What’s driving up healthcare prices in California?
A critical part of the inflation hitting businesses across California is the cost of healthcare for employees – that, in large part, is being driven by unreasonable hospital prices. Prices at hospitals have increased by an alarming 600% in only 35 years. According to the Centers for Disease Control and Prevention, nearly a third of national healthcare spending goes to hospitals while physician and clinical services account for an additional twenty percent. The cost of medications, while important, makes up less than a tenth of healthcare spending.
As someone who represents thousands of small businesses in California, I know this is a critical issue impacting our state. Kaiser Family Foundation found that employers on average pay about $16,000 a year towards healthcare benefits for an average family of four. Employers expect to see their healthcare benefits costs per employee rise 5.4% in 2024 – the biggest increase in more than a decade. As labor costs rise for small businesses, they, in turn, have to raise prices of goods and services to customers. That’s the inflationary cycle California is facing now.
In our state and others, as big hospital chains continue to grow, they can use their dominant market position to squeeze more money out of the system. A report from the University of California Berkeley documents how the consolidation of healthcare markets in California has led to rising costs for consumers. It got so bad in Northern California—where the cost of the average inpatient hospital procedure exceeded that in Southern California by more than $90,000—that the State Attorney General sued a hospital system. They settled for $575 million and agreed to stop their anti-competitive practices.
It’s all over the local news; hospitals have begun threatening to drop patient access to their facilities unless health plans cave to massive price hikes for various services at a hospital. These contract negotiations between health plans and hospitals are becoming a common occurrence. You might have even received a letter about how your provider is threatening to boot your health insurance company because they won’t agree to a rate increase. By using a tactic like this, hospitals have been driving up the cost of healthcare which must land on someone—namely us, the small businesses that pay the salaries of 48.5 percent of California’s total workforce.
While large hospital systems complain that they are also facing rising costs and that they were throttled by the Covid pandemic, in reality their prices in relation to their costs have been rising for over three decades. For example, in 1999 hospitals charged about 200 percent compared to the costs. By 2018, long before COVID, prices were 417 percent compared to their costs.
Recently hospital systems have taken in billions in taxpayer dollars, both state and federal money, which translated into record revenue for most. With all that excess cash, many have expanded by buying up independent doctors’ offices and smaller care centers to charge patients more. When a hospital system acquires a physician’s office, they typically exploit payment rules to increase prices by 14.1 percent, on average.
This is a major issue in California, which is home to 4.1 million small businesses representing 99.8 percent of all businesses in the state and employing 7.2 million workers. Small businesses are creating two-thirds of new jobs in the state.
But with inflation, including rising healthcare costs driven by hospital price increases, businesses are increasingly working with health plans to dig into why hospital costs are so high. That’s because across the board health plans are working to drive value for healthcare spending, while hospitals continue to push fee-for-service models that inevitably encourage more treatments and tests, further driving up costs.
As head of the one of the largest ethnic Chambers of Commerce in the country, I sincerely hope that our policymakers will address the impact of hospital prices on runaway healthcare prices. If this trend continues, eventually something will have to give. Small businesses don’t want to have to pass on these cost increases to our customers who are, after all, also our friends and neighbors.
The cost of living continues to rise for everyone, making it difficult for Californians to afford everyday essentials. If something’s not done to put a lid on rising hospital prices, the next time you are at the gas pump, eating at your favorite restaurant, or picking up your dry cleaning, you’ll be paying even more to cover the costs employers are shelling out to pay for healthcare coverage.
Julian Canete is the President & CEO of the California Hispanic Chambers of Commerce