California hospitals could cut inpatient costs 25% and save $10 billion, study says

California hospitals may be wasting $10 billion a year on excessive patient stays despite the state’s reputation for tightly managed care, according to a new analysis of state data.

The report finds that inpatient costs at 275 hospitals statewide could be reduced by 25%, yielding the $10 billion in savings among patients covered by Medicare, Medicaid and private health insurance.

The biggest savings would come in the commercial insurance market, where hospital reimbursements are far higher than for government programs.

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“We are spending more than we should, and there is still tremendous opportunity to reduce costs,” said David Axene, the report’s author and a highly regarded actuary nationally.

His Murrieta firm, Axene Health Partners, has done consulting work for health insurers, hospitals and regulators. He’s planning to issue similar reports on other states, including Washington and Pennsylvania.

Axene will present his findings at a health policy conference Friday in Los Angeles. He analyzed 2014 data that hospitals filed with California’s Office of Statewide Health Planning and Development.

An estimated $300 billion is spent on healthcare in California annually.

Hospital industry officials agreed that more can be done to squeeze unnecessary costs out of the system, but they said California is already leading that effort.

The California Hospital Assn. said the state ranks among the lowest nationally on length of stay and admissions.

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California is 11th lowest in the nation for number of hospital admissions per 1,000 people and seventh-lowest in inpatient days, according to the American Hospital Assn.

“I agree there is room for improved efficiency and reduced utilization. I don’t know if it’s 25% or $10 billion,” said Anne McLeod, senior vice president of health policy and innovation at the California Hospital Assn. “We are not putting a bunch of people in the hospital compared to other states.”

Steve Valentine, president of the Camden Group, a national healthcare consulting firm in El Segundo, said he thought the estimated savings might be overstated. He said a timely discharge can hinge on a number of factors, such as finding a rehab facility or home healthcare.

California hospitals often get paid a flat rate for a patient’s hospitalization, reducing the financial incentive for a longer stay. But Axene said extra days in the hospital still drive up operating costs that providers recoup in negotiating reimbursements or billing public programs later on.

California has been at the forefront of adopting numerous payment reforms in which hospitals, physician groups and insurers work together on coordinating care and then sharing in the financial risk. The idea is to reward providers for keeping patients healthy and let them share in the savings.

In his research, Axene said he saw no substantial difference in the efficiency of for-profit and nonprofit hospitals.

Los Angeles and San Francisco counties tended to have the least cost efficient hospitals in the state. As expected, public hospitals were among the worst performers.

“Public hospitals are the least efficient, and we should expect that because they end up with all the train wrecks. That didn’t bother me,” Axene said.

One surprising finding was that California hospitals coded patient visits for billing purposes with about 28% more complications or severe conditions than what’s found nationally.

That sharp difference could indicate hospitals are making patients appear sicker than they really are in order to boost revenue. Axene said he couldn’t draw any conclusions based on his analysis.

Kaiser Permanente hospitals weren’t included because they don’t file comparable cost data with the state, Axene said.

McLeod took issue with the individual ranking of 275 hospitals and the report singling out the 20 least efficient hospitals.

“I see trauma centers, research organizations and teaching hospitals on there. You can’t fit those in a nice, neat efficiency box,” McLeod said. “They are treating the sickest of the sick. To call them underperformers is unfair.”

Hospital costs attract attention because they remain the single biggest category of medical spending, ahead of physician services and prescription drugs.

Glenn Melnick, a USC health economist, said the report’s findings don’t surprise him and that he’s not optimistic about hospitals becoming more efficient as their market power grows.

“Consolidation and the formation of these big health systems has allowed hospitals to gain a pricing advantage in most parts of California,” Melnick said.

Twitter: @chadterhune

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