Hospital Cost Disparity Study: Implications for ABX1-1

The press is abuzz with the news that there’s a wide disparity in what different California hospitals charge for providing the same services. The study found that hospitals sometimes charge more than they need to in order to maximize their profits (or, for the non-profits, retained earnings). It seems hospitals charge what they can get away with. Amazing! (For examples of the coverage the report is receiving, take a look at what the Los Angeles Times, the San Jose Mercury News, San Francisco Chronicle, and the Kaiser Family Foundation’s KaiserNetwork.org web site have to say about it.) Not to fan the flames further, but there are also studies out there that show there’s no correlation between the cost of services and the quality of the outcomes.

The new hospital cost study was sponsored by the California Public Employees Retirement System (Cal-PERS) and the Pacific Business Group on Health (PBGH). Pardon my lack of surprise at the findings, but the findings are kind of old news. Health plans have been making this point since at least the late-90’s. Their claims were generally dismissed as mere justifications for rate hikes, but the facts have been out there for a long time.

There’s a host of reasons for these disparities. For example, there’s the impact of consolidation among hospitals. Community-based hospitals got tired of having their pricing requests ground down by carriers representing substantial numbers of potential patients. They realized the need for some heft of their own and consolidation was a way to get it fast. When the M&A activity settled, some hospitals were the only game in town — literally. This not only helped those hospitals negotiate higher reimbursements, it helped their chain as well. If a carrier wants a contract with the only hospital in City A, it might have to offer a sweeter deal to that hospital’s sister facility in City B. The result: higher hospital costs and, consequently, higher premiums.

Cal-PERS and the PBGH have done a public service by recognizing this market dynamic and having the credibility to draw attention to it. And anything that reminds policy makers that the key driver of health insurance premiums is the underlying cost of care is a very good thing.

What the study does not do, in my mind, is validate the need for a state-run purchasing pool as is called for by Assembly Bill X1-1, the compromise health care reform bill promoted by Governor Arnold Schwarzenegger and Assembly Speaker Fabian Nunez. Yet some see the study as confirming the need for the state to gin up its own activities as a health insurance buyer to negotiate with carriers. This is the public policy equivalent of 1950s Japanese monster movie. When Mantra invades, the government calls in Godzilla to fend him off. Of course, the city gets trampled in the process (or at least a cardboard facsimile of the city gets trampled), but in the end, these citizens who survive are assumed to be winners.

I have a great deal of respect for the folks at Health Access. I appreciate the thought they put into their positions even when I disagree with their conclusions. Yet I was surprised to see them play the Godzilla card concerning the purchasing pool. A recent post on the Health Access blog claims the hospital cost study underscores “why AB x1 1 has a purchasing pool–bigger than CALPERS–to negotiate the best possible deal with insurers and drug companies.” But the ABX1-1 purchasing pool won’t be negotiating directly with hospitals. They can hang tough with carriers all they want, but it won’t begin to touch the problems cited in the study.

In fact, several California carriers already have roughly as much, if not more, purchasing power than the state-run pool is likely to have and have long used it to try to negotiate lower prices for their members. (As noted in an earlier post, another study estimates the government-run pool ABX1-1 seeks to create would provide coverage to about 2.5 million Californians.) Ironically, when carriers leverage their purchasing power in this way, they’re sometimes condemned for it. The reality is, however, that in a seller’s market — where there are monopolies or near monopolies, for example — purchasing power isn’t very, well, powerful.

Nor is it clear how successful a purchasing pool will be in negotiating down insurance premiums. The California HealthCare Foundation has studied the performance of several such arrangements around the country. They conclude that “a voluntary purchasing pool will not automatically reduce premiums.”   

The last time the state created a government-managed pool was as part of the small group health care reform package passed in 1992 known as AB 1672. That legislation created the Health Insurance Plan of California (HIPC). The HIPC was later transferred to  … wait for it … the Pacific Business Group on Health which renamed it PacAdvantage. It failed to reduce costs or to remain competitive in the marketplace and is out-of-business.

The hospital cost study is an important contribution to the health care reform debate. It underscores the need to rationalize spending with outcomes. To claim it justifies the creation of a state-run purchasing pool is too far a stretch.