There is growing concern among some city leaders that a controversial deal Mayor Ed Lee has struck with California Pacific Medical Center to build a 555-bed hospital on Cathedral Hill will undermine San Francisco's efforts to control health care costs.

While the mayor has lauded the complex, 229-page agreement as a jobs generator that will bring the city's hospital network into the 21st century, the deal has raised concerns about how much of the $2.5 billion construction project will be passed on to consumers. The project would overhaul the Sutter Health affiliate's medical facilities across the city and build two hospitals that meet state seismic safety mandates.

Because the medical center provides health care for some city workers and retirees, the fear is that taxpayers could foot the bill for increased health care premiums for those workers in the form of taxes and fees paid by residents, businesses and visitors. Overall, it's unclear how much of the construction costs may be passed on in rate increases, although the city's deal with the center includes a cap on rates it charges to Blue Shield for city coverage.

"In the end, it's the consumers who are paying for this," said Supervisor Sean Elsbernd, a political ally of the mayor and a fiscal hawk.

"The question is: Is this going to be an increase any higher than the city is already going to be dealing with? And two, if it is, is it offset by all the benefits of this hospital?" Elsbernd said. "I don't have answers to those questions yet."

A report last month from Catherine Dodd, the director of the city's Health Service System, which negotiates benefits for public employees, listed the deal as one of several "threats to success" of the city's goal of providing affordable, quality health care.

The Health Service System "has attempted to prevent the cost of the new building from being passed on in (city) premiums, however, Sutter is unwilling to agree to limit the rates charged to (the city's) vendors to the national medical cost of inflation," the report said, noting that Sutter's rates make up the largest portion of Blue Shield rate increases for the city.

When The Chronicle asked Dodd to comment on the report, she declined, saying the city and the Sutter affiliate are negotiating.

The mayor's current agreement caps increases that Sutter can charge to Blue Shield, which the city contracts with to provide health insurance, but the cap is higher than what Dodd was seeking. Under the deal, rate increases are capped at 5 percent a year for the first three years and at the national medical inflation rate plus 1.5 percent for seven years after that.

Long-term concerns

Kathryn Graham, a medical center spokeswoman, said that rate structure guarantees construction costs will not be passed to the city and its employees "in a disproportionate fashion."

"We are not asking for a public subsidy," Graham said. Ken Rich who helped negotiate the deal for the mayor, said that the construction costs will be borne by rate payers to some extent and that the city is "willing to pay for our fair share."

The cap is designed to do that and represents the maximum the city would pay, he said. Annual negotiations on city health care rates could lower prices below the cap.

But others with a stake in the deal say the amounts may seem small but could prove significant. The city, with a $6.8 billion annual budget, has spent more than $368 million on managed care insurance for the first eight months of the fiscal year ending June 30.

Increases could also combine with other factors to make the medical center a dominant provider in San Francisco with the power to increasingly dictate prices, warned Paul Kumar, a policy consultant to the National Union of Healthcare Workers, which represents roughly 750 medical center employees. His group opposes the current deal.

"The short-term impact may not be dramatic, but the long-term impact is devastating," Kumar said. "The mayor's office is about to impose runaway health care costs not only on city taxpayers, but on every business in San Francisco." Graham called that notion "ridiculous."

Supervisor Carmen Chu said that overall the deal has "a lot of positive features in it," but she added that there are details that need to be studied.

A majority of the city's 11 supervisors would need to support the agreement for the hospital plan to move forward. No supervisor signed on as a co-sponsor when the mayor introduced the legislation last week. It also needs approval from the Planning Commission, which will take up the plan Thursday.

"The crucial challenge of controlling health costs is just one example of the incredible complexity of this project," Supervisor David Chiu said.

The deal the mayor brokered is designed to offset the project's public impact, including the demolition of 25 housing units, the strain of more Muni riders on lines in the area and the additional automobile traffic from building a large hospital and medical office building at one of the city's busiest intersections, Van Ness Avenue and Geary Boulevard.

In exchange, the medical center, which is facing a state mandate to retrofit or rebuild three of its hospitals that don't meet seismic standards, would get approvals for its projects, which in their current form need exemptions to city planning rules, including height restrictions and residential housing requirements.

Job creation expected

Lee says the deal guarantees $1.1 billion in community benefits, will create 1,500 construction jobs, retain 6,000 existing medical center jobs and add up to 1,500 permanent new jobs. The deal also would have the medical center providing less charity care than it already does, according to an analysis of city, state and medical center documents, even though a December report from UC Hastings College of the Law found that the Sutter affiliate spent far less on care for poor residents than other private nonprofit hospitals in the city.

The mayor's original proposal called for the medical center to provide charity care at a level "consistent with other nonprofit San Francisco hospitals."

The center provided $101 million in charity care in 2010, the last full year of available data. Under the current deal, it would be required to provide a baseline of $86 million a year, plus take on an additional 10,000 Medi-Cal patients. But the deal caps the center's expenses for those Medi-Cal patients at $9.5 million, bringing their required annual charity-care contribution to $95.5 million, which is $5.5 million less than it provided in 2010.

The 2010 figure was above the average of the prior three years, when the Sutter affiliate's charity care ranged from $71 million to $80 million annually.

"It's a baseline minimum," medical center spokeswoman Graham said of the charity-care requirement in the deal. "We actually expect to do more."

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John Coté is a San Francisco Chronicle staff writer. jcote@sfchronicle.com

This article appeared on page A - 1 of the San Francisco Chronicle