Large Health Systems Drive Up Costs in Northern California

Hospital costs in the San Francisco Bay Area are significantly higher than in Southern California, in part because large health systems in the northern region have enough influence to raise prices and reduce competition, the New York Times reports.

Details of Higher Costs

The Times recently highlighted Sutter Health's clout in Northern California and examined how it has led to higher costs for patients.

California Pacific Medical Center -- Sutter's main campus and California's largest not-for-profit private hospital -- earns the highest net income in the state, the Times reports. The facility's prices are among the top 20% of hospital costs in the U.S. according to a Times analysis of federal government data.

According to a master list of hospital costs, CPMC charges:

• $32,901 for an X-ray of the heart's arteries;
• $25,646 for a gall bladder removal, not including doctors' fees; and
• $5,510 for a vaginal delivery, plus $731 for each hour of labor and $137 for each bag of IV fluid.

In addition, the center charges:

• $20 for a codeine pill, compared with 50 cents at a pharmacy;
• $543 for a breast pump kit, compared with $25 online; and
• $4,495 for a CT scan of the abdomen, compared with $400 at nearby outpatient facilities.

Despite those higher costs, the California HealthCare Foundation in a report gave CPMC average quality scores for most of its hospital services. CHCF publishes California Healthline (Rosenthal, New York Times, 12/2).

Meanwhile, insurance premiums in the Bay Area also have increased, with the lowest-cost silver-tier plan offered through Covered California costing 26% more in Alameda County than in Orange County.

Reasons for Higher Costs

Sutter's ability to consolidate and develop hospitals systems has given it the ability to drive up costs, according to KQED's "State of Health" (Aliferis, "State of Health," KQED, 12/3).

Glenn Melnick, a professor of health economics at the University of Southern California, called Sutter "a leader -- a pioneer -- in figuring out how to amass market power to raise prices and decrease competition."

Melnick added that hospital charges are "basically arbitrary, not connected to underlying costs or market prices."

David Lansky -- CEO of Pacific Business Group on Health -- added that Sutter's contracts include "gag clauses" that keep employers from knowing what rates insurers have negotiated on their behalf.

Lansky added, "Sutter has been successful at leveraging their huge size in dictating not just price but contract terms."

According to the Times, Sutter's higher prices also have created a "ripple effect across Northern California," allowing smaller facilities to raise their prices (New York Times, 12/2).

Melnick said that insurance "premiums are higher in the Bay Area even after accounting for the higher cost of living here" ("State of Health," KQED, 12/3).

Sutter's Reaction

Warren Browner, CEO of CPMC, said the center's higher prices are necessary to keep professionals available around the clock. He said the center also must constantly upgrade equipment and buildings to meet new standards, as well as provide care to low-income individuals who are unable to pay.

"We have to recoup what it costs to keep open, what it costs to take care of the un- and underinsured and to rebuild," Browner said.

He added that Medi-Cal -- California's Medicaid program -- only reimburses for 10% to 20% of the actual cost of care, while Medicare pays about 70% of the cost of care (New York Times, 12/2).