California Hospital Charges Increase 150% in 10 Years

The Patient Protection and Affordable Care Act does a great deal to address insurance industry practices. The new health care reform law, however, has been rightly criticized as failing to directly and forcefully attack rising medical costs, the primary driver of insurance premiums. Yes, the new law establishes.

The PPACA has a number of pilot projects, demonstration programs, and studies buried in its provisions that could, in time, lower overall cost spending. And supporters of the bill will argue that the Medical Loss Ratio provision is aimed at keeping down the cost of coverage. (Ironically, the MLR limits may have the unintended consequence of raising insurance costs. Administrative costs are usually fixed and independent of the premium paid. The cost to have a claims representative process a claim is the same whether the coverage cost $1,000 or $3,000 per year. But the $1,000 policy makes only $200 available for administrative expenses under the medical loss ratio calculation; the $3,000 plan makes $600 available. In other words, because the MLR rules apply percentages, carriers have an incentive to eliminate low-cost plans).

Carriers need to educate lawmakers and the public about the elements that go into a premium rate. Yes, profit and overhead are a part of the cost. But the biggest driver of health insurance premiums is the underlying cost of medical care. And the carrier community may have begun this educational process.

America’s Health Insurance Plans, the industry trade association, released a study showing that, in California, hospital charges increased 150 percent between 2000 and 2009. The Sacramento Bee, quotes AHIP spokesperson Robert Zirkelbach as observing “What this data shows is that there needs to be much greater focus on the underlying cost of medical care that is driving those premium increases. At some point, people will have to address these underlying cost drivers if health care costs are going to come down.” In other words, you’ve taken your shot at the insurers, now, if you’re serious about reducing costs, let’s look at the hospitals.

Interestingly the AHIP report acknowledges that hospitals and other providers of medical care need to make up for underpayments by government health programs. In California, between 2000 and 2009, hospitals charges to health plans rose by 159 percent. This is more than twice the rate of increase for Medicare and eight times the increase hospitals received for Medi-Cal – the state’s version of Medicaid.

Needless to say the hospitals didn’t appreciate AHIP pointing this out. “It’s really tough for a pot to call a kettle black,” the Sacramento Bee reports Scott Seamons, the regional vice president for the Hospital Council of Northern and Central California. I don’t know if Mr. Seamons intended to acknowledge that hospitals are at least as much at fault for rising insurance premiums as carriers, but if the insurance companies are the pot and the hospitals the kettle, that is what he’s saying. If so, that would be a refreshing dose of frankness to the dialogue. Meanwhile, consumer groups, not unexpectedly, accused the AHIP of trying to shift the blame for rising premiums. Apparently they can’t accept that anything other than insurer greed and profiteering drives insurance premiums. Any correlation with hospital charges or medical inflation are merely accidental.

All of this rhetoric and accusing is standard issue among advocacy groups and trade associations. And if all that comes out of the report are fingers among these usual suspects pointing at the usual places, then this report will have done little good. If, however, the study represents the beginning of a concerted effort to bring to the public’s attention what drives their insurance premiums; if it leads lawmakers to ask “why” hospitals needed a 159 percent rate increase over 10 years; if it gets people thinking about the monopoly position some hospital chains enjoy – and employ – in parts of the state, that’s something altogether different. Because if these possibilities become reality, the AHIP report may be seen as an important start to what will be a long, but critical, educational effort.

14 thoughts on “California Hospital Charges Increase 150% in 10 Years

  1. It’s all about transparency and prevention of blatant profiteering. ALL ASPECTS OF HEALTH CARE, not just insurance. PPACA attacks payers and ignores providers. For their own survival, payers should increase their levels of disclosure to heighten public awareness of abuses- or at least to call attention to them and force explanation.
    The largest mansion in our town is owned by an anesthesioligist. 15,000 sq feet, an indoor pool, an elevator. Stone lions guard the front gate and huge monogram over the entrance. I don’t fault the man for making what he can make- we all do what we can.
    But the PPACA is lazy, simplistic and misguided, and does nothing to correct the underlying systemic problems.

  2. Alan, very helpful post. I understand that health care costs drive health insurance premiums. I suspect, however, that there is more nuance to this issue. While “Hospitals raise rates 159% in 10 years” makes a good headline; aren’t many hospitals facing financial ruin? My understanding is that many of them are in a precarious financial position. So, if hospitals struggle, despite raising their rates (charges), what is the solution. Cutting hospital reimbursements (the logical solution to raising charges) will force hospitals to close.

    Further, I understand that some procedures within hospitals are profitable while others are not. Were hospitals to focus on only profitable procedures we’d all loose.

    Personally, I think as a country, we’ve got to move away from the fee-for-service reimbursment arrangements and replace them with capitated ones. Or go to staff model HMOs (ACOs). We can’t continue to pay people for every test and procedure they perform because the incentive is to do many tests and procedures.

    Alan, what is your recommendation to cut medical costs and lower health insurance premiums 🙂

    • Bruce: Thanks for the comment. I agree the situation is, as you say, nuanced. Some hospitals are in financial peril. Others are thriving and enjoying the “benefits” of near-monopoly positions. The rate of increase in hospital charges noted in the post is due, in large part, to cost-shifting as a result of government programs underpaying the cost of care. What was significant to me, and what was intended to be the major point of the post, was that legislative attention might be shifting from focusing exclusively on the cost of insurance coverage to recognizing the need to address the cost of care. I also agree with you that the fee-for-service model creates incentives that drive up costs. I also think insurance plans can be designed to encourage healthy actions by consumers. There’s a host of ideas out there for restraining medical costs. As I said, my hope is that these ideas will make their way to the forefront of the debate.

      And in the future I’ll spend more time thinking about my headlines. :-).

    • Bruce:

      I do understand where you are coming from in your comments. Not sure what part of the country you live and work in but here in the Northeast it is not the hospitals that are hurting so badly (although a few in less well off areas have been forced to close recently), but the physicians. Doctors are actually selling their practices and choosing to become employees of whatever hospital will take them. One driver of this is that hospitals have more negotiating muscle with insurance companies than individual doctors so far as fee reimbursement. Had the people in Washington really cared about cost or access to care they could have put carpenters, painters, electricians, and plumbers to work retro fitting the huge amount of vacant office space we have in this country into first rate medical clinics. These clinics could have been run by the government on a means tested sliding scale. Use of these clinics could have been purely voluntary on a situation by situation basis. Educational incentives in the form of scholarships and student loans could have been provided to kids while still in high school to encourage them to go into medicine. If they accepted a scholarship or loan then they would be requied to serve a certain number of years to the government. This idea could have given some real cost relief to America. It would have also put a lot of skilled labor to work right now instead of expanding unemployment. It also would have provided Single Payor to those that want it without needing to change the existing structure one bit. PPACA has tid bits of what I have suggested here but not nearly enough emphasis. Ths would be the way to control costs.

  3. Alan
    I do hope you understand the difference between charges and costs. I don’t know how of if hospitals in CA report their financials as they do in a state that I am more familiar with, Pennsylvania, http://www.phc4.org/financial/
    To track trends in COST you need to track EXPENSES or INCOME, not charges. Charges are just a proxy for cost shifting, as you allude to.
    Your underlying point is valid however.

    • Jimmy: great point, thanks for putting it out there. It’s also true that not all carriers pay the same charges. Thanks for clarifying.
      Alan

  4. “But the $1,000 policy makes only $200 available for administrative expenses under the medical loss ratio calculation; the $3,000 plan makes $600 available. In other words, because the MLR rules apply percentages, carriers have an incentive to eliminate low-cost plans).”

    Interesting that the carriers want to eliminate low cost policies then the employer may be penalized for buying the “Cadillac Plan”. This makes for interesting theater but more importantly demonstrates just how complicated compliance will be.

  5. Alan, I concur with your conclusion that the public and politicians should be educated on what makes up their premiums but as long as politicians are in the pockets of lobbiests from AARP and AMA, they are going to refuse to listen to facts.

  6. perhaps rather than looking to NAHU to provide the leadership on something they are either incapable or unwilling to tackle, we as agents should be looking to partner with AHIP on something of national scope. Emphasizing the importance of agents.

    • I disagree with your premise Jerry. No organization in the country is more focused on the broker perspectives and interests than NAHU. AHIP has it’s own priorities — nothing wrong with that. But NAHU’s priorities are our priorities.

      Not that you’re doing this Jerry, but it is sad to see some of the attacks on NAHU of late. Sad, but not surprising. When Republicans got shellacked in the 2008 election they turned on one another. In the aftermath of the 2010 election we’ve seen Democrats turn on one another. Now brokers seem to be doing the same thing.

      Circular firing squads make for entertaining political theater, but accomplishes little. Anyone who thought dealing with health care reform would be easy or everything would go “our way” was fooling themselves. The PPACA would have been much more harmful to brokers than it has been but for NAHU and their allies. Even on the MLR, the battle is far from over. NAHU has been, and remains, brokers best hope of influencing health care reform.

      • Alan – while I understand your staunch and ongoing support of NAHU let’s face it: This outfit has proven to be virtually impotent in helping our cause and Alan while you continually state it’s “early yet” – it is surely not “early” to those of us who have serious skin in this game.

        I did appreciate your article in the sense that it certainly does reinforce what I have been reading in recent days about the ungodly mess that is the Mass Exchange – they have – miracles of miracles – finally started opening their eyes to the FACT that it is not health insurance that’s the problem but the skyrocketing cost of health care services that holds the insurance industry and consumers hostage. Wait until people across the country wake up to A LAW that demands they pay whatever the health insurance premium is. I’m smirking as I write this because I wish I could be there when every liberal hypothesizes that PPACA was actually written by health insurance bigwigs…. Each and every one of ’em will deserve what’s coming to ’em all….of course by then I’ll be living in my car and talking to imaginary clients. (Don’t worry Andrea – you can park your car next to mine…)

    • Jerry there is no guarantee we can win this. It is an almost impossible situation to convince premium payers who want to get done whatever they want done when they want it done then expect someone else to pay for it to think rationally when the premium is coming out of their pocket.

      NAHU is fighting the good fight but we all have to understand that it is an uphill battle since we are perceived as the sacrificial lamb in this battle. An example I use is with a psychologist friend who complains about reimbursements from carriers. I explain to her that the pecking order is hospitals, pharma and MD. You get what’s left and simply put it’s not much.

      I think Alan correctly pointed out that a reality check is coming on this legislation. And I for one hope it is sooner rather than later.

      • Mark

        I really appreciate your comments – smart and to the point. I really think your comment about compliance makes incredible sense and underscores the importance of agents in the process of managing health coverage.

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