformed to the protocol of care. that is the evidence-based standard of care for their condition. and what things took place that should not have taken place or that were dangerous or wasteful. in a state that we had done, my organization has been mounting these evaluations. the first large-scale reports will be coming out in california this year. calpers has commissioned an analysis of about 300,000 -- their fee-for-service beneficiaries. they are representing pg&e workers. they have also agreed to an analysis, about 100,000 of their

beneficiaries. most of home if not all are in the bay area. the things i want to say to you is that this has to be done. if i were a planning director today in this area, i would do everything i could to insist that there be complete disclosure not only of the finances, but complete disclosure of all of the issues related to quality care and performance. those are as obscure and concealed as politically possible by the organizations that reflect and support these large private hospital networks. supervisor campos: thank you very much for your thoughts, your insight. greatly appreciated. we look forward to hearing from you in the future as well. now we are going to hear from our very own catherine dodd.

as was noted earlier, you will not find anyone who knows more about these issues than she does. so, to our wonderful director of san francisco health services. >> thank you very much. i have to say that the fix sort of precluded me from even speaking to her before this, i had nothing to do with that comment. [laughter] it is great to be here, and i want to thank you for shedding light and shining a light on the increasing cost of health care for our own employees, but also for employers and employees throughout the bay area. the health services system provides coverage for not just city and county employees, but also the community college district and the superior court.