California Hospital Law Has Cut Fees Paid by Uninsured

Diana Swift

January 12, 2015

Legislating ceilings on the fees hospitals charge uninsured patients decreased the amounts such patients paid, and other jurisdictions should consider similar legislation, according to a study on the effect of California's Hospital Fair Pricing Act.

Passed in 2006 to shield uninsured Californians from paying gross, undiscounted charges, as determined by hospital chargemasters, the comprehensive law has substantially reduced the net prices uninsured patients pay. "With the coverage gaps left by the [Affordable Care Act], there remains a need for more comprehensive pricing laws similar to California's to protect the most vulnerable uninsured patients," writes study author Ge Bai, PhD, in an article published in the January issue of Health Affairs.

An assistant professor of accounting at the Williams School of Commerce, Economics, and Politics, Washington and Lee University, Lexington, Virginia, Dr Bair studied hospital pricing in California from 2004 to 2012, both 2 years before the act and 6 years after it passed.

With their substantial bargaining power, Dr Bai pointed out, government and commercial insurers can negotiate prices that are often less than half of hospitals' gross charges. However, having little bargaining power, individual uninsured patients, who are often from low-income families, can pay more than 2.5 times as much as an insured patient for the same service.

Under the California law, hospitals are limited in what they can charge uninsured patients with low or moderate incomes. The law also shields underinsured individuals from financial hardship caused by high annual medical costs (>10% of household income).

Using data from hospital financial disclosure reports published by the Office of Statewide Health Planning and Development, Dr Bai evaluated the law's effect. She found that during the study period, the net prices actually paid by uninsured patients shrank from 6% higher than Medicare prices to 68% lower, testifying to the act's effect. Furthermore, the adjusted collection ratio for uninsured patients (the amount hospitals actually collected for every dollar in gross price charged) dropped from 32% to 11%.

In addition, despite being less able to generate revenues from uninsured patients, California hospitals raised the proportion of services provided to uninsured patients relative to the total services provided to all patients. "The substantial protection provided to uninsured patients by the California Hospital Fair Pricing Act has important implications for federal and state policy makers seeking to achieve a similar goal," Dr Bai writes, noting that comparable regulation exists in Colorado, Illinois, Maryland, Minnesota, New Jersey, and New York.

The California act has a checkered history. Proposed in 2003, it was vetoed by then-Governor Arnold Schwarzenegger in 2004. Two years after its 2006 passage, 66 hospitals assessed by consumer group representatives proved to be less than compliant with the regulations, sparking media attention and advocacy efforts to raise awareness of the rights of the uninsured. By 2011, however, most California hospitals had responded to the law by adopting financial assistance policies.

Dr Bai's study sample included 3418 hospital-year observations from 390 general acute care facilities between 2003 and 2012. Of these, approximately 18% were government hospitals, 25% were for-profit hospitals, and 57% were nonprofit hospitals. The Office of Statewide Health Planning and Development groups patients by insurance type: Medicare, Medicaid, commercial payers, county programs for the indigent, and other (including uninsured and paying international patients). Uninsured patients were not distributed evenly across hospitals, Dr Bai found.

The net price paid by a patient is determined by service type and insurance type and often varies greatly for the same service in the same facility. Medicare pays flat fees based on diagnosis-related groups. Medicaid pays according to flat diagnosis-related groups or per diem rates. Commercial carriers pay, after negotiation, according to diagnosis-related groups, per diem rates, or discounted gross charges. Thus, hospitals receive only a portion of the full amount of their gross fees from government or commercial programs.

During the study period, the median proportion of hospital revenues generated from uninsured patients decreased from 3.3% to 1.2%; in contrast, the median proportion of charges to uninsured patients increased from 3.8% to 5.2%.

Dr Bai recommended that Congress and other state legislatures consider legislating eligibility criteria for discounted hospital charges, mandating lower price ceilings for services, and regulating the billing and collection practices for uninsured patients of for-profit hospitals, which in 2014 made up 20% of US hospitals.

Unless eligibility criteria are legislated, Dr Bai argues, the estimated 30 million Americans who will remain uninsured even after full implementation of the ACA will be at risk of facing inflated hospital charges. Only nonprofit hospitals are required to offer discounted prices to the eligible uninsured to maintain their tax-exempt status. Patients are generally not informed of a hospital's ownership status and its important financial implications.

"The conjecture that for-profit hospitals in other states will voluntarily apply discounted charges to uninsured patients is not supported by empirical evidence," Dr Bai writes.

The author has disclosed no relevant financial relationships.

Health Aff. 2015;34:64-70. Abstract

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