Why Health Insurance in the Bay Area Costs More Than in SoCal

Over at the New York Times, Elisabeth Rosenthal continues her terrific series on the high cost of health care in America. Tuesday's installment is a deeply-reported look into the murky world of hospital prices, where a "stitch tops $500," says the headline.

But it's where Rosenthal sets most of her reporting that makes the story a must-read for anyone in the Bay Area. She profiles patients receiving care at California Pacific Medical Center, a Sutter Health hospital -- and her piece indirectly brings up the question of higher health insurance premiums here.

These higher premiums were made evident when Covered California released its plans for all the 19 "rating regions" of the state. In Alameda County, for example, the "silver tier" premiums for a 40-year-old range from $317 to $365. In Orange County, the range is $252 to $290 and Kaiser coming in at a high of $332. In other words, the lowest-cost silver-tier plan is 26 percent more expensive in Alameda County vs. Orange County.

Glenn Melnick, a health economist at USC, is quoted throughout the Times piece, and I called him Tuesday morning to talk about this NorCal vs. SoCal difference. "I would say that hospital prices represent a disproportionate share of that differential," he said, and added that premiums are higher in the Bay Area even after accounting for the higher cost of living here.

Why do hospitals matter so much? Because the Bay Area has a leader in hospital consolidation and development of hospital systems: Sutter Health.

Sutter is "a pioneer -- in figuring out how to amass market power to raise prices and decrease competition," Melnick told Rosenthal.

To state the obvious, higher prices and decreased competition from hospitals leads to higher health insurance premiums. Remember that most Californians receive health insurance from their employers, but businesses are virtually powerless to negotiate better prices from insurers, because "Sutter contracts include 'gag clauses' that prevent employers from knowing what rates have been negotiated by their insurers on their behalf," David Lansky told Rosenthal. He's CEO of the Pacific Business Group on Health, which represents 60 of the state's largest employers in health care negotiations.

"Our members are very exercised about Sutter -- it has increased prices disproportionately," Lansky also said. "Sutter has been successfully at leveraging their huge size in dictating not just price but contract terms." Rosenthal reports that when Sutter bought Oakland's Summit Hospital in 1999, "rates there went up 29 percent to 72 percent, researchers found."

Melnick acknowledged that the physician market is less competitive here as well, but he said that hospitals are easier to study and document. Sutter has 25 hospitals in northern California. If Sutter has the only hospital in one community and an insurer must have it, Sutter insists the carrier take all 25, even if their prices in other, more competitive communities, are higher than the insurer wants to pay, Melnick said.

From the Times:

“Hospitals are self-fueling, ever-expanding machines,” said James Robinson, an economist and professor of health policy at the University of California, Berkeley. “There is an infinite amount of stuff to buy — amenities, machines, new wings, higher salaries, more nurses." ...

The high prices have had a ripple effect across Northern California, allowing smaller hospitals to charge more as well. “Sutter is the tallest Sequoia and everyone goes up just underneath them a bit,” said Professor Melnick. He noted that hospital prices in California had more than doubled in the past decade, after adjustment for inflation.

But there's no correlation between higher prices and better care. "In fact," Rosenthal reports, "a recent study in the publication Annals of Surgery, a monthly review of surgical science, found that hospitals with the highest complication rates tended to have higher prices."

Pay more for worse care. This is American medicine.