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Good fall-guys are valuable. And in the search for someone to blame for rising health care costs, the insurance companies have long held that role. Under the new health care law, regulators can limit excessive premium increases. But there are no such limits on how much hospitals can charge insurance companies for medical care. Why should all this matter? As hospitals have consolidated into large chains, they've been able to set take it or leave it prices. And those prices get passed on to us. From our partner Kaiser Health News and member station KQED, Sarah Varney reports.
SARAH VARNEY: Christina Anderson and her three stepkids live in the sprawling Sacramento suburb of Roseville, California and suffer the ordinary American chaos every day after school.
Ms. CHRISTINA ANDERSON: How about you grab a fruit (unintelligible). Those are healthy.
Unidentified Child: Aww. I don't want fruit.
VARNEY: Austin has karate. Faith and Taylor have to do their homework. And mom, who got laid off from her telecommunications job earlier this year, has to juggle the bills and the household budget.
Ms. ANDERSON: We're eating at home a lot more than we did before and, you know, we're not going to the movies as much. You know, every single time we go to the movies for our family, it's 50, 60 bucks.
VARNEY: But on 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.
Ms. ANDERSON: I've been a Sutter patient for years. I'm a loyal person. And I'm happy with Sutter.
VARNEY: 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.
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 24 acute care hospitals.
Mr. JOHN MURRAY (Insurance Broker): In this particular Roseville market, a pretty, you know, big suburban area, the hospital is Sutter. It's a lock right now.
VARNEY: John Murray is a veteran insurance broker. He says 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.
Mr. PATRICK FRY (CEO, Sutter): People choose Sutter because they believe that the care that they're going to receive is going to be extremely good.
VARNEY: Even still, the average stay at the Sutter hospital in Roseville costs some $30,000. That's 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.
Mr. MURRAY: So what I did is, just to show you some examples, is I ran a group, a sample group, in Roseville, using a Roseville zip code, to say what is the difference in Roseville between the carriers - so what I did is...
VARNEY: Murray is holding 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.
MURRAY: Our customers really perceive the need to have Sutter in the network. That's just our customers.
VARNEY: Even though we're talking about a $10,000 a month difference - $120,000 a year?
Mr. MURRAY: Yes.
Mr. KENYON LEDERER: All right. How are we putting these things in, you guys?
VARNEY: One of those clients is Kenyon Lederer, who runs a small investment advisory firm in Roseville. He's currently on his hands and knees stuffing fliers, snacks and other swag into giveaway bags. He's hoping to attract new clients at an upcoming golf outing.
Mr. LEDERER: When golfers come around, we're giving out a little cooler with an apple and some peanuts and some Skittles.
VARNEY: While politicians in Washington continue to agonize over the health care law, its success may very well lie with whether business owners like Kenyon Lederer can be as ruthless with their health care costs as they are generous with their goodie bags
Mr. LEDERER: We have five employees. We've been paying for their health care for 12 years, 13 years.
VARNEY: 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.
I'm curious. This is a, it's a big price break.
Mr. LEDERER: Yes.
VARNEY: And when you talk to John, I'm sure he has showed you this same sheet. How do you make that choice as an employer about why you don't go for those lower cost options?
Mr. LEDERER: We like to go to the doctors that we have and that we think are -we get good quality care there.
VARNEY: It's a story I heard from other employers in Roseville, 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.
Mr. LEDERER: Health care and the health of my family and my employees' families is - I mean it's the most - it's one of the most important things I could think of. So if it affects profits a little bit, then it does.
VARNEY: 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. And, says Brady, complaints that Sutter's prices are too high for services like MRIs are unfair, because a stand-alone imaging center in a strip mall doesn't have the same costs as a full-scale hospital.
Still, says Brady, the hospital is trying to bring down its prices.
Mr. PAT BRADY (CEO, Sutter Roseville Medical Center): We're about ready to open a very significant outpatient imaging facility. And we have every intention to have the pricing, the cost structure, everything involved in that be very competitive with any outside entity.
VARNEY: 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.
Mr. BRADY: We're very, very conscious of this because we recognize that if that cost the insurer is passing on is significantly higher, and even more so, they say that Sutter is the reason for that, then we need to respond.
VARNEY: 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.
For NPR News, I'm Sarah Varney.