San Diego: Retreat from Capitation Raises Cost Concerns

Center for Studying Health System Change



San Diego County had a total population of approximately 3 million in 2007, or 8% of the state’s population. Population growth over the past 10 years has been steady but somewhat slower than for California as a whole (9% vs. 14% statewide). The proportion of the population in San Diego that is 65 years and older (11%) is consistent with the state average, while the white, non-Latino population is higher than the state average (54% vs. 43%).

The percentage of San Diego households with incomes above $50,000 is moderately higher than the state average (57% vs. 51%), and the population lacking health insurance (13%) is comparable to that of the state as a whole. Residents in the northern area of the county, such as La Jolla, tend to have higher incomes and are more likely to have health insurance, while residents in the south, such as the Chula Vista and National City areas, are more likely to be uninsured and have lower incomes.

A striking feature of San Diego is the large role that public employers play in the local economy. Seven of the 10 largest employers are public entities, including the US Navy, federal government, state government, University of California, San Diego Unified School District, city of San Diego, and county of San Diego. The large hospital systems in San Diego, including Sharp HealthCare (Sharp), Scripps Health (Scripps), and Kaiser Permanente (Kaiser) round out the remaining 10 largest employers. In January 2009, San Diego’s unemployment rate reached 8.6% — lower than the state average of 10.6% but markedly higher than San Diego’s January 2008 rate of 5.1%.

Geographically, San Diego is bordered by Mexico to the south, the Pacific Ocean to the west, Marine Corps-base Camp Pendleton to the north and the desert to the east, which results in a relatively self-contained market area. These geographic boundaries have a significant influence on the configuration of the health care system and how health care providers collaborate and compete.

Issues to Track

While San Diego has been called the “last bastion of capitation,” this appears to be changing. The strong market positions of some hospital systems and affiliated physicians have enabled them to move from capitated to fee-for-service contracts with health plans. The desire of some national health plans to move away from capitated payment arrangements has contributed to this change. But there is concern among some purchasers that health care costs in San Diego are likely to increase significantly as a result. Health plans are expanding their product portfolios to offer plans with limited benefits in response to employer demands for lower costs, and are experimenting with narrow-network products that exclude higher-cost providers from their networks.

San Diego’s somewhat unique system for providing health care for the uninsured relies heavily on private providers but is being challenged by low Medi-Cal payment rates. Safety-net providers are also being challenged by increasing demand for their services and limitations on access to specialty services, which stand to worsen with the economic decline. The following are among the key issues to track:

  • How will the shift from capitation to fee for service evolve in San Diego? Moving forward, what will be the impact on care delivery, costs, and quality?
  • Will large hospital systems seek to divide the health care market in San Diego along geographic lines? Will consolidation of providers continue? If so, how will this affect costs and access?
  • Will narrow-network and consumer-directed health plan products gain employer and employee acceptance and, if so, will they be effective in injecting new cost discipline into the San Diego market?
  • Can San Diego’s safety net be sustained in the face of increased demands for services in a deteriorating economy? Will the county government increase financial support for the safety net?

Since 2009, CHCF has published a series of regional market studies that examine the health care markets in specific regions across California. These studies highlight the range of economic, demographic, and health care delivery and financing conditions in California. They are published as part of the CHCF California Health Care Almanac, an online clearinghouse for key data and analyses examining California’s health care system.