Health care spending depends on two things: how much care patients get and the prices that are charged for that care. In California, there is a big problem with pricing.
The price for the same test or surgery can be very different from one part of the state to another. Prices can even vary from one health care provider to another in the same area. Higher prices are almost never explained by better quality, more complex patients, or higher underlying costs (like staff salaries). More expensive rarely means better.
Why Does This Happen?
Hospital consolidation and health care monopolies, as well as pharmaceutical middlemen, are two major drivers of inflated costs.
How Much Money Gets Wasted?
About $19 billion annually is fueled by prices that are inflated because there isn’t enough competition between health care organizations.
How It Hurts Patients
Patients pay higher premiums to an insurance company that dominates the market and is keeping the profit, or to an insurance company that is passing on higher costs from the only available in-network hospital.
Why Prices Are High and Uneven
When Fewer Companies Control the Market
Decades of research shows that prices for inpatient and outpatient services — from C-sections to CT head scans — are higher when there is less competition. This happens when hospitals, medical groups, or health plans merge or buy their competitors. With fewer choices, a big system in one area can set higher prices and anti-competitive contract terms.
Many markets in California are now health care monopolies or trending that way, with just one major hospital system, a few large medical groups, or a small number of health plans in charge. That gives those companies more power to raise prices without improving quality or service.
Pharmaceutical Middlemen and Drug Costs
Most prescriptions in the U.S. are handled by three big companies called pharmacy benefit managers (PBMs): CVS Caremark, Express Scripts, and OptumRx. They sit between drug makers, pharmacies, and health plans. PBMs negotiate discounts, but they may keep much of the savings. They sometimes steer patients to their own pharmacies, which can make it harder for independent pharmacies to compete.
What This Means for Patients
Here’s how these market problems can directly hit patients’ wallets:
Imagine your local hospital is the only major hospital in town. They can set higher prices and demand insurance companies pay higher reimbursement rates. The insurance company has little negotiating power — they need that hospital in their network so customers can get care. But insurance companies don’t absorb these higher costs. Instead, they pass them directly to patients through higher monthly premiums, bigger copays, or higher deductibles.
In some areas, it’s the insurance company that dominates the market. With few competitors, they can charge higher premiums simply because patients have nowhere else to go for coverage.
Either way, patients always end up paying.
What California Can Do Now
California can use existing or new oversight to make sure prices are fair and care is more affordable.
- Under the California Office of Health Care Affordability’s (OHCA) cost growth targets, the state’s hospitals, medical groups, and health insurers can’t increase their spending by more than roughly 3% annually. This creates a disincentive for any of these groups to inflate prices.
- OHCA also carefully reviews hospital, physician, and health plan mergers and can refer deals that are likely to reduce competition and raise prices to the California Attorney General. Currently, the Attorney General can sue to stop anti-competitive mergers, but California could enhance the power of the Attorney General to block or conditionally approve these mergers rather than relying on litigation.
- Several states have begun more aggressively regulating PBMs so they don’t squeeze out independent pharmacies in favor of their own pharmacy chains. Many states also prohibit “spread pricing,” when a PBM bills a health plan more for a drug than it pays a pharmacy to fill it.
- Some states explicitly prohibit various kinds of anti-competitive contracting behavior by hospitals, medical groups, and health plans. Other states have begun to consider or to implement explicit caps on the prices that hospitals and medical groups are allowed to charge.