Boston hospital prices rise at double-digit clip

Healthcare costs may not be growing as fast, except in one critical area: hospital prices.

Hospital costs in the Boston area are going up at a double-digit clip, local insurance executives say, driven by the growing use of services, especially diagnostic tests, and by significant increases in prices for those services.

"Higher hospital prices are a big driver of costs right now, and that was not always the case," said Susan Connolly, a principal with Mercer Human Resource Consulting, a benefits firm. Hospital prices are rising nationwide, she said, but in some markets, including Boston, the increases are especially steep.

Insurers are reluctant to be specific, but insurance consultants say price increases of 7 to 9 percent are not uncommon.

Hospitals don't dispute that they are charging more. They attribute the increases to their own rising costs, particularly for labor. They also point out that the government programs they rely on -- Medicare, which pays the bills for senior citizens, and Medicaid, which insures the poor -- do not adequately reimburse them.

"We're caught between the proverbial rock and hard place," said Richard Aubut, chief executive of South Shore Hospital in Weymouth. "If Medicare is going up only 2 to 3 percent, Medicaid isn't going up at all, labor costs are up 6 to 8 percent, and energy and insurance are up even more, where do hospitals find the extra money?"

The answer, Aubut said, is to seek more from private insurers, who pass the costs along in the form of higher premiums.

Hospitals say their own costs are rising on all fronts. In a recent report, the Massachusetts Hospital Association concluded that the prices hospitals pay for goods and services will climb 5 percent this year, the most in eight years. Costs are up for drugs, medical equipment, and labor. The last item is especially critical.

The hospital association said Boston-area hospitals will pay an average of $35 a hour for nurses in 2004, an 8 percent increase from last year. Hospitals here and elsewhere have had to raise nurses' pay to cope with a chronic shortage of workers. Pay for other hospital employees, including technicians, has risen sharply for the same reason.

"The sophistication of what nurses do today compared to a few years ago is amazing," said Thomas Lee network president of Partners Healthcare, the system that includes Massachusetts General and Brigham and Women's hospitals. Lee's broader point is that talking about hospital prices is misleading, because the services keep changing. "You are not buying the same thing because there have been so many advances in care," he said.

One subject hospitals are not anxious to talk about is their growing clout in the marketplace.

As hospitals have consolidated into ever larger systems, their ability to make price increases stick has grown commensurately, say health specialists.

As the Center for Studying Health System Change, a Washington think tank, put it in one of its reports: "Hospitals continue to use their formidable negotiating leverage to demand large payment rate increases from health plans -- in part, to reverse the effect of discounted payment rates in the mid-1990s."

Throughout most of the 1990s, hospital prices rose 2 to 3 percent a year, roughly in line with inflation in general. According to the Center for Studying Health System Change, prices nationally began escalating in 2002, and the trend has continued this year.

In 1999, hospitals were responsible for 36 percent of the overall rise in health care spending, the center's research shows. By 2002, the last full year for which numbers are available, hospitals accounted for 51 percent of the annual increase. Costs rise from a combination of higher use of services and higher prices.

In some parts of the country, higher hospital prices have sparked a backlash.

Last month, the California Public Employees' Retirement System, which buys health insurance for 1.2 million people, decided to drop 38 high-cost hospitals from its network.

"We hope this sends a message that we cannot pay unreasonable prices," said Clark McKinley, a spokesman for Calpers.

Some of the hospitals Calpers members will no longer be able to use have national reputations, including Cedar-Sinai in Los Angeles. McKinley said the hospitals dropped from the network had prices that were as much as 60 to 80 percent above the average for their areas. McKinley said Calpers' insurance premiums climbed 50 percent over the past three years, and that hospital costs accounted for half of the increase.

"In our view these costs are over the top," he said.

In Massachusetts, insurers have been reluctant to take such a tough line with hospitals.

Charles Baker, president of Harvard Pilgrim Health Care, a health maintenance organization, said that in the Boston market, customers expect to be able to go to any hospital they choose. "That limits how hard we can push back when we're in the midst of negotiations with the hospitals," Baker said.

At least one big employer in Boston is pushing back. Starting July 1, the Group Insurance Commission, which buys insurance for 265,000 state workers and their families, will offer policies that charge members higher copayments if they get inpatient care at more expensive hospitals.

"We want to encourage people to think long and hard about what hospitals they use," said Dolores Mitchell, the commission's executive director.

Charles Stein can be reached at stein@globe.com.