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Experts warn of medical industry cartels' power

"Christina Bernstein, a medical-device engineer and independent sales representative based in San Francisco, sells disposable surgical tools made mostly out of plastic that she estimates are manufactured for about $40 each. These are marked up and sold to hospitals for as much as $350, she said, for a single use in a surgery on a patient."

Carolyn Lochhead, Victoria Colliver, Chronicle Staff Writers

Feb. 21, 2010

The planned spike in health insurance rates by Anthem Blue Cross in California is just the tip of a Titanic-size iceberg of exorbitant price increases, secret pricing and consolidation not only by insurers - but by the hospitals, doctors and medical devicemakers that send the bills to the insurers.

Insurers, who strike deals with providers, pass the bills on to patients, businesses and governments. The nation is fast being bankrupted by a medical money machine that costs $2.5 trillion a year and takes more than $1 of every $6 that Americans earn.

"It's an insider's game in health care," said Jeffrey Lerner, president and chief executive of the ECRI Institute, a nonprofit that researches medical practices.

Anthem, a subsidiary of WellPoint Inc., has come under state and federal scrutiny for its plan to raise rates by as much as 39 percent for many of its 700,000 California members who buy individual coverage. The company blames the increases on healthy individual policyholders who have dropped out of the market, creating a pool of sicker people.

The company said it will delay the rate hikes until May 1 to allow a state review. Hearings are planned in Sacramento and Washington, and Health and Human Services Secretary Kathleen Sebelius issued a report Thursday that found double-digit premium hikes in California and a half-dozen other states.

While the Anthem case has raised a political storm, the underlying surge in costs gets far less scrutiny. But each sector of the health industry points fingers at the other for driving up prices, and all are raking in money.

Insurers blame hospitals and doctors, doctors blame insurers, and hospitals blame doctors and medical devicemakers in what academics call an inscrutable medical-industrial complex that rivals anything the defense industry ever invented. All these groups are combining into what many experts describe as cartels.

Many industry insiders are afraid to speak on the record for fear of antagonizing the medical groups they rely on for their survival. Contracting practices are draped in secrecy. Prices are almost impossible to obtain because of "confidentiality agreements" among hospitals, physician groups, insurers and devicemakers who do not want their markups exposed to competition or public scrutiny.

Christina Bernstein, a medical-device engineer and independent sales representative based in San Francisco, sells disposable surgical tools made mostly out of plastic that she estimates are manufactured for about $40 each. These are marked up and sold to hospitals for as much as $350, she said, for a single use in a surgery on a patient.

"But if you were to get a detailed bill of what the hospital was charging the insurance company for the insured patient, those things get marked up to something like $1,200," Bernstein said. "It's ridiculous. There's no open competition."

With doctors and hospitals sprinkled in every congressional district and wielding their clout, a year of health reform in Congress has overlooked some of the biggest cost drivers in American medicine.

"While the talk surrounding health reform has been about problems with the health insurance market, and I don't want to suggest that's entirely misplaced, I think market power on the part of providers, doctors and hospitals is a bigger issue," said Martin Gaynor, an economist at Carnegie Mellon University.

Jerry Flanagan, health care policy director for Consumer Watchdog in Santa Monica, said the heath care system is "in a tug-of-war between warring tribes ... over who has market dominance over price." Flanagan doesn't think the insurance industry is losing the battle.

Consumers have almost no control over costs, no ability to shop and little incentive to do so because most patients neither buy their own insurance nor pay their medical bills directly. But they foot the bill in skyrocketing premiums, deductibles and co-pays.

Individuals who buy their own insurance instead of getting it through their employer are at an especially steep disadvantage. They do not get the giant tax break Congress grants only to employers. Nor do they get the discounts that providers negotiate, often confidentially, for large insurers.

What has received far less scrutiny is the collusion operating underneath this system. The regional "networks" that hospitals and their allied physicians form to negotiate with insurers often exclude competitors and lock in exorbitant prices that are passed on as premiums.

Keith Smith, an anesthesiologist and co-founder of the Oklahoma Surgery Center in Oklahoma City, posts his surgery center's prices online, a rarity in the industry. But he points to the "preferred provider organizations," or PPOs, that he contends have morphed into medical cartels that make deals with insurers to monopolize care in their region.

"My prices at my facility are most of the time 70 percent to 80 percent less than the same procedure across town at a not-for-profit hospital," Smith said. "Yet Blue Cross and any number of insurance companies are not the least bit interested in contracting with me. And we're not fly-by-night. We've been in business 13 years and have the top physicians in the city. All I know is something smells."

Don Crane, chief executive of the California Association of Physician Groups, which represents medical groups reimbursed by managed-care policies, blamed much of providers' high costs on the fee-for-service system, which he says encourages doctors and hospitals to spend more, and on paltry reimbursement rates from government programs.

But a report last month by Massachusetts Attorney General Martha Coakley found extensive evidence of anti-competitive behavior among providers, including huge price disparities that bear no relation to anything except market power. Special pricing pacts and other forms of collusive behavior were "pervasive," the report said.

The report said large provider networks that dominate local territories exercise leverage over insurers who need to offer their services.

Insurers leap on this argument, blaming rising provider charges, which were up about 6 percent last year, for higher premiums. But they do little to fight them. Exempt from antitrust laws, insurers have been rapidly consolidating and often dominate local regions, giving them power to pass on price increases to consumers and businesses.

Democratic Rep. John Garamendi of Walnut Grove (Sacramento County), a former state insurance commissioner, said provider groups "can dominate the market to the extent of dictating prices" in a local area. "We simply do not have a market system in many parts of the nation and California."

Critics say even large price increases by providers cannot justify the double-digit increases that Anthem planned.

"It's hard for me to make the leap from something that's a few percent over inflation to something that is many multiples over inflation," said Marian Mulkey, senior program officer for the California HealthCare Foundation, an independent philanthropy group based in Oakland.

Carolyn Lochhead was the Washington correspondent for the San Francisco Chronicle, where she covered national politics and policy for 27 years. She grew up in Paso Robles (San Luis Obispo County) and graduated from UC Berkeley cum laude in rhetoric and economics. She has a masters of journalism degree from Columbia University. Twitter: @carolynlochhead


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