California ballot measures test cities' ability to police health care costs

At a time of mounting national anger about rising health care prices, the country’s largest union of health workers has sponsored ballot measures in two San Francisco Bay Area cities that would limit how much hospitals and doctors can charge for patient care.

The twin measures in Palo Alto and Livermore, sponsored by the Service Employees International Union-United Healthcare Workers West, take aim primarily at Stanford Health Care, which operates Stanford Hospital and Clinics, the facility with the third-highest profits in the country from patient care services, according to a 2016 study.

Related: Can California bring down Sutter Health’s monopoly?

The union also is sponsoring Proposition 8, a statewide measure that would impose a cap on profits for dialysis clinics. Together, the state and local measures seek to draw on public outrage over sky-high medical prices. And, for municipalities, they amount to a novel and untested effort to rein in those prices through the ballot box.

“I’ve been in this field almost 50 years, and I’ve never seen a local government regulating hospital prices,” said Paul Ginsburg, director of public policy at the Schaeffer Center for Health Policy & Economics at the University of Southern California. A number of states set hospital rates in the 1970s, and two states, Maryland and West Virginia, do so today, he said.

Opponents question the legal authority of cities to regulate health care pricing, and they predict a flood of litigation against the measures if they pass. The city councils of both cities oppose the proposals, arguing that local officials with no expertise in health care costs would be required to create a new bureaucracy to regulate them.

Stanford Health Care officials say the measures could undermine quality. “It would threaten [the system’s] ability to provide top-quality health care to patients from Palo Alto and across the region,” according to a September statement from the system.

Ginsburg expressed skepticism. “Of course, you could cut rates too much and harm hospitals financially,” he said. “But if done with intelligence, you could accomplish some price reduction without harming quality.”

For the union, the ballot measures could help it gain leverage in future bargaining or organizing efforts with Stanford and other hospitals. Stanford Health Care operates the largest hospital system in both cities where the price cap proposal is on the ballot. Stanford has opened, has acquired or is building health care centers with clinics and specialty services in Emeryville, Pleasanton and Redwood City — Bay Area cities where the SEIU-UHW tried but failed to place similar price-control measures on local ballots.

But union officials say their motive is simply to rein in prices. “Stanford Health is nonprofit. They don’t pay property taxes or incomes taxes,” said Sean Wherley, an SEIU-UHW spokesman. “Taxpayers are subsidizing their operations and getting wrung out by over-the-top prices.”

Stanford and other health systems have been on a buying spree in recent years acquiring hospitals and physician practices, and this concentration of ownership has stifled market competition and further boosted prices for insurers and patients.

The Palo Alto and Livermore initiatives, which also affect other medical systems in the cities, would cap prices charged by hospitals and other health care providers at 115 percent of “the reasonable cost of direct patient care.”

And there, some experts say, lies the rub.

“What is a seemingly simple idea — limiting prices to 115 percent of ‘costs’ — is neither simple in execution, nor concept,” said Benedic Ippolito, a research fellow at the American Enterprise Institute who studies health care financing. “What costs are acceptable/? How will we stop providers from increasing costs as much as possible” to compensate for the cap?

Under the initiatives, hospitals and other medical providers would be obliged to pay back any charges above the cap each year to private commercial — but not government — insurers, and to patients who pay for their own care. They would also owe the cities a fine equal to 5 percent of the excess charges. Fines collected by the cities could be used to pay for enforcing the laws.

Stanford estimates that Proposition F, the Palo Alto measure, would reduce the health system’s budget by 25 percent, forcing it to make cutbacks and possibly end essential services, said David Entwistle, the health system’s president and chief executive officer.

Livermore would need to spend $1.9 million a year on the staff required to implement Measure U — its version of the proposal — and would likely incur another $750,000 to $1 million in legal and startup costs, according to an analysis conducted for the city by Henry Zaretsky, a health economist who has worked for the state and the California Hospital Association.

Patients in the wealthy region expect high-quality services but also can be savvy consumers and passionate voters. It is an open question whether the measures would pass.

Industry consolidation is far more pronounced in Northern California than in Southern California, according to a recent study from the University of California-Berkeley. As a result, inpatient hospital prices in the north were 70 percent higher and outpatient costs as much as 55 percent higher than in the south. The price disparities, even within the Northern California region, can be dramatic.

For instance, independent doctors in the Bay Area are reimbursed, on average, a median $2,408.45 for a routine vaginal delivery, which includes prenatal and postnatal visits, according to a 2017 Kaiser Health News analysis of claims data from Amino, a health cost transparency company. That compares with $5,238.13 for the same bundle of services for Stanford physicians (and $8,049.84 for doctors employed by the University of California-San Francisco).

The higher cost of medical care also pushes up insurance premiums for patients. Health plans purchased on the state insurance exchange were 35 percent higher in Northern California than in Southern California, the 2018 UC Berkeley study showed.

Earlier this year, California Attorney General Xavier Becerra took aim at medical industry consolidation and the high prices associated with it. He sued Sutter Health, one of the nation’s largest health systems, saying it was systematically overcharging patients and illegally driving out competition in Northern California.

To C. Duane Dauner, a former president and CEO of the California Hospital Association, the ballot proposals are “a power play by SEIU-UHW to put pressure on Stanford Health Care.” The union wants Stanford “to be neutral when they try to organize employees in Redwood City, Emeryville, Pleasanton and Livermore,” said Dauner, who heads the campaign committee opposing both measures.

Larry Tramutola, a veteran campaign consultant who is not involved on either side, agrees.

“I don’t think it has anything to do with controlling health care prices,” said Tramutola, who recently managed successful local initiatives to tax sodas and ban menthol cigarettes. “It’s about bargaining. Win or lose on this, other hospitals in other places will take notice and realize that SEIU is a formidable foe.”

Protect Our Local Hospitals and Health Care, the campaign committee opposing the measures, has raised $4.2 million so far this year. The union’s political action committee has spent $1.5 million in support of the initiatives.

Kaiser Health News is a nonprofit news service covering health issues. It is an editorially independent program of the Kaiser Family Foundation, which is not affiliated with Kaiser Permanente. California Healthline senior correspondent Barbara Feder Ostrov contributed to this report.