Add California to the list of states where researchers are documenting evidence of hospitals and doctors using their market clout to extract higher payments for services – higher payments that get passed on to people insured in private health plans.

The latest study, following on the heels of a Massachusetts report with similar findings (see below), tells us that in California, doctors and hospitals use their size, reputation, and various strong-arm negotiating strategies to win higher payment rates from insurers.  Here are some findings:

•  All or None Negotiating:  Hospital mergers and acquisitions have resulted in some really huge hospital chains, particularly in Northern California.  Sutter Health has two-dozen hospitals, some with several locations, while Catholic Healthcare West has 33 acute care hospitals across the state.  When negotiating with insurers for rates, these large systems essentially say, “take all of us in your network at the rates we want or lose all of us.”  If insurers had their way, they could drop unneeded hospitals from their networks or pay them less based on quality and still keep the hospitals they need in-network.  But “no can do” under “all or none” negotiating.  And in some markets, physician groups have attached to the hospital groups so they enjoy and expand the benefits of all or none.
•  Must-Have Hospitals and Physicians:  Certain hospitals and physician groups have such strong reputations or provide such unique, specialized services that insurers must have them in their networks in order to sell their plans.  Some of these must-haves have consolidated into larger systems, which enable them to demand higher prices for all providers in the system, including those that would not have been so well-paid as independent providers. One executive from a competing hospital suggested that Cedars-Sinai Medical Center in Los Angeles, which has chosen to remain largely independent, nonetheless commands high prices because it has “a strong marketing arm and the [movie] actors,” enforcing its reputation as a must-have. 
•  Doctors Stick Together:  In California, IPAs are common.  They negotiate for groups of doctors to receive capitated payments for HMO plans.  Some of these IPAs represent thousands of doctors.  Ironically, their strong bargaining power has so increased the costs on HMO plans, usually thought to be less expensive than PPOs because of more utilization control, that some insurers are trying to shift customers to PPOs.  But there, too, large multi-specialty or single-speciality practice groups tend to get the upper hand in rate negotiations.  Conversely, small or independent doctors who go it alone get stuck with low “take it or leave it” rates from insurers.

What does all of this mean for consumers?  We are paying higher premiums to cover higher provider rates.  One commonly cited study from 2006 reported that hospital consolidation increased hospital prices anywhere from 5 to 40 percent.

The California study does not rely on the pricing, quality, and cost data that the Massachusetts Attorney General used to show that prices are more closely tied to market leverage than quality and costs.  Still, the conclusions of both studies raise questions about what policies are needed to address the increasingly uneven bargaining power of providers and insurers. 

Some, including the study’s authors, have suggested that hospital or physician rate-setting may be in order.  Right now, only Maryland sets the rates that hospitals get paid.  Government rate setting was more widespread in the 1970s and 1980s before states such as New York, New Jersey, and Massachusetts deregulated rates in the early 1990s. In his book, The Healing of America, T.R. Reid describes how several countries that use private insurers and private providers to achieve universal coverage do so by injecting government-control or government-facilitated payment rates into the system.  However, here in America, where even the current market-based health reforms are derogatively referred to as “government-control,” widespread government price regulation may never be politically feasible. 

We need new solutions that go beyond the current antitrust approach, which is to allow providers to negotiate jointly for rates so long as they meet some minimum standards of clinical or financial integration.  These standards are obviously failing consumers.  Federal and state authorities must be more aggressive in keeping provider markets competitive and setting stricter rules around negotiations for payment rates.

Why does health care cost so much? That’s the question of the hour. How much things cost has a lot to do with how much power different players have in our healthcare system.  Individual people have very little ability to negotiate the fees we pay our doctors and hospitals.  And we now know that even health insurance companies have a lot less leverage to negotiate good prices than they used to have.

Massachusetts Attorney General Martha Coakley investigated the secret negotiations that insurers conduct with each hospital and physician group in their networks to set the prices that the insurers will pay for services to their members.  In an effort to understand the root causes of rising healthcare costs, Massachusetts gave Coakley authority to subpoena data on price, quality, and costs from the states’ insurers and providers. 

In a preliminary report, Coakley found that large, powerful hospital and physician groups in Massachusetts get paid more for their services than smaller or less well-known providers even though they don’t necessarily provide better or safer care.

 In fact, their higher prices are not based on any of the things we traditionally think cause health costs to rise — higher quality of care, differences in the sickness of patients, academic or teaching status, or differences in a hospital’s costs to provide the care.  They are paid more simply because the big doctor and hospital groups have more “market leverage.”

 Here’s the key set of findings from the report:

• Prices paid by health insurance companies to hospitals and physician groups vary significantly within the same geographic area and amongst providers offering similar levels of service. 
•  Price variations are not correlated to (1) quality of care, (2) the sickness or complexity of the population being served, (3) the extent to which a provider is responsible for caring for a large portion of patients on Medicare or Medicaid, or (4) whether a provider is an academic teaching or research facility. Moreover, (5) price variations are not adequately explained by differences in hospital costs of delivering similar services at similar facilities.
• Price variations are correlated to market leverage as measured by the relative market position of the hospital or provider group compared with other hospitals or provider groups within a geographic region or within a group of academic medical centers. 
• Variation in total medical expenses on a per member per month basis is not correlated to the methodology used to pay for health care, with total medical expenses sometimes higher for globally paid providers than for providers paid on a fee-for-service basis. 
• Price increases, not increases in utilization, caused most of the increases in health care costs during the past few years in Massachusetts. 
• The commercial health care marketplace has been distorted by contracting practices that reinforce and perpetuate disparities in pricing. 

 The study reinforced some preliminary findings by the Boston Globe in 2008.

A 2008 Globe Spotlight Team series focused on the Boston market found that hospitals such as Massachusetts General Hospital and Brigham and Women’s Hospital typically are paid 15 percent to 60 percent more for essentially the same work as other hospitals, even though the quality is not superior. Coakley’s statewide investigation found that the payment gap was wider than the Globe determined.

In the early days of managed care, if hospitals or doctors demanded prices that were too high, insurers could beat back these demands by threatening to drop them from the networks, which would result in lost patients and revenue.  But hospital and physician groups merged or otherwise teamed up to strengthen their brand names and increase their bargaining power in negotiations.  Now these big groups of doctors or hospitals can refuse to accept an insurers’ patients if their price demands are not met.  It’s the insurers who can’t afford to lose these popular systems from their networks, so they cave in to higher prices. And then pass on those higher prices to you. 

Coakley will release more details and a final report in coming months.  Another state agency will hold hearings on the issue.  Getting under the hood of our healthcare markets in this manner is a great step toward figuring out why our healthcare is costing us so much.

As reported by Time today, consumers in California, Maine, Indiana, and Oregon are being hit with rate increases of at least 15%.   Medical Inflation is at 9%. 

13 million Americans buy insurance for themselves.   As more employers drop coverage, more Americans will be forced into the individual market – where they have no ability to negotiate on price.

In an interesting related news, USA Today reported  the top 15 Health Trade Groups increased their political spending in 2009 by 14%.   

Consumers need to know where their premiums dollars go.   The time for rate reform is now.

Oregon is providing a model for the rest of the country by making all health insurance rate filings public.

In contrast to California where consumers have no information about how Anthem is justifying its recently announced 39% rate hike, starting April 1st Oregonians will have access to all of the information health insurance companies file for rate hikes.  The Oregon Insurance Division must review health insurance rates for individual, small employer (2-50 employees), and portability plans before they take effect in Oregon.

New rules adopted today put in place reform passed by the 2009 Legislature.  These include:

• A 30-day period for the public to comment on rate requests.
• More detail about what insurers spend on salaries, broker commissions, marketing and advertising, and other administrative expenses.
• Ability to consider an insurer’s overall profitability rather than just costs for a particular type of insurance such as individual health plans.

We applaud Oregon for giving consumers the information they need.  The rest of the country could learn a lesson (especially the state to the South of the border of Oregon).

As reported in the New York Times today,  Anthem has provided “Exhibit A” for Health Reform.

Anthem Blue Cross, has agreed to delay the rate hikes in California until Insurance Commissioner Steve Poizner has had time to review whether Anthem has spent at least 70% of premiums on health claims, as required by state law. In this case, it will probably mean just a 2 month reprieve for consumers from the outrageous rates.  (Even though Wellpoint posted record profits in the last quarter of 2009, this review is limited to the California individual market.)

Consumers deserve full disclosure about how much of their premium dollars goes towards actual health care services – and how much goes towards lobbying to defeat health reform, advertising, and administrative overhead –bonuses fall in this category.

Federal bills would require 80% of premiums be used for health services in the small groups and indiviudal markets and 85% in the large group markets.

Check out these blogs for more information about how health reform would help prevent these rate hikes:

Anthony Wright at The Treatment, the health policy blog of The New Republic and Ezra Klein at The Washington Post.

The CA Assembly Health Committee will hold a hearing on the premium increases on February 23rd.  On th 24th, Energy and Commerce Committee Chairman, Subcommittee on Oversight and Investigations will hold a hearing.

By now, we’ve all heard the excuses that Wellpoint, Inc. has given for hiking premiums up to 39% for its Anthem Blue Cross of California customers who can least afford it – those in non-group plans, as first reported in the Los Angeles Times.

It’s not our fault, the company says, rising medical costs are forcing us to raise premiums.  Healthy people are dropping coverage so sicker people are left, requiring drastic rate increases to cover their medical claims.

Wellpoint, Anthem’s extraordinarily profitable parent company, is blaming these large rate hikes on the so-called “death spiral.”  In a nutshell, here’s what that is:  Insurers are supposed to spread risk.  All policyholders pay premiums and insurers pool the money to pay for those who incur medical costs.  In a death spiral, as medical costs rise, pushing up premiums, healthier people who don’t need much medical care leave the pool until only sicker customers remain.  Insurers say they are forced to charge these customers exorbitant premiums to cover their high medical costs, and the vicious cycle continues as more customers leave. 

We can’t accept Anthem’s reasons as true without knowing the underlying facts.  Insurers can split up pools of individual policyholders however they want.  They may intentionally plunge certain blocks of their business into a death spiral by isolating aging customers or those with high medical costs in a pool.  They don’t add new, potentially healthier customers to these pools to spread risk, and they refuse to offer customers in the pool different policies that they offer new or healthier customers.  In industry parlance, they “close a block” of business.

The effect of this common practice is that sicker or older (i.e., less profitable) customers face rapidly rising premiums until they eventually are driven out of the insurers’ plans.  (Most state laws prohibit insurers from canceling sicker customers outright.)  It’s just another way that insurers cherry pick.

Jonathan Cohn of The New Republic has a nice, in-depth description of this practice.  Karen Pollitz, of the Health Policy Institute at Georgetown University, told the Milwaukee Journal Sentinel:  “These practices persist because they are amazingly invisible.” 

California law requires insurers to notify regulators when they close blocks and to offer customers comparable policies or pool the blocks with other “appropriate” blocks.  But it’s not clear if the rules are being enforced or evaded.

Wisconsin is trying a seemingly simple solution.  The state recently enacted a requirement that insurers allow policyholders to change to a different plan upon renewal without imposing new pre-existing condition exclusions or new medical underwriting based on health status.  In effect, they cannot close a block.  (It’s in the state’s budget act at section 3174, page 592).

The reform bills in Congress would stop the death spiral practice by requiring insurers to pool all non-group market customers together.  But for the millions of people soon to be hit with double-digit premium hikes, we need regulators to act now to stop insurers from spiraling their customers right out of coverage.

Welcome to a new blog from Consumers Union, the non-profit publisher of Consumer Reports. We’re excited to add Your Health Dollar to our family of blogs for consumers. We know there are a lot of other blogs out there vying for your attention, not to mention all the tweets and texts, IMs and emails. So here’s why Your Health Dollar will be important to you.

For the past year, all eyes have been on Washington D.C. as the march toward comprehensive, national healthcare reform has progressed. CU has updates on the reform effort as well as all the resources you need to understand the reform proposals at www.prescriptionforchange.org.

Outside of Washington, however, life goes on for millions of consumers who face higher healthcare costs, loss of insurance, and other struggles to get medical care.  At CU, we’ve also kept our eyes on what’s happening on the ground in the states, and in healthcare markets across the country. From Oregon to Maine, we’ve seen insurers battle regulators for less regulation and higher profits. We’ve looked at the finances of our so-called non-profit insurers to see if they are truly serving their missions to provide affordable, quality coverage (answer: not so much). And we’ve observed the tug-o-war between providers and insurers as hospitals and doctors demand higher reimbursements and insurers experiment with new payment models.

On this blog, we’ll bring you the details on these issues and more. Our goal is to follow the money and bring more transparency to the healthcare marketplace. Many of the corporations that collect, distribute, invest, or otherwise spend your healthcare dollars are huge hospital and insurance interests, with various lines of business and a multitude of subsidiaries. They must be held accountable, not just to their boards of directors or shareholders, but to every American.

We’ll also keep tabs on our government regulators to show you whether they are acting in your interests. We’ll discuss policy developments and industry trends as they arise. We’ll tell you how you can help us push for transparency and accountability. And, of course, we want your input so feel free to post your comments. Let us know what you’re thinking about Your Health Dollar!