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Study finds wide disparity in hospital pricing in California
Fifteen of the state's 20 least expensive hospitals are in Southern California -- as well as some of the costliest, a study released Tuesday says.
An analysis of publicly available data found that the costliest hospitals -- which include Cedars-Sinai Medical Center and Los Angeles County-USC Medical Center -- were charging insurance carriers five times as much as the least expensive ones.
The study was commissioned by large health purchasers, including the California Public Employees' Retirement System, the nation's third-largest health benefits purchaser, and the Pacific Business Group on Health, which represents 50 large employers that spend $10 billion a year on healthcare for workers and retirees.
The study sponsors said they were troubled by the wide variations in hospital prices, based on 2005 data, and noted that the average charges of hospitals in the Sacramento region -- where many CalPERS members reside -- were 30% higher than the statewide average for the same mix of services.
"The report underscores what we have long suspected: that some hospitals are basing their prices to private insurers and patients on what they can get away with," said Peter V. Lee, chief executive of the Pacific Business Group on Health.
The study also looked at the difference between hospitals' costs and what they billed. In all, it found that insurance carriers paid $18 billion for care that cost the hospitals $13 billion to deliver in 2005.
The big difference helped pay for the hospitals' $7.1 billion in losses on their care for uninsured patients and shortfalls in reimbursements from Medicare and Medi-Cal for their care of the elderly and the poor.
Jan Emerson, a spokeswoman for the California Hospital Assn., said state hospitals posted an average operating margin of 3.6% in 2005 and 1.5% in 2006.
"This assertion that hospitals are 'price gouging' commercial insurers is not accurate," she said. "Health plans clearly know that when they sit down to negotiate contracts with a given hospital, part of what the rates they are negotiating include are subsidies for the shortfalls."
But hospital shortfalls are a statewide problem that don't necessarily explain price variations.
Lee said the study suggested that Southern California's hospital market was more competitive, allowing insurers to obtain better prices.
"In Southern California," he said, "it appears we have a more functioning market of hospitals."
Hospitals disagree. They say prices vary by local market conditions -- a dynamic they say has led to devastating consequences in the Southland, where insurers enjoy considerable bargaining power.
Because hospitals tend to be independently owned and located in clusters in Southern California, insurers are able to drive charges lower -- so low that some hospitals complain that they don't cover costs, said Jim Lott, a spokesman for the Southern California Hospital Assn.
"What they are claiming in this report is simply their inability to leverage the Northern and Central California market as well as they have been able to leverage the Southern California market with predatory pricing and negotiating strategy," Lott said.
Seventeen Southern California hospitals have closed in the last 10 years and many more are in financial distress, he said. About 42% of hospitals statewide are operating at a loss, but that figure is about 50% in Southern California.
The study found that Los Angeles has two of the five most expensive hospitals. But Cedars-Sinai Medical Center and Los Angeles County-USC Medical Center cost more than the average hospital for different reasons. County-USC provides more care to indigent patients -- much of it uncompensated -- than any other large hospital in the state.
Cedars-Sinai, on the other hand, provides a lower level of indigent care relative to other hospitals, the study found. It also found that Cedars had relatively high underlying costs, but it did not detail why.
Cedars says it is unique because it is a major independent, free-standing academic medical center, faced with associated higher costs -- major teaching and research programs in addition to complex cases -- without the financial support of a university or state government.