Why hospitals must approve big premium hikes

Insurance company executives are paid too much, but stopping them from jacking up premiums is too risky for hospitals.

That was the gist of an interview I had earlier this week with C. Duane Dauner, president of the California Hospital Association and one of the state's most prominent healthcare leaders.

I was curious about the CHA's oppostion to AB 52, a bill currently in the state Legislature. It would give the two agencies that oversee health insurers in California, the Department of Insurance and the Department of Managed Health Care, a chance to reject any premium increases considered to be unreasonable. The bill recently passed the Assembly and is currently in the Senate.

I've been writing about healthcare in California for nearly 20 years, and hospitals and health plans have rarely played nice with one another. Contract wrangling between hospitals and insurers is legendary, and sometimes takes on a form of chicken, with each side daring the other to blink first. Hospital systems like Sutter Health and Prime Healthcare were constructed primarily in a way to best obtain leverage with insurers, and their costs are considerably higher than other hospitals in the state.

So it seemed odd that hospitals would not support some legislation that would make it a little more likely California's inhabitants could purchase insurance. It's a big issue in California, where the number of uninsured jumped by a third in the past four years, to 8 million.

Meanwhile, plans such as Anthem Blue Cross and Blue Shield of California have routinely given individual policyholders double-digit premium increases, sometimes multiple times a year. Anthem recently ignored a conclusion by Insurance Commissioner Dave Jones that its most recent rate hike was unreasonable, and imposed it anyway. Blue Shield, a not-for-profit, recently backed off on some rate increases, and just announced a cap on net income and a refund of premiums after Jones' office reported that CEO Bruce Bodaken was earning nearly $5 million a year.

"We're not trying to be the voice for health plans," Dauner assured me in the interview, where his voice often rose with emotion. He expressed displeasure at Bodaken's compensation, and was also displeased that CHA's premiums to provide healthcare coverage to its employees recently rose 18 percent.

However, as he explained to me, hospitals in the Golden State spend about $12 billion more a year on Medicare, Medicaid and uninsured patients than they take in. They therefore need to make it up on their patients enrolled in commercial health plans. Hospitals fear that any crimping of premiums will lead to even more wrangling on rates, and exacerbate the problem.

"We're dealing with two forces coming from opposite directions, while we have two feet in separate boats," Dauner said.

But Dauner noted he would support regulation of premium increases if a "comprehensive approach" was taken that addressed payment shortfalls on the government side of the equation. However, it isn't. Medicare and Medicaid payments are mostly getting smaller rather than larger, creating more pressure to extract optimum revenue from commercial payers, and essentially pitting hospitals against the best financial interests of its patients.

So, if there is no rationality in one sector of healthcare finance, it is likely it won't appear anywhere else. And as California often leads the industry, this odd saga is likely to play out in other parts of the country as well. - Ron