data. the accountable care organization had a head start because they were working with calpers and they hit the ground running and they have seen remarkable improvements in their emergency department rates and generic drug utilization rates. commends have been made in their working toward bringing those same metrics down. they are not quite as significant, but the really important takeaway number is when you look at the trend line, and had been 16%. we were going to see continued trend that 16% and we have lowered them to 9%. that's largely due to accountable care organizations.

how's that translated to our rates was the first year, 2011, blue shield and groups and hospitals of france said we are counting on you being a successful and we will give you a $15 million rate increase production. that was the rate commitment from physicians and their collaborating hospitals. this year, our trend was down to 9%, but because we had subsidize premiums last year, our rates were going up dramatically. we will be writing checks to hospitals and physician groups and we also paid down the premiums and we got a 3% rate

reduction so 3% at over a million dollars is a substantial amount of savings to the city. they're working both in terms of keeping people healthy and saving money. in the long run, the coordination of care is significant and i would be happy to meet with you individually and tell you stories about how much they care has improved because doctors are working directly with the hospital. as a nurse, i thought that it made sense but we actually had to put it into our contracts that we wanted them to collaborate. secretary sibelius came to st. francis when we launched and we have had a meeting with the regional director and this is being watched closely by the nation to see how accountable care organizations can compete to improve care based on not

just equality but cost. >> it is critically important that we have competitive aco's? >> absolutely. we had a health futurist and economist speak to us who said it we must keep competition post-health-care reform. health-care reform is pouring a lot of government money into coverage so every hospital system is trying to buy up their corner and increase their market share. i was reading a trade journal and one of the goals is to increase market share because when you increase market share, you eliminate competition. that is the only way we can keep costs down. supervisor chiu: >> it do you see challenges maintaining those

here in san francisco? >> there is a challenge in terms of how the out of network costs will be attributed. on june 14, blue shield brought in their own network proposal eliminating st. francis and st. mary's. no one anticipated it. they promised they would keep our rates flat so we would have no increase, which was a short- term savings. the health service board said we want to competing ones, come back next year. they wanted to make sure the employees could still go to st. francis and go to st. mary's. i think it was clear the goal

was to increase market share and challenge smaller hospitals. we are talking about the whole health system in this agreement. it is not just st. luke's, it's all providers in san francisco and the board felt our members should not be forced into kaiser alone and not be forced into sutter alone and we should keep competition in the marketplace. supervisor chiu: so you are saying that a couple of weeks ago, blue shield proposed a narrow network to essentially drive out their competitors? is that a fair characterization? >> that is one way of saying it. i think it was a brilliant business strategy. the idea is to increase your market share so that you can determine the price point.

as the largest employer in this city, if we were to poll all of our members, 5000 members you know how big our employers are. we don't have many to have 5000 employees. if an employer pulled out of st. francis or st. mary's, that would be a significant loss of business. supervisor chiu: i know there was not a lot of coverage on the decision but i was surprised to understand what had happened and i appreciate the explanation. >> i think the other part of the narrow network is when you go back -- let me continue and we will talk a little more about it.

>> i think it is -- i am a little bit alarmed that this proposal. can you walk me through this again? when you are saying blue shield is proposing to narrow the network, and excluding st. mary's, what does that mean at the end? what happens to our 5000 members who are part of the physicians dignity? >> they would have to switch medical groups and if they needed hospitalization, they would be required to go to cpmc. supervisor kim: what is the

option if you want to stay with your current medical group? >> you would have to disenroll and then enroll in a preferred provider claim. it's extremely expensive for us and we only have about 700 active employees because it is so expensive. the insurance costs are much, much higher. >> with the break down then? >> there are 21,000 members in san francisco and another 5000 -- they are now a united medical group. 5000 in alameda county. the palo alto and one has about 5000 members there. for us, the issue in the east

bay is it doesn't really matter because that's the only choice they have. sutter bones every single hospital bed with the exception of st. rose which is struggling. hear, our employees have a choice and here we have the finest medical institution in the country. there is probably elul competition there but we wanted our employees to be able to have a choice. an interesting question that you raised is because uc is in that group, they have high-risk members or more expensive patients. you don't really go there to see

your family practice doctor. you go because you have an underlying chronic illness or you have had cancer and are being followed up. they have by definition high- risk members and have partnered beautifully with st. mary's and st. francis and have a step down in terms of rehab. you have an academic medical center partnering with a community-based hospital and the physicians have done a better job at reducing costs. they had experienced doing it in the sacramento and we are hoping this kind of improved care will spread throughout both of them. >> i am understand this is a difficult question to answer, but i assume many experts would say this would allow health care costs to increase when there is less competition? >> if you look at the current

literature, the warning is about increased consolidation and the elimination of competition. kaiser came with the lowest increase we have ever had because we keep talking about competition and we have pushed the rates down by subsidizing them. we are saving the city a tremendous amount of money mostly because of competition between blue shield and kaiser. ultimately, we want competition between the two. the blue shield rate is lower than the kaiser raid or they have a narrow network. competition is absolutely essential and particularly after health care reform. >> thank you.

>> our goal was to provide some predictability. our second goal was to make sure the city paid its fair share of the cost of a new building. that they were not all passed on through the premiums. within the development agreement, the mayor's office and health services agreed to limit the rate increases to blue shield to 5% for years for-10, it would be the medical cost of inflation plus 1.5%. medical inflation has ranged between 3% and 4.7%. in my reading yesterday, the june health affairs journal which is a notable journal and

the industry projects post- health-care reform will see medical inflation increase and from 2011 through 2021, inflation will be at about 7.5% that it will go back down. medical inflation is unpredictable, but at least there is a cap there. in this model, blue shield and negotiates with the accountable care organizations and what was proposed is of the top line. we are hoping to create different rates for those premiums based on cost and quality in those networks. we want our members to choose

based on quality, not just based on the physician have always known. yet a history of heart disease, you should know where the best cardiac care is. you should be picking our hospital and physician based on what they do the best and what is most cost-effective. ec those 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