Big Hospitals Dictate Premiums Using Their Clout

Christina Anderson and her three stepchildren live in the sprawling Sacramento suburb of Roseville, Calif., and suffer the ordinary American chaos every afternoon: Austin has karate, and Faith and Taylor have to do their homework. And Anderson, who got laid off from her telecommunications job earlier this year, has to juggle the bills and the household budget.

“We’re eating at home a lot more than we did before, and we’re not going to the movies as much,” she says. “Every single time we go to the movies, it’s 50, 60 bucks.”

But for one of the family’s biggest bills — health insurance premiums — Anderson is unwilling to switch to a cheaper plan that doesn’t have access to her doctors and her local Sutter hospital. “I’ve been a Sutter patient for years,” she says. “I’m a loyal person. And I’m happy with Sutter.”

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Big Hospitals Dictate Premiums Using Their Clout

What Anderson might not know, however, is how Sutter’s battle for market share in her corner of suburbia is affecting her bottom line. Hospital prices in the Sacramento region are among the highest in California, driven in large part by the negotiating clout of the hospital chain Sutter Health.

Dominating The Market

Over the last decade and a half, Sutter has gradually accumulated hospitals and amassed a roster of doctors who contract exclusively with the company. Sutter is now one of the largest hospital chains in California with 22 acute care hospitals.

“In this Roseville market, which is a big suburban area, the hospital is Sutter,” says John Murray, a veteran insurance broker. “It’s a lock right now. Because Sutter dominates the market, major insurance companies, like Blue Cross and Aetna, can’t sell policies that exclude Sutter hospitals and doctors. That dependence means the hospital chain can dictate high prices.”

 In fact, according to government data, Sutter’s charges for a day of care are 37 percent more than the state average. Sutter’s CEO Patrick Fry says its costs are fair and that it pours a portion of its profits back into state-of-the-art facilities.

“People choose Sutter because they believe that the care that they are going to receive is going to be extremely good,” Fry says.

Even still, the average stay at the Sutter hospital in Roseville costs some $30,000 — about $12,000 more than its closest competitor who offers similar quality of care. It’s impossible to say how much Sutter’s pricing influences the cost of health insurance in Roseville. The company’s price list is confidential. But what’s happening in Roseville offers a glimpse into how one large hospital chain can effectively dictate insurance premiums.

Murray pulls out a list of insurance options for a sample employer — plans he could sell to a prospective client. The plans have similar co-pays, deductibles, benefits and premiums. But there are two plans that are dramatically less expensive. They’re the only ones which contract with non-Sutter hospitals.

The difference in dollars can be staggering. In Murray’s example, an employer with about 20 workers would pay $29,000 a month for coverage that includes Sutter hospitals. The other plans are $10,000 cheaper. And yet, Murray says, the price break doesn’t sway his clients, even in this example where the customer could save $120,000 a year. “Our customers really perceive the need to have Sutter in the network, Murray says.

Patient Loyalty, Despite Prices

One of those clients is Kenyon Lederer, who runs a small investment advisory firm in Roseville. When Lederer’s insurance premiums went up 19 percent last year, he asked his insurance broker, John Murray, to find some alternatives. There was one stipulation though: any new plan had to include Sutter hospital and its doctors. The only lower priced options Murray found didn’t meet that requirement, and Lederer decided to stay with the higher priced plan because “we like to go to the doctors we have and we get good quality care there.”

It’s a common explanation employers in Roseville give, and something insurance brokers and health plans hear all the time. No one wants to switch plans if it means changing doctors or hospitals, even if it could save them a lot of money without sacrificing quality of care.

For their part, Sutter executives say they’ve earned their patients’ loyalty. Indeed, the Sutter hospital in Roseville has a new neonatal intensive care unit and an impressive rehabilitation center. None of that comes cheap, says Pat Brady, CEO of Sutter Roseville Medical Center.

Sutter And Insurance Companies

Brady says complaints that Sutter’s prices are too high for services like MRIs are unfair because a standalone imaging center in a strip mall doesn’t have the same costs as a full-scale hospital. Still, Brady says, the hospital is trying to bring down its prices.

“We’re about ready to open a very significant outpatient imaging facility,” he says. “We have every intention to have the pricing be very competitive with any outside entity.”

But Brady doesn’t understand why insurance companies charge so much for including his hospital, and other Sutter hospitals, in their networks. Especially, he says, because he typically asks Sutter’s corporate negotiators for a single-digit increase — not the double digit hikes that health insurers are demanding. “We’re very conscious of this because we recognize if that cost the insurer is passing on is significantly higher and even more so the say Sutter is the reason for that, we need to respond.”

While Brady may be asking his corporate parent for a slight increase, it’s unknown just how much Sutter negotiators are demanding from insurers. Such negotiations are confidential.

Still, Brady’s hospital is practically printing money. Its operating margin is an envious 17.1 percent. And the hospital’s corporate business strategy seems unshakeable: weave hospitals, physician groups and surgery centers into one regional juggernaut that employers and insurers can’t live without.

It’s a strategy that makes health care reformers anxious. The growing market power of providers, they say, will make cutting down on the nation’s out-of-control health care bill that much harder.