narrow networks separated out and is a key piece here explains there are in network charges and out of network charges. in the agreement, they agreed to cap in network charges, but for anyone not in that network to end up in a summer hospital, they would be out of network. if the separate networks are created, they would get the discount rate and the out of network would pay what they call a non-participating rate. while we do not know the exact amount, while blue shield offered to open the books, most hospitals will not open their books, but it is known in the industry that the non-

participation rate is 95%. you might ask what is the retail charge? from one of our retirees who brought us for bill, her eight- day stay in the hospital was over $900,000. because she was a medicare, blue shield only had to pay 21% of that. but the bill charged for a generic stool softener was $17.50. the bill for an aspirin was $1.80. hospitals very rarely charge people the bill charges unless you are out of network, which is what we are talking about. supervisor chiu: you mentioned it was hard to get information

and i had been told they had some of the data and i was wondering if you could talk about what we know about their rates compared to other hospital and health-care systems? >> hospital systems file their retail list with the statewide bureau and there was an article last year in the "l.a. times that showed their prices were about 30% above other hospital prices in terms of their pricing strategy. >> this is statewide? >> they are predominantly in northern california. their 30% higher than other hospital chains. calpers has data because they are a public entity, it shows their prices are higher than other hospitals. but there is a real this

advantage, as long as prices go up, hospitals come in and out shout a price below them. you can still be competitive as long as you are just a little bit below them until you don't exist. >> is that helpful? in closing, how would we and force this cap? cpmc agreed to having an independent actuary validate if we had the same people and same claims year over year, they would look at the numbers and the cost and they would not increase their cost over 5% for the first three years.

if they violate that provision, they are required to refund that amount to the city of any amount that was impermissibly charged. questions? supervisor chiu: i have a number of questions. from your perspective, do you think what is proposed in this agreement meets the city's objective is to keep costs down? >> i think it is a modest beginning. i think having a cat at a time when there is so much unpredictability is really valuable. having the cap at 5% is a beginning. the challenge for us would be to level a playing field and until

we can assure both programs can maintain their memberships and compete equally, there is some jeopardy about whether we can continue the accountable care organization. the physicians' group does not have enough of a market share to compound the fact that pretty much every four blocks in san francisco you can go to a setter emergency department. if i had a heart attack in the castro, i would go to ralph davies because it is so close. because they have the dominant market share of emergency departments, they have the dominant market share of admissions to the hospital. if the other is paying that higher rate, it will be difficult to meet their operating expenses. as far as i know, blue shield has not said will you do a

narrow network. but they have said it would be very hard. our goal is to level the playing field. whenever we have to do to allow them to compete, not just for the city and county, above all the employers in this city. as the largest purchaser of health services, what happens here is the beginning. what happens in san francisco stays in san francisco and we will see cost increases if we eliminate the competition. >> what is your suggestion to make sure maintain competition be within the system and this project does not allow further elimination of that competition. >> if the blue shield would

negotiate the same rates regardless of which hospital people went to, i know other participating hospitals are willing to say if you end up at st. francis or say mary, they will not charge out of network rates whereas the two networks separate it. the prices are still higher, but the percentage rate is what is difficult. kaiser is a great example. when a kaiser member and that in a summer hospital, they pay 100% of billed charges. kaiser is very good at repatriating members, but it's all large amount of money they spend on out of network hospitals. if we look at our own plan, we have in network possible that out of network hospitals.

our greatest cost are 4 out of network hospitals. we are trying to expand those hospitals. we don't have a lot of people and it's not nearly the size of money we're talking about in terms of the blue shield contract. i don't mean to ramble. >> if i could ask another question from a supreme court decision -- i was surprised -- it is what the industry is expecting is a medical inflation is going to go up. you mentioned that right now, different health-care systems are jockeying for position. could you explain what impact that is going to have? 1.5% given the numbers you are talking about seems like pretty big numbers. >> i would agree that they are very big numbers.

it is a large increase the city will have to bear as the city is trying to balance the budget or that our employees will have to bear. this is the third year we will cost shift to employees. in terms of what health systems are doing is they are trying to corner the market on the high- tech, highly reimbursable services. the secondary and tertiary care services, health services are expanding their surgical facilities and expanding their transplant facilities because of those are highly reimbursed beds. them -- they are in demand. the more high revenue beds you have, the more of the market you have and the less likely smaller competitors are to compete. >> when i spoke with the

management of what they expected their rates to look like, i was told they do not expect us to see the types of numbers you just laid out. i don't know if this is best directed to you or other city staff but could you talk about what you expect to see as far as rates moving forward? what sorts of numbers can we expect? >> that is probably the largest area of uncertainty right now. california is in very good hands with our exchange being led by the former executive director of the business group on health. but the broad expansion and unmet needs of the people pouring in you have not gotten the knee surgery and back pain taken care of it is going to increase utilization. the good news is the economy will improve.

bad news is when the economy goes up, health-care utilization goes up. people are afraid of getting there any fixed or whatever they need done. they are afraid of having surgery because they might use -- they might lose their jobs. i don't have a crystal ball. i just did a quick search anticipating a question of what health care inflation will look like. that article suggested that. >> i know we have been talking about our ability as a city and the ability to control cost for our health care expenditures. can you talk about what that might mean for private sector costs and employers year as they deal with health care? i think what we do from the city helps to impact what happens in

other sectors. >> our strategy for containing costs, to have to a vibrant and competitiveaco's -- knowing who is charging what for what and being able to compare why a knee replacement costs $35,000 in one place and $55,000 across town and focus on wellness, those are our three cost-containment strategies. i was asked to present the accountable care organizations in december because everybody is watching this competitive experiment hoping it will be successful in containing costs. we came in better than most businesses and i think we did because we have been talking competition now for two years. we were lucky to figure out a

way to turn blue shield around. if we don't contain this competition or continue to maintain competition, all the other employers are going to pay higher costs. we get good rates partly because we are so big. we have a huge pool. the importance of competition is underscored and you will see more and more employers will have a kaiser-only model because they cannot afford a blue shield model. we believe especially with the excellent medical care we have that all of the hospitals, all of our employees should be able to pick any hospital and be able

to afford it. >> it seems like the type of medical inflation that would impact this city, if you magnify that, we are talking about hundreds of millions of dollars if we do not get it right. >> i believe that is true. supervisor cohen: i have a question about competition. do you know of any analysis the city has done or a third party that relates to what the impact will be to other businesses and their health care costs? even if there has been in the analysis done on how this deal will have an impact on smaller business owners.

is there any data? >> to my knowledge, no analysis has been done. you could say what are the implications of having a one hospital system have a majority of the market share. i know that the catalyst for payment reform is doing a lot of work nationally. this is not only happening here. is happening across the country and that is why it is the employer's stepping up as well as the insurer's saying we have to do something. >> have you heard from other employers? >> just in off the record conversations. supervisor kim: i will spare the questions because i just have a

couple of questions. have a 3:00 meeting so i cannot stay. the route past couple of months, as i think we on the board have really been digesting this development agreement, what has become really clear to me in only the last couple of weeks is how important this piece of the development agreement is and i have focused on some of the traditional aspects, whether it's affordable housing or how large employer and to be that plan on growing helps to mitigate some of the housing market impact is going to create and publish ensuring a level of charity care we have seen from our other institutions, as i think about this long term, as a policymaker, i think this very issue of what health care costs

the city and how what overall impacts employers in the city is an incredibly important issue. st. luke's is an important part of the delivery of health care and i hope as we continue to move through, that we really have a robust discussion on what the long-term impact of this mean and i am alarmed that a proposal of narrowing a network that doesn't include a really important health-care institution and what it means long-term when we see this competitive experiment has been working and saving taxpayer dollars and for the city, what it means for every one. this is a priority issue for our country, what health care means and how much it costs for people to take care of

themselves and be healthy and safe. i think there are larger questions with our ability to trust who we negotiate with because a lot of that is involved in supporting a deal like this and i hope this conversation doesn't and it here today because this is going to have a huge impact not just on tax care dollars but we just went through a budget process where we debated over how we can spend dollars on services for people who are homeless or seniors and immigrants cannot to know that we may not be able to make those types of decisions because health-care entities are figuring out how to create a larger market share or charge more to keep people healthy is problematic. i just want to put that out there. this is increasingly becoming an issue i plan on focusing on and i appreciate the city for their

presentation on this issue. supervisor mar: thank you for breaking down a very complex system. he said sutter help charges a 30% more than other health-care change but where is the source of that? >> is was na "los angeles *" article from last year. i believed it was a steady at the university of southern california, but i could be wrong. i would be happy to look -- and probably have the article in this folder. supervisor mar: thank you very much. last couple of speakers to help us understand this, the first is alan schafer from the center of policy analysis. i'm going to ask her to limit

her remarks to no more than five minutes if possible. >> i am the co-director of the equal health network, a project of the center for policy -- center for policy analysis. i appreciate the chance to explain consolidation and competition in the next five minutes, so i will do my best. i want to say a couple of things. the proposed expansion would drive up the cost of health care and divert services away from the health-care needs of san franciscans. i want to say the consolidation will certainly concentrate bargaining power in the hands of mega hospitals. but it's also important to recognize the value of having

capacity south of market and making sure at this time of transition that we don't make big decisions that will limit our future options. i am speaking at the invitation of the california nurses association, and i am making my way remarks in concert -- a more balanced division of beds would not only address many of the serious environmental concerns raised by the project, it would result in the long-term viability serving the south of market community. i want to step back on the issue of consolidation and competition. i presented in my written remarks a lot of evidence about how consolidation does increase the cost of health care and there is a reference to the

steady in the los angeles times reporting that last year. i think the important thing to recognizes we are venturing into a new era with health-care reform. economists have told us for many years that the health care system is not an economic good or service like any other and we have seesawed over time between competitive at temps and consolidated attempts to control costs and provide services. it happens right now that we are on a swing with increasing funding for health care but it is important to maintain competition. increasing competition between doctors and hospitals and entities, all of which basically have an interest in maximizing their own income, is never going to successfully control costs.

we have seen evidence of this consistently over time. for now, the main threat to health care costs and affordable health care is a from consolidation. a report by one business group pointed out hospitals are largely nonprofit firms, but when bestowed with market power, use that to drive prices and revenues higher. they spend their monopoly rents on business augmentation strategies and enhancements of dubious value. hospital consolidation in the 1990's resulted in raising prices at least 5% when the hospitals were closely located, increases were 40% or more. when the firms raise prices,

it's easier for competitors to follow suit. in one community, prices went up 23% for emerged hospital and 23% for its competitor relative to control. we know well that summer hospital's business plan is explicitly to consolidate and create a monopoly in particular geographic areas. their own business plan says it is critical for them to secure 25% to 30% of the market share. this is a vital if they're going to be indispensable to major health-care plans. consolidation has resulted in higher hospital prices in northern california in particular. in california, there is an average increase of 10.6% between 1999 and 2005, double

the national rate. the article we mentioned compared hospital costs between northern and southern california and found we pay $7,349 per patient on average compared with los angeles county where it was $4,389 and san bernadine know where it was $4,393. according to the article, much of the reason for higher cost allies was sutter which has groups throughout the northern california region. we can see the strategy at play in several other areas. they have proposed the same kind of game plan that they are

proposing now to consolidate with a provider in a low-income area and they have done this with a public entity created to operate a hospital for the benefit of citizens living in and around castro valley. the hospital district purchased a hospital in 2004 using public funds owned by the district and those who question the arrangement were sure it was negotiated for the express purpose of ensuring funding for the continued operation of the hospital, however they negotiated a provision by which they had the option to cease its operating commend its net revenues fell below a certain level, which was determined after accounting for operating losses to be calculated by setter itself.

this hospital, like st. luke's, services and less affluent population and the related hospital in castro valley. sutter has now made its intention known to close in months, rather than years, leaving residents scrambling to find options for keeping the facility open and operating as an acute-care hospital. it is likely that cathedral hill will continue to attract successful physician practices to include a health insurance plan they can contract with. the same scenario that it will then seek to close a competitive hospital in this case, looking at st. luke's as a competitor that not only provide services but might pull down its rates, we can see a similar game

plan in the east bay with the merger between summit hospital in oakland and in berkeley. a more balanced division of beds would guarantee that we keep the capacity we currently have and maintain the kind of competition between health providers that will give some guarantee as we enter into this time is set up by the affordable care act that we will maintain both the competition we need temporarily to help moderate prices and capacity in neighborhoods to provide services to our population. san francisco and california have been on the cutting age -- cutting edge to find ways to reduce costs and expand access and quality. the city's access -- the city's

actions in this important matter should continue to move us forward. supervisor mar: thank you. any questions? supervisor cohen: just a couple of questions. he noted that consolidated hospitals drive up prices and it is a safe assumption we can't have a hospital in every single corner. what do we need to do? >> in the long term, we have to recognize we have to give power to the public sector and figure out how to set and control rates separate from setting providers competing with each other so we have duplicative purchases of mri machines and duplicative services. we need to use the tools that are available to figure out how to provide and determine what services we need, provide and