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Santa Maria Sun / Cover Story

The following article was posted on September 9th, 2020, in the Santa Maria Sun - Volume 21, Issue 28 [ Submit a Story ]
The following articles were printed from Santa Maria Sun [] - Volume 21, Issue 28

Experts say hospital consolidation is driving up medical costs. Is it locally? - Part 1


Editor’s note: This article is Part 1 of a two-part series produced as a data fellowship with the USC Annenberg Center for Health Journalism.

Jamie Maraviglia has spent long days and nights in the hospital, but her time at home with medical bills is sometimes even more intense.

Arroyo Grande resident Jamie Maraviglia says that the hospital bills for her daughter, Ara (pictured), who suffers from a chronic illness, are putting significant financial strain on her family.

The Arroyo Grande resident is routinely in and out of the hospital with her 2-year-old daughter, Ara, who suffers from Hirschsprung disease, a chronic intestinal illness.

Ara started out her life in the neonatal intensive care unit at Sierra Vista Regional Medical Center in San Luis Obispo. She has had four surgeries since, and is “gearing up for more,” her mom said.

“I have stacks and stacks and binders of medical billing,” Maraviglia told the Sun. “I would spend, at one point, 10 hours a week on the phone with insurance, with hospitals, with billing companies. A lot of it is just arguing.”

Even with her employer-sponsored health insurance, Maraviglia said she’s astonished by the amounts on her bills—the charges, the out-of-pocket costs, the confusing network limitations, and her ever-rising insurance premiums.

Maraviglia believes that getting health care on the Central Coast is even more expensive than in other places. She’s concluded that there’s a core underlying reason why.

“We live in a health care desert. There’s no other way to say it,” she said. “We are basically beholden to two major health care companies.”

Dignity Health and Tenet Healthcare—a national nonprofit and national for-profit hospital system, respectively—own all five hospitals in SLO County and Santa Maria as well as a network of local outpatient services, clinics, and physicians.

According to a Sun investigation of the cost of local health care, the two systems made three times more revenue on third-party payers—like Maraviglia on an employer-sponsored plan—than they did on Medicare patients in 2018 on a per-inpatient day basis, according to data from the California Office of Statewide Health Planning and Development.

Between 2005 and 2018, local hospitals’ net revenue on commercial payers grew 354 percent, to $222.1 million, while their net losses on Medicare payers plummeted 641 percent, to negative $133.8 million.

Locals and health care experts told the Sun that the larger, highly integrated systems are using their market leverage to receive higher reimbursements from private insurance providers, which they say raises the overall cost of health care and causes anticompetitive impacts.

“It dramatically raises the cost of doing medical care,” said David Palchak, an Arroyo Grande-based oncologist with his own independent practice. “I can’t get anything above Medicare rates [from commercial insurance]. ... Two to three times Medicare is unreasonable.”

In 2017, the five hospitals set their prices between five- and nine-times above what Medicare determined their costs to be—bigger markups than most hospitals in the state, according to Medicare data. Dignity and Tenet officials declined to answer specific questions about their prices and revenue trends, but they touted the benefits of integrated care systems.

“Our primary goal is to provide seamless care and service between our hospitals and our clinics, imaging centers, and urgent care facilities, for the patients we treat every day,” Tenet Health Central Coast CEO Mark Lisa said in a statement. “[Tenet] provides safe, first-class health care to anyone who walks through our doors. ... As the largest private, non-utility employer in SLO County, we are proud to provide services to the communities we are part of.”

Consolidation concern

In recent years, health care researchers, advocates, regulators, and lawmakers have all discussed hospital consolidation with increasing concern and urgency.

Dignity Health owns Marian Regional Medical Center in Santa Maria, Arroyo Grande Community Hospital, French Hospital Medical Center in SLO, and a variety of local clinics, services, and physicians. Its new parent company, CommonSpirit, is one of the largest nonprofit hospital systems in the U.S.

Earlier this year, state Sen. Bill Monning (D-Carmel) introduced Senate Bill 977, which would’ve expanded the state attorney general’s oversight of private health care transactions. In 2019, California Attorney General Xavier Becerra sued Sutter Health over its allegedly anticompetitive charging practices, which ended this year in a $575 million settlement for Sutter to pay.

According to a 2018 study at UC Berkeley, more than 80 percent of California counties, including Santa Barbara and SLO, had hospital markets that were “highly concentrated”—or close to becoming monopolies.

This consolidation is a result of years and years of both horizontal (such as a hospital acquiring another hospital) and vertical (such as a hospital acquiring a physician group) integration, experts say. Many researchers conclude that the consolidation wave has driven up health care costs.

“The data is incredibly clear on this,” said Jaime King, a professor at UC Hastings College of Law who specializes in health care markets and policy. “Hospital mergers result in significant price increases almost immediately. Both entities’ prices go up as a result. Neighboring hospitals’ prices go up, too, as a shadow effect. It’s having an even bigger effect in the overarching market.”

In Northern Santa Barbara County and SLO County, Tenet’s and Dignity’s shares of the in-patient hospital market began in 2005, when Dignity (then Catholic Healthcare West) acquired a struggling French Hospital Medical Center and Arroyo Grande Community Hospital from previous ownership. It already owned Marian Regional Medical Center in Santa Maria. Tenet had owned Sierra Vista Regional Medical Center in SLO and Twin Cities Community Hospital in Templeton for years prior.

In the 15 years since, the two systems expanded. Tenet bought a multi-state hospital chain, Vanguard Health Systems, in 2013 and then partnered with outpatient giant United Surgical Partners International. In 2019, Dignity merged with Catholic Health Initiatives, a Colorado-based hospital chain, to form CommonSpirit Health, which is now the second largest nonprofit hospital owner in the U.S.

As the systems grew outward, an increasing number of Central Coast physician groups, primary care centers, urgent cares, and other outpatient services joined Dignity’s and Tenet’s umbrellas.

“That’s where a lot of the growth is now focused,” King said.

Hospital prices in Northern Santa Barbara County and SLO County also rose substantially over those years. Rates vary by facility, but in 2017, all five hospitals’ chargemaster prices, when divided in aggregate over their Medicare determined costs (called a charge-to-cost ratio), exceeded the state median.

A charge-to-cost ratio “is a way to measure the markup of chargemaster rates over Medicare-allowable costs,” according to a 2015 Johns Hopkins University study. “It’s a hospital’s total gross charges divided by its total Medicare-allowable cost.” While raw chargemaster rates are not often billed to patients, they are often the starting points for contract negotiations with insurance providers, industry experts say.

Chargemaster rates (the raw prices for all services, goods, and procedures) are rarely what patients and insurers end up paying for care. But they’re often the starting point for negotiations with insurers and for other billing calculations.

“They are relevant,” King said, “because oftentimes insurance companies negotiate a percentage off of the chargemaster. And they’ll say, ‘We negotiated 50 percent off the chargemaster.’ But what is the chargemaster? If the chargemaster is 500 percent of Medicare, that’s still 250 percent above Medicare.”

On average, California hospitals’ chargemasters were about five times their total costs as calculated by Medicare. Locally, those charge-to-cost ratios ranged from 8.6 at Twin Cities Community Hospital, to 5.2 at Marian Regional Medical Center, to 2.2 at Lompoc Valley Medical Center, the region’s only public hospital.

The markups, King said, underscore how hospitals can charge with near impunity given their power and leverage in the market.

“What a lot of what this tells us 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. We’re just not seeing that happen,” King said. “It’s seems as though prices can go up and up and up, and we don’t see the demand fall.”

You can reach Peter Johnson, assistant editor of the Sun’s sister paper, New Times, at

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