Calpers Takes Aim at Soaring Hospital Prices

Tenet, HCA and Health Management are among the companies coming under scrutiny.
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Critics are seeking a radical cure for soaring hospital prices.

Last week, the California Public Employees' Retirement System directed its staff to "aggressively" pursue legislation that would expose and then eliminate excessive hospital charges. In the meantime, Calpers is attempting to shave costs on its own by excluding particularly expensive hospitals from the network that serves its 1.2 million members. So far, the agency has stopped conducting business with 45 California hospitals -- some of them owned by

Tenet

(THC) - Get Report

-- as it pursues greater savings.

"Shaving a few millions of dollars off hospital costs doesn't address the need for structural reform," Sid Abrams, chairman of the Calpers benefits committee, said in a press release issued Wednesday. "We need to stop the shell game and sit down with all of the hospital providers to find better ways to deliver quality, affordable services to our people."

Calpers is seeking new laws that would force hospitals to disclose their prices and, at the same time, give the state attorney general more power to pursue antitrust violations responsible for driving up prices in the first place. In the end, the agency hopes to secure "fair" hospital prices for its customers.

Typically, hospitals set high prices -- far exceeding their actual costs -- and then offer discounts to public and private insurers. But hospital consultant Peter Young foresees sweeping changes, driven by the employers and insurers that have been picking up big hospital tabs for years.

"They're saying, 'Shouldn't we be paying based on costs? And shouldn't those costs be more public?'" Young said. "The ramifications for hospitals are quite significant."

UBS analyst Kenneth Weakley has been warning about hospital pricing risks for some time. He believes that excessive list prices could wither under mounting scrutiny.

Weakley reiterated his stance this week after an insurer sued a number of Florida hospitals for allegedly charging outlandish prices.

"The insurer claims that the hospitals chose to boycott because the insurer refused to tolerate high prices, which exceeded 300% of actual costs," Weakley wrote on Friday. "This recent lawsuit adds another layer of focus on hospital gross charges, the implications of which would seem to support -- at the very least -- our ideas regarding rising transparency in the hospital industry."

Weakley has pointed to Tenet and

Health Management Associates

(HMA)

as particularly vulnerable, saying their prices are higher than most. The analyst has earned widespread respect for exposing Tenet's aggressive pricing strategy in the first place. But he has also taken some heat for comparing HMA to the disgraced hospital chain.

The lawsuit that triggered Weakley's latest note actually points to HMA as a possible future defendant. In the meantime, it already names

HCA

(HCA) - Get Report

outright.

Medical Savings, an Indianapolis provider of medical savings accounts, has accused HCA of conspiring with others to drive up prices in the Florida market -- and then drive the insurer out of the state. The company, which specializes in medical savings accounts, claims that list prices at Florida hospitals are three times higher than actual hospital costs. The company says it is contractually obligated to seek "reasonable" prices for its customers. It therefore chose to pay managed care-style prices -- or 20% more than Medicare -- instead of the huge list prices charged mainly to the uninsured. But the company says that Florida hospitals, conspiring together, rejected 75% of its checks and crippled its business as a result.

"The only competitive pressure in the acute-care industry in Florida today is from insurers like Medical Savings that seek fair and reasonable hospital prices for the insured and consumer activists seeking to assist the uninsured patient who otherwise has no perceptible voice," the complaint states. "The efforts of the defendant hospitals to quell Medical Savings' strides toward ensuring reasonable acute-care hospital prices have harmed both Medical Savings and the hospital patients -- insured and uninsured alike -- in the state of Florida."

The complaint also names the Florida Hospital Association, chaired by an HCA executive, as a defendant. It claims the association operates as a "statewide clearinghouse" for price-fixing activities. Furthermore, it says the participating hospitals routinely withhold the same information they are sharing among themselves.

"Curiously, while the defendant hospitals' chargemasters are discussed in open forums among competitors, they are closely held and even guarded from disclosure to the very patients and insurers who are ultimately responsible for paying for the hospitals' acute-care goods and services," the lawsuit states.

Medical Savings is seeking to end the alleged anticompetitive practices and dismantle the system that created them. It is also pursuing triple damages for its own personal losses.

Young, for one, expects more outcry to come.

"Are we going to hear other voices in this choir?" he asked. "The answer is yes -- and probably soon."