A new study on hospital pricing from some of the largest health systems in California raises questions about the impact of hospital mergers and consolidations on healthcare costs.
Researchers at the University of Southern California analyzed claims data from Blue Shield of California for hospital services from 2004 to 2013. Prices for all hospitals in the state grew 76 percent per hospital admission during that time frame, while prices at the hospitals that are part of the largest systems in the state, Sutter Health and Dignity Health, grew substantially more—by 113 percent. Prices were nearly the same for both groups at the start of the study period, about $9,200 per admission. By the end of that period, prices at the largest health systems exceeded prices at other California hospitals by almost $4,000 per patient admission. The study uses actual prices paid by Blue Shield, not billed charges.
The study’s results could have implications for understanding hospital prices nationwide.
But an important caveat to consider regarding the study is that it only includes Blue Shield data, and Blue Shield has its own iron in the fire: It has publicly clashed with Sutter over its prices and has pending litigation against the health system, accusing Sutter of imposing anticompetitive terms and illegally inflated prices. The study authors say Blue Shield shared its claims data but was not involved in any analysis or conclusions.
Dignity Health and Sutter disputed claims that they can dictate prices, saying they face competition and there are many other factors that drive costs, such as labor expenses, paying for California seismic upgrade mandates, and the price of treating the rapidly growing Medi-Cal population. Sutter also questioned why other large health systems besides Sutter Health and Dignity Health weren’t included in the study, such as Sharp HealthCare and Scripps Health in Southern California.
Kaiser Permanente, the state’s largest insurer and a major competitor of Sutter and Dignity, was not included in the study because it’s an insurer and a health system. Still, Sutter and Dignity have to compete with Kaiser, and much of their growth and expansion has likely been part of a strategy aimed at responding to KP’s size and strength.
Given that competitive environment, health systems argue that mergers allow them to operate more efficiently and better control cost increases. But the new study suggests that once health systems become large and powerful, it becomes much more difficult for a health plan to exclude certain hospitals within a health system because systems have leverage to negotiate prices on an all-or-nothing basis, requiring all member hospitals to be in the plan’s network.
The USC study also found indications that the pricing power of Sutter and Dignity allowed their competitors to raise rates, too, which could mean that prices overall can be raised in a healthcare market over time after a merger. The authors say other hospitals in the same markets as Sutter and Dignity can tell an insurer they want to be paid more and still be a lower-priced option compared to the larger systems.
Higher prices in areas where Sutter and Dignity are dominant is not new to employers or consumers. Each year, the Covered California insurance exchange premiums and CalPERS regional premiums are always higher in Northern California, where Sutter and Dignity dominate, than in Southern California, where health systems are less consolidated. Officials from both CalPERS and the exchange say the reason for the higher premiums is high hospital consolidation and the market power of these large health systems. Other factors, such as cost of living, also play into pricing as well.
While Blue Shield may have had more than one reason for sharing its claims data with researchers, this study could shed light on the impact of large mergers and acquisitions by health systems in many parts of the country. Because California experienced much of its health system consolidation earlier than some other parts of the nation, this study provides insights into the long-term influence that hospital consolidation can have over prices for consumers and employers.
Jenny Kerr is a senior analyst at DRG and an Employer Benefit Trends expert. Follow her on Twitter at @JennyKerrDRG.