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California Hospitals: Prices Rising Rapidly, But Quality Varies

Oct 18, 2010

This story, part of an occasional series, was produced in collaboration with

SAN FRANCISCO — Soon after her colonoscopy, Mary McClung received a bill from California Pacific Medical Center for $4,871. The amount fell within her high insurance deductible, leaving her responsible.

"Nobody should be billed $4,800 for a colonoscopy, this is wrong," McClung, 56, recalls thinking. "I don’t have a ton of money."

Hospital rates in the Bay Area now are among California’s most expensive, propelled upward by prominent hospitals and networks, including Sutter Health, Stanford Hospital & Clinics and John Muir Health, according to private and government data.

Statewide, hospital prices have been rising rapidly for years. For privately insured patients, the cost of a stay has increased annually by an average of 8.5 percent over the past five years, while the cost of an outpatient visit has grown by 9.6 percent a year, state records reveal.

In many cases, hospitals are able to keep raising prices beyond inflation because their sizes or reputations give them clout in negotiating rates with insurers, researchers say. Yet high prices don’t always equate with superior care. Quality measures for some of the Bay Area’s most prestigious hospitals, including Stanford and John Muir, show that in some instances, less expensive competitors perform as well or better in their basic responsibilities, such as avoiding infections and high death rates for patients in intensive care.

"Some hospitals are able to charge higher prices than the market normally would bear, even without providing higher quality," says Dr. R. Adams Dudley, a professor of medicine and health policy at the University of California, San Francisco. "That means they’re getting those higher prices without really offering more to patients or the rest of society."

Nationally, hospital price increases for the privately insured have averaged 4.9 percent a year over the past decade, according to the federal Bureau of Labor Statistics. In California, premiums for families with employer-based coverage grew by an average of 4.6 percent a year between 2005 and 2009, according to the federal Medical Expenditure Panel Survey.

Hospital executives insist their rates are fair and that there is enough competition among them that if they charge too much insurers and employers can take their business elsewhere. The hospitals also say they charge more to pay for better equipment, compete for talented nurses and doctors, treat complex cases and make up for reduced payments from government health care programs, including Medicare, which serves the elderly and disabled, and MediCal, which covers the poor.

Mary McClung, who lives in San Francisco, was billed $4,871 for a colonoscopy.

In addition, many hospitals are having to provide free care to people who have lost their jobs, and update their buildings to meet state earthquake safety requirements. But some acknowledge their current charges are increasingly unaffordable.

"The pressure on organizations like ours and others throughout the United States is they are going to have to get much more efficient than they have been in the past," says Patrick Fry, chief executive officer of Sutter, a large hospital system in Northern California that owns California Pacific Medical Center. "We are not where we want to be at this point in time."

State laws have inadvertently given hospitals even more leverage. California requires health maintenance organizations to have "adequate networks" that offer all major specialties reasonably close to where patients live. Lisa Rubino, president of Molina Healthcare of California, an insurer, says the law makes it difficult for insurers to drop big hospitals from their networks.

"You have to work with them or make a strategic decision to get out of the area because they can dig in," says Rubino.

Sutter Health Is Priciest

California requires hospitals to publicly reveal more information about their finances than other states do. Hospitals must report to the California Office of Statewide Planning and Development how much they collect from insurers, employers and patients. The data show:

-- The average price of an inpatient stay rose to $20,858 in 2009 from $15,063 in 2005. The average price of an outpatient visit rose to $728 in 2009 from $505 in 2005. Overall, California acute care hospitals last year collected $28.7 billion from non-governmental sources, principally people who get coverage through their employers. That was a 37 percent increase from 2005, when hospitals were paid $20.9 billion.

-- Sutter Health is California’s priciest large hospital system. An average day’s worth of care cost 37 percent more than the state average, even more than the University of California hospitals, which see more of the sickest patients. Catholic Healthcare West, another nonprofit chain that is one of Sutter’s main competitors in many Northern California markets, was paid 4 percent below the state average.

California Pacific Medical Center, part of the Sutter Health Network, is in San Francisco.

-- Inpatient stays in the East Bay cost 40 percent more than the state average, while all of Southern California, including San Diego and Los Angeles, are below average.

Often, a hospital’s dominance in an area helps determine how much it can charge, experts say. Consider John Muir Health, a two-hospital nonprofit system in the East Bay. With campuses in Concord and Walnut Creek, John Muir has the biggest footprint in the local hospital market, accounting for 54 percent of all the acute care inpatient stays in 2009, more than any other hospital group, according to state data.  At the other end is San Ramon Medical Center, a Tenet-owned, for-profit hospital, with 10 percent of the acute care inpatients.

The lowest amount the insurer Aetna paid John Muir for an outpatient colonoscopy was $3,185, according to Aetna’s website. Aetna paid $1,483 to San Ramon Regional Medical Center for the same service. The least Aetna paid John Muir for an uncomplicated birth was $7,722, while the lowest price for a birth at San Ramon was $5,278.

Yet on broad quality measures, John Muir’s hospitals generally score no better than San Ramon does, according to the California Hospitals and Reporting Taskforce, a nonprofit that produces hospital report cards published at Calhospitalcompare.org. San Ramon ranks equal to John Muir’s Walnut Creek campus in most major measures, including mortality rates in the intensive care units, overall patient satisfaction and maternity care. John Muir’s Concord campus ranks below San Ramon on several measures, including mortality rate and patient experience, though John Muir was rated better in avoiding complications for patients on ventilators.

Ben Drew, a spokesman for John Muir Health, said in an email that John Muir sees more Medicare and Medi-Cal patients than San Ramon does, requiring other patients to pay more to help cover the costs. He also said John Muir offers more complex and costly services, such as trauma care.

"We believe our payments are appropriate for the quality of care we provide and our ongoing reinvestment in the local community’s health care needs," he said, adding that John Muir is a nonprofit and does "not generate profits for shareholders or facilities outside of the areas we serve."

Consumers Want Hospital Choices

Few employers are willing to limit workers to plans with less expensive hospitals. "When we propose alternatives, one of the very first question employers of all sizes ask is what impact the change will have on employees and their dependents," says Jennifer Walsh, benefits practice leader at Woodruff-Sawyer & Co. in San Francisco.

Many employers instead make their workers pay the increased costs. "We have a hard dollar cap (on what we spend), so most of the increases are passed on to our employees and our budget is not hit as hard," says Richard Rogers, superintendent of Oakley Elementary School District in Contra Costa County. "The increases can be devastating to them."

A few employers are trying to stop the upward march of hospital prices. CalPERS, the state pension fund, estimates it has saved $252 million over five years by kicking some of the costliest hospitals and doctors — including some of Sutter’s — out of several of its HMO networks in 2005. The savings amounted to about 3.1 percent of premiums, CalPERS says.

Another employer, Stanford University, has put the onus on its workers. Stanford pays all the costs of their employee-only coverage for the cheapest health plan it offers, and most of the cost of dependent coverage. Employees who choose a more expensive plan must pay the difference, says Les Schlaegel, Stanford University’s associate vice president for benefits.

Yet 6 out of 10 employees don’t choose the cheapest policy. Some pay as much as $5,000 more to buy insurance plans that let them go to doctors and hospitals they choose.

Schlaegel says so many employees like to see doctors at the Palo Alto Medical Foundation, a doctors’ organization affiliated with Sutter with a clinic right across the Stanford campus, that the university feels obliged to keep offering insurance networks that include Sutter.

"Sutter basically has a stranglehold on Northern California," says Schlaegel. "They are strategically situated, both for hospitals and medical groups. They know purchasers need them. When you are strategically located, you can say ‘this is our price and you can pay it.'"

Sutter officials dispute their rates are unfair or that they have excessive negotiating power. Cynthia Greaves, a spokeswoman for Palo Alto Medical Foundation, said the foundation’s relationship with Stanford is built on "a connection aided by convenience of proximity and reinforced by shared priorities of outstanding medical care."

Stanford Hospital One Of Most Costly

Stanford’s own hospital is one of the most expensive in the area — even for routine procedures. For an MRI of the lower back, the least Aetna paid Stanford Hospital was $3,221, twice as much as Aetna’s lowest payment of $1,405 to Sequoia Hospital, a Catholic Healthcare West facility in nearby Redwood City.

Yet Stanford’s basic care isn’t uniformly superior to those hospitals. In fact, Stanford’s ICU mortality rate and patient satisfaction ratings are below Sequoia’s, though Stanford does better in patient safety, according to CalHospitalCompare.

But Stanford has something nearby competitors lack: an international reputation for sophisticated brain surgeries and organ transplants, bolstered by prestigious faculty at Stanford’s medical school.

"We do certain procedures that are only done in a handful of places in the country," says Gary May, a Stanford vice president who negotiates contracts with insurers. He says it’s because of "those kinds of services and Stanford kind of being the last stop for people, they need to have us in the network."

May also says Stanford’s higher prices for routine procedures help pay for unique costs, including the expense of training new physicians, but he says Stanford has never used its market power to gouge insurers.

Consumers and patients share blame for insisting that their insurance plans include certain hospitals no matter the cost, says John Glynn, an Oakland consultant to the California Health Care Coalition, a group of employers, unions and trust funds.

"They love their providers," he says. “They want Sutter, they want John Muir, without any concept or knowledge of what those providers are doing, either in terms of cost or, more importantly, quality."

The hospitals haven’t made it easy for consumers to comparison shop. State law requires hospitals to reveal their charges for specific services. But those charges don’t reflect the lower negotiated rates insurers actually pay – rates hospitals usually insist be kept secret. The California Hospital Association has opposed legislation to ban such "gag clauses"; the most recent of these bills died in the state Assembly in August.

Hospitals have also resisted a four-year campaign by the Pacific Business Group on Health, a large employer coalition, and CalPERS to create a "hospital value initiative" that would allow hospital comparison based on and quality of care.

"Collaboration failed, in our view," says David Hopkins, a leader of the business group.

Rarely able to evaluate hospital costs and quality, patients often defer to their physicians when deciding on a hospital. Rochelle N. Doble had a seriously infected toe amputated at Sutter Delta Hospital in Antioch in 2007. Her doctor told her the bill would be about $1,400, but when she arrived at the hospital, Doble says Sutter told her it didn’t contract with her insurer and that she would be billed for the full amount—more than $5,400.

Doble, 54, says the only reason she went to Sutter was because her doctor chose it for its convenience. "His practice is in Antioch," she says. "He did it five minutes from his office."

Doble refused to pay and her account was sent to collections. In July, Sutter agreed to lower the bill to $1,400 after JustHealth, a Santa Rosa-based advocacy group, helped her protest it, according to correspondence from Sutter provided by Doble.

Stacey Wells, a Sutter spokeswoman, said the hospital couldn’t discuss Doble’s case. She said the bill for this kind of procedure would be determined by the number of hours spent in the operating room and recovery areas and charges for all supplies.

John Metz, JustHealth’s executive director, says few people bother to challenge their bills as Doble did. "Most people trust hospitals are going to treat them right," he says. "When they get these bills, they are literally impossible to understand, and people just accept them."

After four months of negotiations with California Pacific Medical Center, McClung got Sutter to reduce her $4,871 colonoscopy bill. (The actual colonoscopy was $3,193; there were accompanying charges for supplies, the recovery room and a polyp removal.) Sutter says it agreed to let McClung pay $825 because McClung’s doctor’s office had wrongly told her she would be eligible for a lower rate offered to uninsured patients.  McClung says she had to work hard to get Sutter to change the bill.

"I think I had a good outcome, but I think it was just because of persistence and stamina," says McClung, who lives in San Francisco and organizes people’s homes and offices.

"You buy a box of nails, the person selling it can tell you the price of it," she says. "But not with health care."

jrau@kff.org

Related: How KHN Obtained Data For The California Hospital Prices 

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