Study: Hospital clout spurs higher Calif. health costs

Don’t blame only insurers for rising health-care costs, a study in the journal Health Affairs says.

California’s hospital fees surged 10.6 percent annually from 1999 to 2005, twice the national average, as the state’s
biggest hospital networks began to demand higher rates from insurance companies, according to the report released today.

By exerting their market clout, the systems led by the five University of California medical centers may be as responsible
for cost inflation as insurers doing business in the state, the study said. In the same period, California lawmakers also
passed regulations that made it difficult for insurers to cut off subscribers’ access to doctors and hospitals, no matter
their fees.

“Health insurers have been squarely in the crosshairs, blamed for the high cost of private insurance while the role
of growing hospital and physician market power has escaped scrutiny,” Robert Berenson, a study co-author and researcher
at the Washington-based Center for Studying Health System Change and the Urban Institute, said in a statement. “Provider
power is the elephant in the room that no one wants to talk about.”

President Barack Obama met Thursday with Democratic and Republican members of Congress on a health-care proposal that focuses
on restricting the insurance industry’s clout. Berenson, who worked on Medicare policy for President Bill Clinton, said
putting a leash on insurers may not be enough.

Policy makers must rein in “growing provider market strength,” the study’s authors said, recommending that
all-payer rate setting and similar direct regulatory approaches be considered. An all-payer rate system is one in which all
insurers use the same fee schedule, which is set after examination of the underlying costs for hospitals and doctors.

A move by a WellPoint Inc. subsidiary in California to raise premiums by as much as 39 percent prompted congressional hearings
Feb. 24, at which the Indianapolis-based insurer’s chief executive officer, Angela Braly, testified that rising provider
cost are a reason for the increase.

California Attorney General Jerry Brown on Thursday subpoenaed the financial records of seven health insurers led by WellPoint,
Hartford, Conn.-based Aetna Inc. and Philadelphia-based Cigna Corp., saying their rate-setting and claims practices may be
illegal, Brown’s office said in a statement.

Insurer payments to hospitals in Massachusetts and Rhode Island tended to be higher to larger organizations and not based
on quality of service, according to studies of health-care inflation released in January by those state governments.

Rising health-care costs in Massachusetts were driven by hospital and physician group market dominance, according to the
state’s report conducted by Attorney General Martha Coakley, the Democrat defeated by Scott Brown in the U.S. Senate
election on Jan. 19 to fill the late-Senator Ted Kennedy’s seat.

In California, in the late 1990s, hospital systems began to grow and physicians formed medical groups in response to the
development of managed care networks, which demanded lower provider fees as a requirement of participation, the Health Affairs
study said.

Among the largest networks in the state are Sacramento-based nonprofit Sutter Health, with 24 hospitals, and Catholic Healthcare
West, based in San Francisco, with 39 acute care hospitals, the study said. Sutter Health and the University of California
hospital system, with five facilities, each negotiate as a single system, the Health Affairs report noted.

The ability to negotiate with insurers as a single medical provider gives the university bargaining power on payment rates,
the authors say.

Hospital-bed capacity declined and the physician workforce failed to grow enough to cover demand, a tightening that also
enhanced provider market power, according to the report. State regulations also limited the ability of insurance companies
to restrict customers’ access to doctors and hospitals.

Paul Ginsburg, a survey co-author who is president of the not-for-profit Center for Studying Health System Change, said the
timing of the report wasn’t related to the White House health-care summit. While the Obama administration has focused
on insurer profit in addressing rising health-care costs, the market power of hospitals is rarely discussed, Ginsburg said.

“People are less likely to jump on them than they would insurers,” Ginsburg said in a telephone interview.

American Hospital Association general counsel Melinda Hatton called the study “far from convincing” and cited
a report released Feb. 24 by the American Medical Association showing that one or two insurers dominate 309 of 313 metropolitan
areas in 43 states.

“There is no question that the market for health insurance is wildly concentrated,” Hatton said in a telephone
interview. The House of Representatives voted Wednesday to end the insurance industry’s antitrust exemption granted
by Congress in 1945.

America’s Health Insurance Plans, the industry’s Washington, D.C.-based lobbying organization, countered in a
statement Wednesday that 88 percent of U.S. metropolitan areas have highly concentrated hospital markets.

The Health Affairs study was funded by the nonprofit California Healthcare Foundation, based in Oakland, Calif. About 300
hospital executives, doctors, insurers and employers in six major California markets—Fresno, Los Angeles, Oakland/San
Francisco, Riverside/San Bernardino, Sacramento and San Diego—were interviewed from October to December 2008 as part
of the study.

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