California's higher hospital costs add to health insurance hikes
This report is part of an ongoing series examining the factors driving up the cost of health care.
Behind every public uproar are some hidden facts. Here's one about rising health insurance rates in California: Sharp jumps in hospital costs are a big part of the story.
A Bee analysis of financial data from 300 hospitals statewide shows they collected $25 billion from insurance companies between September 2008 and October 2009 - an increase of more than a third since 2005.
Hospitals are charging insurance companies, and by extension their customers, billions of dollars for expenses not directly related to care. These include new hospital wings, new technology and services for the uninsured.
Some providers, including Sutter Health in Sacramento, have negotiated reimbursement rates with "markups" more than double what it costs them to provide services.
"It's become en vogue to crucify the insurance companies. ... It's the hospitals that hold insurance companies hostage," said Will Fox, a principal and consulting actuary for Milliman, a Seattle-based firm that has extensive experience studying hospital finances in California. Fox has done work for insurance companies, government agencies and business groups.
Hospitals say their charges to insurers are justified and necessary. But their byzantine pricing policies make it difficult to understand why costs are rising so quickly.
Under state law, hospitals have to report the total amount of money they spend to provide services to insured patients each year, how much they bill insurance companies and how much they wind up collecting.
Based on those numbers, The Bee found that California hospitals charged insurers an average of 53 percent more than what they told the state it cost them to provide services. In 2005, the gap was 40 percent.
For this story, The Bee obtained data submitted to the Office of Statewide Health Planning and Development by hospitals across California between October 2008 and September 2009, the latest available period. Rising hospital costs reflect billions of dollars in spending on items that don't directly relate to caring for individual patients with insurance, but are nonetheless charged to their insurance companies. These costs get passed along in the form of higher premiums.
Insured carry heavy burden
For example, hospitals charge insurance companies to recoup lost profits from meager Medi-Cal reimbursements and to provide care to the poor and uninsured.
The cost of caring for the uninsured and covering unpaid debts has risen substantially in recent years as the economic downturn leaves more people without income or coverage.
California hospitals are also facing costs of at least $110 billion for construction to comply with state earthquake safety codes.
No one doubts the economic strains hospitals are under, said David Hopkins, director of quality measurement at the Pacific Business Group on Health. The group is a coalition of some of the state's largest employers, including the University of California, Wells Fargo and Chevron.
Still, Hopkins is not entirely sympathetic.
"They're collecting and making all this money for other reasons - and because they can," he said.
Hospitals in the Sacramento area, for example, have expanded considerably in recent years. New wings, investment in medical technology and expansion of services may give hospitals a competitive edge on their rivals, but also add to their costs.
Rising salaries for nurses, pharmacists, imaging professionals, as well as compensation for administrators and staff, are some of the variables that go into a hospital's cost equation.
The prices insurance companies pay to hospitals result from intense negotiations, with providers pushing for the highest prices for their services and health plans pushing for deep discounts.
In Northern California, most hospitals now belong to large chains with the market power to largely dictate prices, according to researchers hired by the California HealthCare Foundation.
According to The Bee's analysis, Sutter hospitals have obtained better reimbursement rates from insurance companies than any other provider in the region.
As one of the region's largest systems, Sutter Health is a "must have" provider in an insurer's network because of its reputation among consumers, said William Sandberg, Executive Director of the Sierra Sacramento Valley Medical Society. Sutter Health leverages that power during negotiations, he said.
Hospitals' price-cost gap varies
Sutter Medical Center, for instance, received about $420 million in payments for medical services from insurers between October 2008 and September 2009 - 127 percent more than it spent to provide those services, The Bee found.
At the other end of the spectrum is Kindred Hospital in Folsom, a small 39-bed facility that belongs to a national chain. It charged insurance companies 35 percent over cost.
Catholic Healthcare West, which operates the chain of Mercy hospitals in the Sacramento area, charged insurance companies anywhere from 40 percent to 80 percent above cost at its various capital hospitals, according to The Bee's analysis.
The UC Davis Medical Center received payments from insurers that were 57 percent above the hospital's costs. As with many other teaching hospitals, UCD's operating costs are significantly higher than those of Sutter or Mercy.
Sutter Health has faced scrutiny for its pricing practices before. Five years ago, CalPERS, the state's largest buyer of health services, forced one of its key insurers to drop 13 Sutter Health hospitals from its stable of providers because CalPERS deemed the Sutter facilities too expensive.
Sutter officials did not offer a direct rebuttal to The Bee's findings about its pricing rates, but said the nonprofit health system, based in Sacramento, should not be judged on price alone.
Patrick Fry, the health system's chief executive officer, said the Cal-PERS action proves Sutter doesn't have the kind of market-controlling clout some of its critics describe.
Consumers, he said, should also consider value.
"When you go to a clothing store, do you know how much it cost to make? We buy things because we think the price is fair," Fry said.
Bill Gleason, a spokesman for Sutter Health, said the hospital system has kept price increases for insurance companies in the "single-digits" in recent years, but declined to elaborate.
"That's hugely important because of certain allegations by health plans who are pointing their fingers at health care providers," Gleason said.
He contrasted the "single-digit" rise in Sutter prices to the 39 percent increase in premiums announced earlier this year by Anthem Blue Cross on thousands of Californians with individual policies. The Blue Cross rate hike ignited a national debate over the rising cost of health care.
Gleason said the high quality of services provided at Sutter Health facilities saves on costs in the long run by reducing expensive follow-up care.
"We still have work to do to make our services even more affordable to patients, and we think we're making good progress," Gleason said.
Rising costs 'a mystery' to experts
Researchers for the California HealthCare Foundation call rising hospital costs "something of a mystery."
Writing in the February issue of Health Affairs, a policy journal, researchers for the foundation said expenses for hospital care rose an average of 10.6 percent a year from 1999 to 2005, far outpacing inflation.
Insurers and hospitals negotiate discounted rates, and hospitals have different price structures for each insurance network they decide to join.
In some cases, hospitals have blocked efforts to shed more light on their pricing policies. Revealing the information, they say, could reduce competition in the industry.
Jan Emerson, a spokeswoman for the California Hospital Association, said hospitals are up front with their costs, as required by law. She noted that hospitals must provide a price quote to anyone who asks, and file menus of procedures and prices with the state.
"The health plans are trying to shift the blame because they are under attack," Emerson said. "It's outrageous that they are trying to shift blame. They should be looking at themselves."
Still, the state's accountability requirements for hospitals have been criticized as weak by some business groups, consumer advocates and others. The prices filed with the state, for instance, rarely reflect what consumers actually pay.
While existing law doesn't prohibit insurers from disclosing cost information, some hospitals explicitly prevent insurers from releasing it.
Sutter Health, for example, does not allow Aetna to publicize its negotiated prices with Sutter hospitals on the insurer's website. Aetna said the information would allow subscribers to comparison shop.
Cedars-Sinai hospital in Los Angeles, considered one of the state's priciest because of its popularity with the rich and famous, was the only other California hospital to prohibit use of its pricing data on Aetna's website, the insurer said.
Last year, the California Medical Association and the California Hospital Association helped defeat Senate Bill 196, which was aimed at giving consumers access to more information. The bill would have barred hospitals and doctors from refusing to allow insurers to reveal their pricing information to subscribers.
The legislation was supported by consumer groups and the insurance industry. They resurrected the issue last month in a new bill, Assembly Bill 2389. The Assembly Health Committee plans to hear it in May.