Northern and Southern California have long argued over which one has the best sports teams, nicer climate and most stunning scenery.
When it comes to healthcare, however, there’s little debate: It costs a lot less to be hospitalized in the Southland.
On average, hospitals in Northern California’s six most populous counties collect 56% more revenue per patient per day from insurance companies and patients than hospitals in Southern California’s six largest counties, according to a Times analysis of state records.
In San Francisco, the most expensive of these northern counties, hospitals get $7,349 per patient per day on average. In Los Angeles County the figure is $4,389, and in San Bernardino County, it’s $3,931 — the lowest of the southern six.
Northern California hospitals say their prices are driven up by significantly higher costs for labor, supplies and other necessities. But leading healthcare economists say that most of the disparity stems from a lack of competition in the north, where a wave of consolidation has given a handful of hospital networks unusual power to dictate what private insurers and their customers pay for care.
“Consolidation definitely drives up prices,” said Glenn Melnick, a USC health economist who has written extensively on the issue. “This is a really serious problem.”
The driving force in the north is Sutter Health, a not-for-profit system of of 24 hospitals and roughly 5,000 doctors that reaches into more than 100 cities and towns across 20 counties.
Insurance companies say that Sutter’s size and dominant position in many local markets give it the upper hand in contract negotiations over prices and which of its hospitals are included in the insurers’ networks.
Insurers also say they must include Sutter hospitals — which account for 1 in 5 such facilities in the region — because they are in such high demand by patients.
Sacramento-based Sutter says it works hard to keep a lid on prices. Nonetheless, the higher rates charged by it and other Northern California hospitals are passed along by insurance companies to individuals and employers.
Aetna Inc., for example, said it charges customers in Northern California about 30% more in premiums than those in Southern California as a result of higher hospital reimbursements in the north that average $5,169 for each patient per day, compared with $3,578 in the south.
Blue Shield of California, a not-for-profit insurer, reports a similar trend. It says it charges up to 40% more for insurance in the north, where it spends an average of $6,570 per patient each day compared with $4,646 in the south.
“Where the cost of care is more expensive, the cost of premiums is more expensive,” said Juan Davila, Blue Shield’s top executive who oversees provider contracting.
And prices do make a difference for customers.
Ben Krasnow, a Blue Shield customer from the San Francisco Bay Area, has watched the premium on his individual policy nearly double — to $1,380 annually from $696 — since he bought it two years ago even though he has remained healthy and never visited the hospital.
To lower his costs, the 28-year-old small-business owner from Redwood City recently began searching for a less expensive policy and found one with a Blue Shield competitor, Health Net Inc.
But Krasnow knows that his insurance bills will only rise as he ages. He’d like to see more regulation to keep prices in check.
“I think they are out of control,” he said. “The trend is worrying.”
In Southern California, competition plays a robust role in keeping hospital and insurance costs down. Half of the region’s 167 hospitals are run by independent operators, including prominent institutions such as Hollywood Presbyterian Medical Center and Huntington Memorial Hospital in Pasadena.
Even so, that could change as financially strapped independents face increasing pressure to join hospital systems as a way to stay in business.
Much of the stress on independent hospitals is caused by state and federal governments cutting their reimbursements for treating the poor and the elderly, and by losses from treating uninsured patients.
With limited bargaining muscle, these hospitals say they often have to accept lower payment rates from commercial insurers, reducing an important source of money to offset costs.
“Systems negotiate from a position of much greater strength and leverage because they represent more beds and more lives. We don’t have the same clout or negotiating power,” said Michael Rembis, a onetime system executive who now runs Hollywood Presbyterian.
“That’s a real disadvantage for independent hospitals and their communities.”
The shakiest operations often wind up closing or merging with networks such as MemorialCare Health System of Fountain Valley. It operates five hospitals in Los Angeles and Orange counties, including Long Beach Memorial Medical Center. And it’s looking to grow.
“There is going to be consolidation in this market,” said Barry Arbuckle, MemorialCare’s president. “A lot of people are waiting to see how this plays out over the next few years.”
That’s happened in much of the country over the last two decades, and the new national healthcare overhaul could accelerate mergers by encouraging more collaboration between hospitals and doctor groups. The strategy is meant to curb healthcare spending and improve the quality of medical care, but experts fear it could also lead to even more consolidation and higher prices.
“There is the risk that healthcare provider organizations will become larger and have a bigger piece of the market,” said Stuart Guterman of the Commonwealth Fund, a private foundation in New York that supports research into healthcare practices. “We’re already seeing that occurring.”
Northern California is a prime example: Just two health systems — Sutter and Catholic Healthcare West — control nearly one-third of the 16,214 hospital beds in the region’s six most populous counties, according to data from the Office of Statewide Health Planning and Development.
The Times analysis of the agency’s data shows that hospitals in those counties — Alameda, Contra Costa, Sacramento, Santa Clara, San Francisco and San Mateo — collect an average of $6,826 in net revenue per day for each privately insured patient they treat.
By contrast, hospitals in Southern California’s most populous counties — Los Angeles, Orange, Riverside, San Bernardino, San Diego and Ventura — get $4,373 per customer per day on average for their in-patient care.
Not included in the survey is the Kaiser Permanente health maintenance organization. It does not report financial data to the state because it operates as its own insurance and provider network.
In Northern California, analysts say, much of the reason for higher costs lies with Sutter, which has medical groups throughout the region.
The operation collects higher daily revenues from privately insured patients than any of the state’s 16 other hospital chains — $6,942 on average for each patient, state records show. The state average is $5,082.
“They are a very powerful hospital system that has proved very successful,” said Dr. Robert Berenson, a fellow at the Urban Institute in Washington who has studied California’s healthcare markets. “They are in a position to drive hard bargains. I don’t think there are many hospital systems in the country that have that kind of market power.”
Sutter declined to make Chief Executive Patrick Fry available for an interview. But other Sutter executives called the system’s prices fair and said Sutter has held annual rate increases for insurers to “single digits” over the last several years.
Sutter officials also say their hospitals receive smaller reimbursements per patient from the federal Medicare insurance program than facilities in the south, requiring them to shift a greater share of hospital costs to commercially insured patients.
“Sutter Health is committed to doing our part to ensure that healthcare is affordable,” said spokesman Bill Gleeson, who noted that Sutter has spent $7 billion since 2000 to build new facilities and upgrade others to meet earthquake safety codes.
The health system and other operators in Northern California dispute that their consolidated operations have led to higher prices and say instead that the region’s rates reflect greater operating costs.
Northern hospitals pay an average of 47% more in salaries and wages for each privately insured patient they treat compared with Southern hospitals, state figures show.
Although labor and living costs definitely play a role, along with rising prices for equipment and medicine, economists and business leaders widely agree that consolidation is the most significant factor in the north’s rising costs, noting that hospital networks wouldn’t be able to pay those higher wages and costs if they didn’t have the leverage with insurers.
“Lack of competition has set prices high,” said David Hopkins, a senior advisor to the Pacific Business Group on Health, a San Francisco-based coalition that represents large employers in California. “Sutter is the price leader. Others will look at that and set their prices accordingly.”
Hospital leaders in Northern California say the region has plenty of competition from prominent hospitals such as Stanford Hospital and other health systems, including Catholic Healthcare West and the University of California.
Both of those nonprofit systems run hospitals in Northern and Southern California. Both take in more revenue in the north from privately insured patients.
The University of California’s two northern medical centers — in San Francisco and Davis — are among the region’s most expensive, partly because they are research facilities that perform many complex procedures, officials said.
Catholic Healthcare West, although it collects more revenue in the north than the south, charges less than Sutter or UC. Still, the state’s largest health system, with 30 hospitals, said it uses revenue from its hospitals in Northern California, and from others in Nevada and Arizona, to shore up weaker operations in Southern California.
Michael Blaszyk, the system’s chief financial officer, said the concentration of hospital ownership in the north is an advantage. “That’s going to give you more ability to compete,” he said.