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Hospital consolidation is leading to soaring costs. Here’s how to localize the story.

Topics in Health: Lessons From The Field

Hospital consolidation is leading to soaring costs. Here’s how to localize the story.

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(Image by Alex Zuniga)
(Image by Alex Zuniga)

Most independent health care experts agree: U.S. hospital consolidation is driving up the cost of health care.

How? When individual hospitals, clinics, and doctors get acquired and merged into a few big entities, those systems gain leverage. With less competition around them, they’re able to set higher prices and dictate lucrative contract terms to insurers. Ultimately, those costs are passed down to patients, who pay through their bills and premiums.

This consolidation phenomenon, which experts say has been accelerating for years and is now at an alarming peak, is well-studied. Occasionally, journalists will cover it when a new academic report is released or when the government files an antitrust lawsuit. But generally, it’s not explored in depth in the news — especially in local outlets.

Sweeping health care topics like this pose a challenge to local reporters. How do we tangibly demonstrate their relevance and impact on the communities we serve? While it may not be obvious to the average citizen that their hospital bill or insurance plan is more expensive due to these forces, they nevertheless influence the entire system.

The subject came to my attention in an email from a San Luis Obispo County oncologist. He claimed that the dominant nonprofit hospital system in our area, Dignity Health, was getting several times above Medicare rates for cancer treatment while his private practice could only get Medicare-level reimbursements. While he offered nearly identical cancer services and worked with the same insurance carriers, his practice earned less, while Dignity patients paid significantly more. He attributed the disparity to Dignity’s power in the market, and sent me links to research on consolidation and its impact on competition and prices.

It piqued my interest. I already knew that a duopoly of hospital owners — Dignity Health and Tenet Healthcare — held court in San Luis Obispo and northern Santa Barbara counties, owning all five hospitals from Paso Robles to Santa Maria. Does that drive up the cost of health care in our region? By how much? Who’s affected? How would I measure it?

The answers seemed daunting to track down at first because data like hospital bills and insurance contracts are private. But it turned out that valuable, informative, and local data awaited me in public places.

In the state of California, the Office of Statewide Health Planning and Development keeps annual hospital financial data dating back to the 1990s on its website. Those datasets can be filtered into pivot tables by individual county, hospital, or even hospital system.

With some help navigating the data from my sources, those spreadsheets revealed quite a bit about the economics of my five local hospitals, including showing how the forces of consolidation may be at play.

A particularly telling data point I used: hospital net revenue by patient payer type (i.e., a patient on commercial insurance, Medicaid or Medicare). Net revenue is what the hospitals earned after subtracting their costs from their revenues. The disparity across the patient groups was eye-opening, especially when looked at over time.

I started my analysis with the year 2005 — the first year that a duopoly had cemented itself on the Central Coast. I tracked it through 2018 — the last year of available data.

What I found was a massive, growing gap between where hospitals make and lose money. Between 2005 and 2018, annual profit from commercial payers at all area hospitals went up 354% (despite just a 12% increase in their total patient days). In contrast, their net losses on Medicare patients climbed 641%. In other words, by 2018, these hospitals were making 3.5 times more on commercial patients, while losing 6.4 times more on Medicare patients.

What this signaled, according to experts, was that hospitals were using their market leverage to raise rates on commercial plans — as Medicare rates stagnated. The net effect was lucrative for hospitals: overall profits surged about 300% by 2018.

The trends seemed to mirror what experts have warned about consolidation. Higher rates are put on the backs of patients in the commercial market, whose plans, unlike Medicare, are not publicly negotiated, regulated, or capped. Without many alternatives, patients and employers simply have to pay up.

“What a lot of what this tells us,” hospital scholar Jaime King of UC Hastings College of Law told me for my project, “is our basic economic models for price and demand — what Economics 101 would tell us — just does not apply to the health care markets in this country. It seems as though prices can go up and up and up, and we don’t see the demand fall.”

In addition to the state OSHPD data, Medicare data also helped me measure how much hospital prices are going up. Medicare annual cost reports are available for download at the Centers for Medicare and Medicaid Services website. With this data, I mimicked a methodology used to calculate hospital “charge-to-cost ratios” in a 2015 Johns Hopkins study about the most “marked-up” hospitals in the U.S.

The Johns Hopkins researchers basically queried the cost reports to divide hospitals’ overall prices by their overall Medicare-determined costs. The end result is a simple numerical ratio — the “mark-up” over costs — this ratio exceeded 10 in the most egregious cases nationwide.

I followed this same procedure for the state of California, looking at where my local hospitals ranked on the list. Data from 2017 showed that all five local hospitals had charge-to-cost ratios above the California median of 4.7, ranging from 5 to 9. One hospital ranked among the top 20 in the state.

The two datasets together revealed that the Central Coast has higher hospital prices and revenue discrepancies by patient type than normal in California. I tried to visualize these findings as simply and clearly as possible for my final project, while incorporating commentary from local patients, doctors, and industry experts.

My project ran despite the hospitals declining to answer any specific questions. Because my data findings were strong and backed up by national experts, we felt comfortable publishing the story anyway. My advice to reporters interested in investigating how consolidation is shaping their health care market is to trust the data and your sources. There are plenty of ways to build the story without your subject’s cooperation.

Indeed, it’s difficult to tell poignant local stories about opaque undercurrents in health care like consolidation. But it’s crucial we try to document them, as these forces can transform our medical systems, slowly and seemingly invisibly, impacting real people on the other side.

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