Private Insurance Payments to California Hospitals Average More Than Double Medicare Payments

Private insurers paid hospitals in California on average more than double what Medicare paid them for similar services in 2015 and 2016. Our analysis of financial data filed by hospitals with the California Office of Statewide Health Planning and Development (OSHPD) found substantial variation across hospitals in the relationship of private insurance payments to Medicare. For the 10 percent of California hospitals with the highest ratio of private to Medicare payments, private insurance payments average 364 percent of Medicare and 255 percent of cost; for the 10 percent with the lowest ratio, the average is 89 percent of Medicare and 89 percent of cost. Among hospitals with more than 300 beds, the 10 hospitals with the highest ratio of private to Medicare payments include Stanford University Hospital, UC Davis Medical Center, and Cedars-Sinai Medical Center. 

We offer two alternative perspectives on these results. The first perspective is that the ability of hospitals to extract relatively high rates of payment from private insurers reflects market failures stemming from circumstances such as consolidation in the hospital industry, the position of “must-have” hospitals even in markets where there may appear to be competitors, and the pressure that private insurers face from employers and employees to offer broad networks. The second perspective is that high rates of private payment are needed to offset payment shortfalls from Medicare and Medi-Cal, California’s Medicaid program.

Regardless of which perspective one adopts, these data should be helpful in assessing the likely effects of proposals that may affect hospital payments in California, including hospital rate-setting proposals or proposals to create a single-payer system