New Study Shows Wide Variations in Hospital Costs

A recent study finds seven Sutter hospitals still among the most expensive facilities in northern California, with adjusted charges ranging from 77 per cent above the average at Sutter Lakeside (Lakeport County) to 26 per cent higher at Sutter Auburn just north of Sacramento. Sponsored and released by the Pacific Business Group on Health (insert link) and CalPERS, the analysis draws on public data submitted by the hospitals to the Office of Statewide Health Planning and Development (OSHPD), a state agency that collects and reports information about California’s health industry.

Using 2005 state data adjusted for such variants as patient condition, uninsured served by the hospitals, local wage standards, and other factors, analysts at Milliman, Inc., a leading health industry actuarial and consulting firm with numerous California clients, studied actual amounts paid to hospitals by health plans for patients under Medicare age eligibility. The study is particularly useful because it compares the actual amounts hospitals are paid by health plans through negotiated contracts instead of publicly reported “charges” that hospitals bill but are rarely actually paid except by uninsured patients who have no access to negotiated rates.

The data show wide variations between regions as well as between hospitals within regions. As the following graph demonstrates, variations in costs to buyers (brown bars) do not appear to correlate with costs to the hospitals in providing care (blue bars).

This study reports only overall buyer costs per hospital because state data do not provide information about hospitals by specific procedures or service lines. So, we cannot learn from publicly reported data which hospitals are the most and least expensive for back surgery or treatment of pneumonia, as examples. Detailed information at that level is hidden by secrecy enforced by contracts between providers and health plans. CalPERS and PBGH deserve our thanks for providing this analysis at no cost to the public. While this study is a good first step, there is still far too much California’s health care consumers and purchasers do not know about how either the cost or quality of the care we are buying.

Readers should know that in 2004, CalPERS requested a similar comparison of hospital costs from Blue Shield in an effort to understand why premiums were rising in double digits each year. Analyzing data from their complete book of business, Blue Shield reported that Sutter hospitals were 80% more expensive overall than similar hospitals around the state providing similar care to similar patients and 60% more expensive than comparable hospitals in northern California providing comparable care. (A similar study by Blue Cross found about the same variation for hospitals in their network.) Sutter Health retaliated by inserting language in their contracts with Blue Shield that prohibit the health plan from reporting any cost comparisons in the future. For more on that story, see the reprint from the San Francisco Business Times (insert link). As far as Sutter Health is concerned, it appears that our ignorance is their bliss.

The California Health Care Coalition is bringing together large group purchasers from around the state to demand improved transparency and a more accountable pricing system.

Note: Some CHCC members may be disappointed to notice that Santa Barbara Cottage Hospital is not included in this report. The data they submitted to OSHPD was of such poor quality that Milliman could not use it.

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