• The Department of Public Health does not request the Board of Supervisors to approve increased rates for all patient services annually. Therefore, rates for some patient services remain unchanged for several years, resulting in very large rate increases in subsequent years. For example, the Department of Public Health did not increase rates for Pharmacy, Central Supply and Surgery Supply for several years, resulting in patient rates for these services, which were below the market average. In FY 2002-2003, the Department of Public Health implemented new prices lists for pharmaceutical, medical, and surgical supplies, with average price increases ranging from 35 to 70 percent, resulting in patients unfairly paying very large rate increases in a single year.
  
  
• Further, by not increasing all patient rates annually, the Department of Public Health has set some patient rates too low to maximize reimbursements from third party payers, risking the loss of reimbursement revenues from third party payers. For example, because the Department of Public Health did not request a rate increase for Home Health Services when the Board of Supervisors approved patient rates, effective July 1, 1999, Home Health Services rates fell below the allowed MediCal cost reimbursement. The Department submitted a second ordinance in January 2000 to increase Home Health Services to prevent revenue loss.
  
  
• Based on a 2002 consultant’s report, the Department of Public Health submitted new patient rates in FY 2002-2003, which were approved by the Board of Supervisors. However, the Department of Public Health did not request that all patient rates be adjusted. The Department of Public Health should request adjustments for all patient rates on an annual basis. Also, the Department of Public Health should incorporate the consultant’s recommendations to review the Hospital’s rate structure to ensure that the Hospital is charging for all services provided

Setting Hospital Patient Rates

The Board of Supervisors adopts an ordinance each fiscal year, establishing Department of Public Health patient rates. The San Francisco Municipal Code requires that the Board of Supervisors set patient rates annually, and that the Department of Public Health compute the unit cost of providing services each year, with approval by the Controller. To establish new rates, the Department conducts surveys of local hospitals and reviews existing reimbursement rates from third party payers. According to the Chief Financial Officer of the Department of Public Health, costs are not the key consideration in setting rates and, instead, the only important consideration is that the Hospital’s published rates exceed costs.

FY 2002-2003 Patient Rates

In FY 2002-2003, the Department of Public Health submitted new San Francisco General Hospital patient rates to the Board of Supervisors with average patient rate increases of 14 to 15 percent. For the first time since 1995, the Department of Public Health increased surgical and medical supply rates, and clinical laboratory and radiology patient rates. Also, San Francisco General Hospital began charging an hourly rate for oxygen therapy for the first time.

In 2001, San Francisco General Hospital hired a consultant to review San Francisco General Hospital patient rates, and based the FY 2002-2003 rates upon the consultant’s report. The consultant benchmarked patient rates that contribute most to Hospital revenues against the detailed rates charged by other California hospitals. The consultant found that:

• Five Hospital departments’ patient rates (Pharmacy, Clinical Laboratory, Radiology, Central Supply, and Surgery Supply) were below the benchmark. The Department of Public Health increased rates for all five departments by 35 percent to 70 percent in FY 2002-2003. Pharmacy rates were also increased by 35 percent.
  
• San Francisco General Hospital rates were below market when compared to comparable rates in other Bay Area hospitals.

Consultant’s Recommendations

Pharmacy, Central Supply, and Surgery Supply Rate Structure

The consultant noted that patient rates in Pharmacy, Central Supply and Surgery Supply were considerably below the benchmark Charge Description Master. Specifically, the consultant noted that San Francisco General Hospital Pharmacy revenues were approximately 8 percent of total Hospital revenues, compared to the other hospitals’ pharmacy revenues, which ranged from 12 to 15 percent of total hospital revenues. Central Supply and Surgery Supply revenues were approximately 3 percent of total revenues, compared to other hospitals’ central and surgery supply revenues, which ranged from 8 percent to 10 percent of total hospital revenues.

The consultant recommended that San Francisco General Hospital review the rate structure in these departments to ensure that the Hospital is:

1. charging for all resources used,
2. capturing all existing charges, and
3. using appropriate mark-up formulas.

San Francisco General Hospital implemented new price lists for medical, surgical, and pharmaceutical supplies in FY 2002-2003, with average price increases for medical and surgical supplies of 70 percent and for pharmaceutical supplies of 35 percent.

Charge Protocol Manuals

The consultant also recommended that San Francisco General Hospital develop charge protocol manuals, documenting the services provided, equipment and supplies used, and the pricing philosophy. The consultant’s review of the Hospital departments showed that some managers of Hospital departments lacked an understanding of how the department charged for the services that it provided.

Setting Patient Rates to Maximize Reimbursement

Patient Rates and Third Party Reimbursements

The Department of Public Health does not expect third party payers to reimburse San Francisco General Hospital for the full amount of patient rates. The Hospital projects annual net revenues based on the actual expected reimbursement rate rather that the full patient rate. For example, in FY 2002-2003, San Francisco General Hospital projected MediCal inpatient net revenues based on the MediCal reimbursement rate of $1,075 per day rather than the Hospital’s medical/surgical room rate of $1,775 per day. In FY 2001-2002, total patient charges were $537,577,501 and total collections from all payers, including managed care capitation payments, were $166,611,876, resulting in a reimbursement rate of 31 percent.

While Federal and State revenue sources are less responsive to rate changes, commercial payers are billed in full for patient charges. During FY 2001-2002, commercial payers had a reimbursement rate of approximately 62 percent. Accordingly, if patient charges billed to commercial payers were increased by only two percent, revenues would increase $252,894.

Setting Patient Rates Too Low to Maximize Reimbursements

In the past, the Department of Public Health has set patient rates too low to maximize third party reimbursements. This was primarily due to lack of a timely review of charges at the detailed level.

In FY 1999-2000, the Department of Public Health did not increase its home health service rates in the annual patient rate ordinance. When Medicare raised its reimbursement cost limits for home health services in November of 1999, the San Francisco General Hospital patient rates fell below the allowed reimbursement. The Department of Public Health submitted an ordinance in January 2000, requesting a retroactive rate increase to prevent a loss of revenue.

In FY 2000-2001, the Department of Public Health requested a second patient rate increase mid year to maximize reimbursement revenues from MediCal. In July 2000, the Department of Public Health increased San Francisco General Hospital room rates by an average of 12 percent, and increased room rates by an additional 10 percent in January 2001.

Patient Rates and Cost Analysis

The Department of Public Health does not have written policies or procedures to develop patient rates. The Department does maintain documentation on rate increases in prior years and informally surveys local hospital room rates each year. According to the Department of Public Health, costs are not a key consideration in establishing rates, although the Department does identify that patient rates exceed costs by comparing estimated revenues based on full patient rates to actual expenses.

The Department estimates aggregate revenues that San Francisco General Hospital would receive if the Hospital were fully reimbursed based on existing patient rates. These estimated aggregate revenues are compared to actual total expenses. According to the Department of Public Health, total expenditures equal approximately 75 percent of estimated aggregate revenues if the Hospital were fully reimbursed based on existing patient rates. The Department does not compare expenses to estimated revenues by individual Hospital services.

The Department of Public Health does not uniformly set patient rates for specific services to equal the cost of providing the service and therefore, is not able to identify if established rates for specific services equal or exceed the cost of providing services. According to San Francisco General Hospital Department of Finance staff, the Hospital does compare actual patient revenues generated by specific services to the cost of providing such services. Because third party payers, such as Medicare, MediCal, and managed care providers, pay a pre-determined reimbursement rate which is usually less than patient rates set by the Department of Public Health, actual patient revenues for specific services are less than estimated revenues which are based on full patient rates. Therefore, the Hospital can identify if actual revenues for specific services are equal to or less than expenditures for the service, but the Hospital is not able to identify if the Hospital’s established rates for specific services equal the costs of providing the services.

Conclusion

The Department of Public Health needs to establish written protocols for annually reviewing all San Francisco General Hospital patient rates to ensure that the Hospital is charging for all resources that are used, that patient rates cover the cost of providing services, and that rates adequately capture third party reimbursement payments.

San Francisco General Hospital does not consider service costs as a key factor in setting patient rates. Most third party payers reimburse the Hospital based on predetermined reimbursement rates, which are usually lower than the patient rates set by the Hospital. However, in the past the Department of Public Health has set some patient rates too low to maximize reimbursements from third party payers, risking the loss of reimbursement revenue. If the Hospital incorporated service costs into patient rates, the Hospital would ensure that third party reimbursements based on patient rates covered the cost of services.

Because the Department of Public Health does not increase all patient rates annually, patient revenues for some services, especially Pharmacy, Central Supply and Surgery, have fallen below the market average for these services. For example, San Francisco General Hospital Pharmacy revenues equal only 8 percent of total Hospital revenues, although in comparable hospitals, pharmacy revenues make up 12 to 15 percent of total revenues. Also, the Department of Public Health has periodically implemented very large rate increases to compensate for no rate increases in prior years. In FY 2002-2003, the Department implemented new price lists for medical, surgical and pharmaceutical supplies, with average price increases ranging from 35 to 70 percent. To prevent patient rates that fall below market average and large periodic rate increases, the Department should increase all rates for patient services, including rates in the Charge Description Master, incrementally each year.

Based on a 2002 consultant’s report, which found that San Francisco General Hospital’s patient rates were below market, the Department of Public Health submitted new patient rates in FY 2002-2003, incorporating the consultant’s findings. The Department of Public Health should also incorporate the consultant’s recommendations to develop charge protocol manuals, documenting the services provided, equipment and supplies used, and the pricing philosophy.

Recommendations

The Department of Public Health should:

Costs and Benefits

Our recommendations would increase the Hospital’s ability to analyze the cost-effectiveness of providing specific services and ensure that the Hospital is fully capturing allowable third party reimbursements. Based on a two percent increase in patient charges to commercial payers, we estimate that Hospital revenues would increase by $252,894 annually.