these would be new facility beds, not those already in operation. it maintains the existing stock. it is anticipated that cpmc would place those it is important to note that skilled facility bed to not have the same stringent -- stringent safety standards at acute-care beds have and it's harder to maintain the beds with those high cost seismic safety standards and our own san francisco general hospital, when it is rebuilt, will have skilled nursing beds but the beds will continue to be in the old hospital building as opposed to the new hospital building. this is a trend not just noted here but as was noted is a national trend among hospitals nationwide.

the last area we focus on is the community benefits on vulnerable populations. key in this area is the community care innovation fund, a $20 million fund that will serve to primary purposes. first, it will support clinics to get them ready for health reform. 75% of the fund will be devoted for this purpose. it will support not only tenderloin provider to provide care to the 10,000 managed lives but the clinic in general so they can be a better partner to other managed-care providers in the city as we prepare for health reform. the focus will be on san francisco's low-income and vulnerable neighborhoods.

this chart provides a summary of the liquidated damages. i did go over them in detail but you can see for each of these provisions listed in the first column on the left, they are specific consequences in the event of a breach of any of these provisions. supervisor chiu: can i ask a question of clarity? i have heard they are investing a significant amount of money and a been no reason to close st. luke's. if the financials we received last week were correct and they were able to get out of the contract, my calculation is they would escape a $30 million a year time is 15 years of obligations to the city, about $450 million. is that correct? >> that is correct. i would defer to legal counsel,

but that is correct. supervisor chiu: it is a good question that is raised about why cpmc would want to pull the plug on save lives, but there is a financial incentive to make that happen. -- on st. luke's. >> i would like to provide an update on the supreme court decision on health reform. the supreme court decision was expected last time and since then the supreme court has ruled in a 5-4 decision on the constitutionality of the affordable care act or health reform. it declared it unconstitutional and constitutional in part. and that held the individual mandate which means people will be required to have health insurance by january 1, 2014. it found to be it

unconstitutionally coercive but created a provision that makes the medicaid and optional for states. california has been on the path to health reform through a waiver it received last year and has already stated its intention to implement the medicaid expansion. as a result of health reform, 80,000 uninsured san franciscans will have health insurance. 30,000 will have metical and reduced reliance on charity care and the provisions in this development agreement that rely on health reform remain relevant. at this point, i would like to turn it over to catherine bought from the health services system. >> thank you for being here. >> thank you. i'm the director of the san francisco of services center. you have before you -- we have 107,000 members that are active

employees and retirees and their dependents. we serve for employers, the city and county is the largest -- is the largest. the san francisco school district makes up 25% from the community college district makes a small percentage of our membership and the superior courts make up an even smaller percentage. all of our members are divided between three different health- care options. the kaiser hmo which is about 47% of our members with a global budget. the blue shield one has about 43% of our members and the difference between the to his his his his kaiser has a global budgets and we pay them a certain number of dollars per member per month and a divided up between the physician group

and inpatient and outpatient. blue shield pays the physician group's a capitated amount per member per month. but then they also pay the hospitals fee-for-service so every emergency room visit, every medication in the hospital is paid as a fee for service cost, not on a capitated basis. our physician group costs are somewhat predictable but hospital costs are completely unpredictable. the third office -- the third option is the city plan, also called plan one, and that is a self-insured product where the city plays every -- the city pays every claim fee-for- service. the majority of the health service enrollees' access hospital care through blue

shield and a smaller number of city plan members also access to care as well. >> can i ask you to read pay -- you save the hospital costs are unpredictable and that could impact them? >> we are hopefully designing an agreement to make it more predictable. that is one of the goals. hospital costs in particular -- prices are driving hospital costs of. it is pricing, not utilization. utilization is also a contributor. in 2011, the health service system looked at what calpers was doing. is the second-largest provider

in the country and they successfully implemented and accountable care organization in sacramento. that is a collaboration between hospital systems and physician groups where they try to work together to bring costs down. it is counterintuitive for the hospitals are paid fee-for- service. hospitals are grappling across the country with how they going to have a revenue stream if they're keeping people out of a hospital? they try to eliminate duplication and better coordinate care. our goal in creating to organizations was to create competition between the two. if you look at this slide, you can see blue shield and accountable care organization one and accountable care organization no. 2.

in terms of how we negotiate rates, and this was true for 2013, it negotiates a single rate for both. if you are in the group, you play u.k. pay the same premium. their rate is negotiated with physician groups and they negotiate their rates with the hospitals. since it is a fee-for-service, blue shield is negotiating a percentage of the bill charges or a percentage of the retail price list.

health and human services does not negotiate directly with them or the hospitals. they do on our behalf. however, we have developed a partnership with both accountable care organizations and we are monitoring and to get data on how many emergency room visits there are decreasing and whether their use of generics is it -- is decreasing. we are monitoring and to make sure they meet the cost and quality metrics. in terms of health insurance costs, if you look at this pie chart, our budgets was $691 million. of that, to under $25 million went to kaiser and $221 million went to police shield. we have members all over the state of -- went to blue shield.

we have members all over california, not just in san francisco. the other piece is attributed to the dental, vision, and long- term disability. that gives a breakdown of what our costs are. at our total cost will be close to $700 million, a substantial amount of money for the county, school district and community college district and the courts. systemwide, there is a correction our average monthly premium increases in 2009, when i came to this position, or 9%. in 2010, they went up to 13%. 2010 was a bad year for all employers, but we felt it.

we went down to 3% in 2011 and you will hear this later this month, we have negotiated rate increases under 3% for 2013. but what is key is the health services system had surplus funds from a blue shield credit and we literally paid down the dependent costs to keep dependence on the product. at the reason it went down so far was because they agreed to flex spending which means we are paying the bills and we brought down the costs which gave a guarantee of more families in the project. those numbers are not just magical. they took work. in terms of possible cost increases, the hospital costs have increased 46% since 2008.

those are caused by increased utilization of members and increased prices, the actual cost of care. >> this is a difficult and complicated system that we have, but if i could boil down what i think is going on here, the federal government is encouraging all jurisdictions to use accountable care and if you have competition, it helps to bring down rates. could you tell us what successes we have had or set up have helped to slow the rate of increase in our premiums? it seemed like we had some pretty good progress between 2012 and 2011. >> today, the centers for medicaid and medicare services announced 89 additional accountable care organizations

throughout the country. this is the leadership of secretary sibelius and president obama saying they are going to reimburse things differently. they're going to pay for quality outcomes and they're looking specifically at things like patient readmission. if they get dismissed after 30 days, perhaps they were not sick enough to begin with or needed better planning. if you can reduce that, you are reducing the hospital cost. similarly, controlling emergency department visits, after-hours, we are working with organizations to establish urgent care hours. the only place where there are effective urgent care ours is that san francisco general. we should be proud of that but after 6:00, the doctor says go to the emergency room.

then we are paying an emergency room visit cost which is more expensive than a doctor's visit. at kaiser, you don't go to the emergency room, you call the advisers. they very rarely sent you to the very expensive emergency room. we have nine months' worth of 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.