In Los Angeles, insurers view Cedars Sinai Medical Center as a “must have” hospital. If a health plan doesn’t have Cedars in its network, people won’t buy the insurance plan according to a study of “Unchecked Provider Clout in California” published in Health Affairs online yesterday.
While other medical centers in northern California have gained market leverage by acquiring other hospitals, Cedars has felt no need to get into the merger and acquisition business. As an executive from a nearby hospital explained to researchers from the Centers for Health System Change, “Cedars can say, ‘Screw it; we have a strong marketing arm and the [movie] actors, let’s grow on campus and they will come to us.’ As a result, according to another respondent, ‘Cedars has the highest rates in the world…. The hospitals down the street have no market power. They have to fight for every penny.’”
Note : no one quoted in the study claimed that Cedars delivers the best care in California. Or that patients are safer at Cedars. In fact, Cedars, like many other hospitals, has had its share of medical errors—notably the incident in November 2007 when the newborn twins of actor Dennis Quaid as well as another child, were given 1,000 times the intended dosage of a blood thinner. Then there was the mystery as to how more than 200 patients undergoing CT brain perfusion scans at Cedars received eight times the normal dose of radiation from February of 2008 through August of 2009. Each time, the dosage appeared on the technicians’ screen, yet somehow, for 18 months, no one noticed.
Nevertheless, Cedars is located just outside Beverly Hills; the world-famous medical center boasts a fabulous art collection, and as its website points out, “For more than 20 years, Los Angeles area residents have named Cedars-Sinai the ‘Most Preferred Hospital for All Health Needs’ in National Research Corporation's (NRC) annual Healthcare Market Guide survey.”
So Cedars can charge more—and it does.
But Cedars-Sinai is not the only hospital hiking the price of health care in California. While other hospitals may not enjoy its star-studded reputation (Frank Sinatra died at Cedars), many have the upper hand when negotiating with insurers simply because they are big— very big.
Throughout California, in the late 1990sand early 2000s, “providers formed larger hospital systems through mergers and acquisitions, and attempted to form tighter physician alliances,” Robert Berenson, Paul Ginsburg and Nicole Kemper explain. . “Medical groups and IPAs consolidated, and the weaker ones went out of business.” No surprise, since then, “hospitals and physicians have become increasingly sophisticated in developing organizational forms primarily to increase their negotiating clout with health plans.” In the 1990s, health plans had the leverage, but now the tables have turned.
Payments to Hospitals Climbing By More than 10 Percent Annually
While some in Washington talk about the need to use anti-trust regulations to break up large insurers, in California (as in some other markets) the providers are the ones pushing premiums higher. Berenson et. al. point to a recent study of California hospitals which shows that , “ 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. “
Of course, the cost of caring for patients also was rising, but “analysis of national Medicare Cost Report data by the Medicare Payment Advisory Commission (MedPAC), shows that inpatient costs per admission increased only 5.5 percent per year during that period.” Meanwhile, “public reporting of hospital payment rates recently has drawn attention to large variations in hospital rates across the country, with specific University of California medical centers and Sutter Health hospitals, among others, establishing prices far above average.”
As one medical group executive told the researchers: "’We are making out hand over fist.’ In some cases, payment rates to hospitals and powerful physician groups approach and exceed 200 percent of what Medicare pays, with annual negotiated double-digit increases in recent years.” Insurers, in turn, pass these rate hikes on to customers in the form of higher premiums. Yet, the authors observe, no likes to suggest that providers are over-paid. : “in current health reform discussions and proposed legislation, providers’ growing market power to negotiate higher payment rates from private insurers is the ‘elephant in the room,’ that is rarely mentioned.” Nevertheless, they argue: ”The trends in California suggest an urgent need for policy makers to address the issue of growing provider market strength.”
Berenson et. al. go on to report that “Some respondents described particular hospital systems, such as Sutter, as adopting an ‘all or none’ negotiating strategy, which means that a single contract defines the terms. The terms include all payment rates of all of the system’s hospitals, not just those hospitals that plans deem important to include in networks.
“Hospitals in the University of California system also now negotiate as a system rather than as individual entities. They realized only recently that the potential power of group negotiating trumped what some respondents described as bureaucratic inertia..In the words of one university hospital executive participating on the negotiating committee, ‘Contracting as a full [University of California] system is frightening to the payers…. These are contracts with big leverage.’"
“Originally,” the study’s authors explains, “physicians may have formed multispecialty groups and IPAs” with an eye to “improving quality through clinical integration. But now they wield their considerable market clout to negotiate favorable payment rates and other contractual terms with HMOs.”
“One group’s medical director estimated, ‘You can get 80 percent of Medicare [rates practicing independently]—or twice that in our groups. That is the real incentive.’”
Will Accountable Care Organizations Charge More?
Both the Senate and the House bills propose rewarding physicians who join “accountable care organization” (ACOs). All of the available evidence suggests that these large, multi-specialty organizations can offer better, more efficient care. But, the study notes, “California-style integrated care systems currently produce higher prices that undermine cost containment.” Will the ACOs of the future also use their size negotiate higher rates?
“Antitrust policy is generally viewed as a remedy for market power abuses. However, the FTC and U.S. Department of Justice (DOJ) mostly have been unsuccessful in challenging hospital mergers.” And Federal law does not guarantee that cost reductions achieved through an ACOs ability to improve quality and manage costs will be passed on to purchasers and consumers.
Berenson and his co-authors are concerned: “Unless market mechanisms can be found to discipline providers’ use of their growing market power, it seems inevitable that policy makers will need to turn to regulatory approaches, such as putting price caps on negotiated private-sector rates and adopting all-payer rate setting.” (See these HealthBeat posts on how Maryland sets hospital rates for all payers here and here.
If we want to keep a lid on insurance premiums, Berenson et.al. conclude, regulating insurers may not be sufficient. Indeed, “some purchasers who believe strongly in the long-term merits of increased integration of care delivery believe that price regulation may be a prerequisite for payment reforms that encourage” Accountable Care Organizations.