supervisor campos: good morning, everyone, and welcome to the thursday april 28, 2011, meeting of the board of supervisors government audit and oversight committee. my name is david campos. i and the chair of the committee. i am joined by the committee vice chair, and we will be joined shortly by committee member president david chiu.

covering the meeting today for sfgtv is derek fernandez. >> please make sure to turn off all cell phones. you wish to speak during public comment, please fill lead speaker card and place it to the right of the podium. -- please fill out a speaker card and place it to the right of the podium. supervisor campos: thank you. what we call item two out of order? >> item two, hearing on the city's debt structure and the $1,360 million in non-voters approved debt on the city's books. supervisor campos: this is a matter that has been submitted by supervisor farrell. supervisor farrell: thank you.

i'm going to make a motion to continue this item to the call of the chair. we had a number of scheduling conflicts with people that i wanted to come here today and are going to be integral to this hearing. also, given the other hearing on the calendar today. so i would like to make a motion to continue to the call of the chair. supervisor campos: we have a motion to continue. that makes sense. before we do that, is there any member of the public who is here to speak on item two? we want to give that person an opportunity. seeing none, the item is closed. if we could take that motion without objection. thank you. madam clerk, please call item 1. >> item 1, hearing on comparative costs of hospitals in the san francisco bay area addressing trends of drivers hospital costs, and future cost increases. supervisor campos: thank you

very much. i like to begin by thanking my staff. especially my legislative aide who has been working very diligently to put this hearing together. let me provide some context as to why we have called this hearing and why i believe is important for the government of the city and county of san francisco to focus on this issue. as many of us know, over the past decade, the amount of money that the city and county of san francisco is paying for employee and retiree health-care costs has grown tremendously. 10 years ago, the city was subsidizing employees' health care costs at the level of $176 million during the fiscal year. today, during this fiscal year, fiscal year 2011-2012, the city

projects to spend about 500 million -- exactly $491 million -- to subsidize the city health inch -- the health insurance of city employees. as we face a deficit that at this point exceeds $300 million, it is really important for us as city government to understand why health care costs are escalating. we cannot put our fiscal house in order unless we have a better grasp of that issue. in thinking about that issue and talking to a number of experts and people who are involved in this issue, it became clear that health care costs in san francisco do not happen in a vacuum. for us to understand why it is that health care costs have increased in san francisco, we have to have a better understanding of what is happening in the region, what is happening in the state. it is in that context that we are having this discussion. the fact is that san francisco residents and employers who are already struggling in this

economy are facing the same burden with most insurance companies -- with both insurance rates going up to the point that many individuals are actually choosing to get less insurance or are forced to become uninsured. in that context, we have put together a very distinguished panel of experts who will discuss the various factors that are causing the massive cost surges in health care. one of the issues we will be focusing on, because we have in our research found that it is a very important factor and one we keep reading about in the papers, is the impact on health care costs by hospital market consolidation, and we have been joined by president david chiu. recently, there has been a string of investigative articles that identify cost disparity between services in northern

california and southern california. in fact, in a recent article, the "los angeles times" reported that where hospitals in san francisco get on average $7,349 per patient per day, hospitals in los angeles county by comparison only receive $4,389. that is about $3,000 in difference. in san bernardino county, the figure is actually $3,931. both aetna inc. and blue shield say they charge higher rates to customers in northern california. they actually acknowledge that. then they do customers in southern california. aetna charges 30% more. blue shield says it charges up to 40% more. that comes directly from them. the issue becomes especially urgent, as the city has before it a proposal by one of the

hospitals, by california pacific medical center, to build a 555- bed hospital in the cathedral hill. let me be clear -- the focus of this hearing is not that project. that project is going through the approval process and will duly come before the planning commission and the board of supervisors, and we, as members of the board, cannot prejudge that project, but we do need to understand what is happening in the context of this issue. cpmc is an affiliate of sutter health company, a hospital system that has 25 hospitals in the region, for which premium levels are assessed for san francisco. a number of news articles, many news articles, have cited their pricing power in the region as a major driver of costs, which, of course, are ultimately passed on to the consumer to increase premiums. this is happening at the same time that sutter is actually

reporting massive surges in profit, to the tune of $878 million, close to that $1 billion you were referencing before, in 2010. by way of example, an article in bloomberg "businessweek" sizes -- sets prices etc. hospital as the will be 40% to 70% higher than rivals for typical procedures, but also mentions agreements with insurance companies to keep their costs secret to the point where it is difficult if not impossible for us as consumers to compare those costs. the same article revealed that aetna paid cpmc with a midpoint of $4,700 for the procedure -- let's take for example an abdominal ct scan. $4,700 paid compared to $3,200

for the same services at catholic healthcare west at san francisco memorial hospital. to compound these issues, we have very important developments that have happened, especially the fact that our california insurance commissioner, dave jones, just intervened in a lawsuit that was filed against setter for what they claim are fraudulent pricing practices -- lawsuit filed against cetera. for those of you who have not seen that complaint, i encourage you to talk about it. what they claim in that complaint is that sutter is overcharging for anesthesiology services that either were not performed and also for unfair practices, which effectively prevent insurance -- insurers to challenge the reasonableness of those costs. it is important for us to hear from the people who actually

know this field, who have worked in this field for many years. so we will hear from a distinguished panel of experts who will discuss these issues. i want to thank all of you for being here. i want to send a special thanks to one of our panelists who is here, who has actually traveled from as far as los angeles to be here with us. so i want to thank glen for being here. in terms of the format of this hearing, the way we have structured it is we will first hear from the panelists. if you have any questions for the individual panelists, you can proceed to ask questions, and then, once the panelists have presented, we will hear from the public. it is important for us to hear directly from these experts so that we have a context to understand how it is that we as a city find ourselves in this

predicament. we are projected to spend close to $500 million on health insurance% -- for city employees and retirees. with that, let me first call our first panelist. lucy john's, mph, who is an independent consultant in health care planning and policy -- lucie johns. good morning and thank you for being here. >> is this working? i am an independent consultant doing business as health-care planning and policy, for over 30 years based in san francisco. i have a master's in public health from uc berkeley. i wrote a book called "financial feasibility review and economic impact analysis for health

planning" which was distributed throughout the united states to help health-care planning agencies. i am pleased to start this conversation and to share your attention with many distinguished speakers. san francisco, like the state of california, faces heart stopping budget decisions this year. this hearing is intended to address the subject on everybody's mind, but for which we have no official platform, namely, the cost of health care and what to do about it. i'm not saying you can in fact do anything about it. others will speak to that, and i look forward to their views. but at least you can be aware that proposals for big new projects have caused consequences. once aware, who knows what you might be able to do? let me introduce some components of cost to keep in mind and keep asking questions about. there are two categories i want to focus on. the first is familiar operating

costs. these are costs at a hospital or physician office or hospice has to cover to function. operating costs include salaries, wages, utilities, drugs, supplies, debt service, and so forth. it is these costs unique to each provider, which feed into negotiations concerning health insurance premiums. . cpmc or st. mary's that contract bargain for payment rates based on operating costs they have to recover when they treat payments. you as supervisors he neared the results of this bargaining when you hear the premium increases the supervisor campos has already mentioned that come to your board. this cover operating costs. kaiser, by the way, does not bargain with insurers. kaiser comes directly to the service system board with premium offers, but the bases is

the same. kaiser premiums have to cover kaiser's operating costs. something important about operating costs -- earning a profit or, more politely, margin, or net income is essential. net income generates funds for expansion, for innovation, for keeping up with technology. this is a fact even for non- profit providers. every hospital in seven cisco is a 501 -- in san francisco is a 501 (c)3 non-profit. profits earned by a nonprofit are not distributed to individuals. they are plowback to finance growth, borrowing contingencies. one can argue about how much profit is reasonable for a nonprofit facility. one cannot argue that nonprofit hospitals should not earned any net income.

the second category of costs i call external drivers. external drivers in turn drive operating costs. providers will tell you they have no or little control over external drivers, and for the most part, they are right. let's consider some. first, technology. healthcare is a high-tech business. the miracles that all of you have experienced personally are from knowing someone whose life was saved by a mammogram, an aids drug, a neonatal intensive care, open heart surgery, or a kidney transplant. these miracles are expensive to produce, invent, by, operate, and update. many cities document that inflation in the cost of medical technology drives as much as 50% of overall health costs deflation in the united states. once in the u.s., we have public agencies that tried to prevent duplication of expensive

technology where it was not needed. if technology is bought, it has to be used to pay it off. those agencies are gone. the result is a medical arms race in san francisco where every hospital, to maintain its competitive position or to give it a competitive edge, once the latest everything. and they get it because you and other employers pay for it every year more and more. this arms race is not confined to hospitals. a lot of high-tech care migrated out of hospitals and physician'' offices and clinics. does your doctor had x-ray equipment in the office? have you seen the advertisements in the "chronicle" for full body scans in a private clinic? as a member of your family had a colonoscopy in a freestanding center far from a hospital? hospitals and doctors compete for patients just as hospitals compete with each other.

another big driver is inappropriate care. this includes care that is unnecessary and care that is needlessly duplicated. you would be amazed how much of what passes for health care has never been tested or proven to have a beneficial effect for the patient. it makes money for the provider. it may make the patient feel something has been done or tried, but the outcome does not change. duplication of expensive diagnostic testing is essentially troublesome. as a family member or friend been referred to a specialist or up to ucsf or into cpmc from out of town with no record of what was done for the referral, so blood tests are done all over again? this happens every day. another external driver is poor quality care. about 10 years ago, the concept of never events began to take

hold. this is surgery on the wrong leg, a drug those that combine with another can be lethal. an infection that could be prevented by washing hands before touching the next patient. the result is loss of revenue for doctors, maybe a malpractice suit. medicare no longer pays for never events. health plans available to you and city employees, have they stopped paying? still another driver is physician practice patterns. researchers at brigham of medical school have documented for years that the chance of getting this or that procedure to treat this or that problem there is extremely across the country -- varies extremely across the country. you have a heart problem in minnesota, you get medication to treat it. you have the same problem in miami, you get quadruple bypass

surgery. dartmouth has documented this extreme variation within california between northern and southern california. this variation is such a disturbing factor driving costs that our latest health reform act establishes new approaches to try to reduce it. finally, let me know as a driver lack of primary care. it is a truism in policy discussions that access to primary care prevents expensive visits to the emergency room, avert hospitalizations that did not have to happen, and enables self care for chronic conditions. we need to anticipate in san francisco that health reform is bound to increase demand for primary care, and we need to ask -- do we have the resources we need? if not, what can we do about it? if we do not pay attention to primary care, we will see the costs of more expensive care rise even faster than it otherwise will. i close now by noting that other speakers are bound to tell you

more about the external drivers and about operating costs they would like to see change. if you are not sure whether the subject under discussion is an operating cost, perhaps called operating expense, potentially under a providers control or whether that subject is an external driver, i hope that you will ask about it and probes. thank you for the chance to comment. i will be pleased to answer any questions. supervisor chiu: thank you for your presentation. i have a quick question on your point around technology and how that is helping to drive up health-care costs. are there ways in which you think either the city or the industry can try to reduce the technological arms race that you talked about? as an example, earlier this week, the board of supervisors passed a resolution that i had offered that would support the creation of unified medical records throughout the city, and i'm wondering if there are other

things we could do or that the industry could do from an i.t. end, from a technological end to reduce those costs. i think everyone wants the latest and greatest technology to be used, but obviously, this is applying a significant upward pressure on prices. >> in a competitive market, purchase and use of expensive technology by just about everybody is probably not going to happen -- preventing purchase and use of expensive technology is probably not going to happen. one of the things i mentioned -- duplication of expensive tests and so forth -- that could be alleviated as electronic medical records take hold. the principal problem with electrification of records is the systems that use them may not be able to talk to each other. we call this the drop ability. a drop ability -- interoperable of the -- interoperability

has been a goal in the industry for decades. we have a movement in california towards what we call a health exchange. they helped exchange is going to be an enormous motivator for the vendors of electronic technology and the users of electronic technology to work on, but right now, we do not have it. we can, however, talk about it constantly and speak about incentives to ensure that we get it eventually. supervisor chiu: thank you. i will say to all the members of the health care industry if there are things that we can do in the city to help move that forward, and i am very interested to see if that can be done. supervisor farrell: just a quick question, follow-up in terms of duplication of services. in your thoughts in terms of the causation -- is it more the lack of interoperable the and technology is not caught up and we are working on it, or is it

also in your mind that there is actually incentives to do this from the health care industry? >> there have definitely been incentives to do everything for everybody. under health reform, payment for services is scheduled to change. that change, however, will start with medicare. it may migrate to the private sector. the basic idea will be to reward providers who save money by enabling them to participate in the savings. the structures required to get there, to incorporate the change into their practice, are quite complex. they are called accountable care organizations, and you will hear a lot more about that from other people this morning.

accountable care organization has been announced for san francisco. i hope that you will get some details about that and ask more questions. the point is that the way care is paid for now in general rewards doing more and everybody doing everything. everybody knows this cannot be sustained. so from the federal government on down, there are policy prescriptions to change that. how quickly these descriptions will be effective and whether they will actually reduce the cost of care we all are waiting breathlessly to see. >> following up on that point -- what can government do -- you know, right now, there are incentives for one hospital when we get a patient to run all the tests that they could possibly run without thinking -- or maybe

they do think -- i do not know, but maybe you could say that -- you know, have these tests been done by another provider and whether they can get access to those results so there is no duplication of the costs. what can government do to make sure that duplication is avoided? >> government, as a purchaser, can think about how and when it is going to pay for services. knowing that some care is ineffective, knowing that some care has probably already been provided, there are strategies that can be written into contracts to manipulate or affect how providers behave. the more you do that in the contract, at least be more awareness your rows about what is going on and what needs to be avoided.

your next round of contract thing, i think, as a result of this hearing, and, of course, a lot of other discussions you are having, you are going to be a supervisor quite knowledgeable about what to challenge your help service board about and whether they can do things to create incentives and impose sanctions for inappropriate care. supervisor campos: just a final, maybe of redundant question, our contracts including any of the current strategies? >> the contract is secret, as you already announced. the concept of secret contract has been established in california since 1983. it is written into state law that providers and insurers do not have to share contracts, at least for some time. that might be something you would like to think about changing at state levels because that is where you would have to do it. supervisor farrell: in terms of

that, i guess one of the things i would wonder is -- none of us up here are doctors, and, you know, i think what we would end up doing is getting expert testimony and so forth to say, "this is appropriate. this is not. as legislators, we are not doctors. how would you suggest from my -- from my point of view, the worst thing would be unintended consequences of jumping to actions. how would you suggest parsing through that, and whose opinion do you rely on? i'm sure people on both sides of the aisle will try to have experts. from our point of view, aside from diving in and spending hours, which we will do, trying our best to understand -- how would you suggest going about the process of evaluating that to make sure that we do not change things just for the sake of changing them and have a bad

outcome? >> you should remember that government at every level -- federal, state, and local -- has been grappling with the problem of inflation and the cost of health care for decades. i think the best you can do is to establish formal procedures for interacting with knowledgeable staff and knowledgeable outsiders. catherine dog is about as knowledgeable as you can get, and you do need to rely on her and trust her judgment -- kathryn dodd. she in turn talked to people constantly. people like her need to be available at all times to address what is the problem, what are the remedies, and what are the advantages and disadvantages and movements. anything you do in health care, almost anything is going to cost both ways. you are right about