Hospital costs in California – the tide has turned

Health Affairs’ most recent edition includes a piece [sub req] on the changing health care landscape in California, one that now has hospitals occupying the high ground. The historical background is telling;
too many hospitals to begin led to tough bargaining by insurers,
which dramatically reduced hospital revenues and profits,
followed by consolidation, hospital closings, and reduction in capacity,
leading to a shift in market power as insurers, needing coverage in key areas,
were forced to agree to ever-higher rates,
pushing hospital costs, revenues, and profits back up.
Here are a couple excerpts from the article.
“In current health reform discussions and proposed legislation, providers’ growing market power to negotiate higher payment rates from private insurers [emphasis added] is the “elephant in the room” that is rarely mentioned. Here, in our study of the current negotiating environment in California, we explain that growing market power for providers caused a shift that gave providers a stronger bargaining position [emphasis added] over health plans, leading in turn to higher insurance premiums…
A recent study has shown that in California, after a downward trend in hospital prices for private-pay patients in the 1990s, a rapid upward trend began about 1999 that produced average annual increases of 10.6 percent over the period 1999-2005 [emphasis added]. The study’s authors concluded that the source of the near-doubling of California hospital prices remains “something of a mystery.”5
Analysis of Medicare Cost Report data by the Medicare Payment Advisory Commission (MedPAC), although national, shows that inpatient costs per admission increased only 5.5 percent per year during that period.”
The net is this – hospitals’ market power enabled them to raise prices by 10.6% while their costs only went up about half that fast.
This is meaningful on many levels.
1. If you operate in California, your facility costs are trending higher quickly.
2. Reimbursement is but one part of the contracting process; hospitals will, and are, using their leverage to squeeze other concessions out of payers, including faster bill payment, reductions in the UR burden, and speedy resolution of disputes.
3. California is leading a trend that will be felt in many other states, and soon.
4. Those payers with the ‘loosest’ contracts, particularly those based on a percentage off charges, are going to get hammered. And those with contracts that are only slightly better are no better off.
I’d add that the article also addresses the growing power of larger physician groups, whose negotiating leverage is evolving along similar lines. More on that in a future post.
What does this mean for you?
Big health plans are at the mercy of hospitals, so costs are going to go up. For workers comp payers, the picture is even worse. Your best bet is to keep injured workers out of hospitals.
Then again, you can always just raise rates…