California hospitals charge different prices for services. Source: The Wisconsin Alliance of Cities

California hospitals are charging private insurers and patients dramatically different prices, even after considering factors like the number of uninsured and the severity of illness, according to a study conducted by consulting firm Milliman.

Sponsors of the study, which include the California Public Employees' Retirement System (CPERS) and the Pacific Business Group on Health (PBGH), said hospital consolidation - or a lack of competition within a region - appears to be a major factor in determining how much a hospital will charge for its services.

"We see what appears to be hospitals charging whatever the market will bear," Peter Lee, CEO of the PBGH, which represents 50 large employers responsible for about $10 billion in healthcare expenses, reported to The San Francisco Chronicle.

The study, based on state data from 2005, found that insurers and patients paid $18 billion that year for services that cost hospitals $13 billion to provide, according to Milliman.

According to CPERS and PBGH, the study clearly demonstrates private payors are subsidizing hospitals for low payments made by government programs like Medicaid, called Medi-Cal in California. It did not, however, address hospitals' list prices, which typically are not billed to anyone who has health insurance. Instead, it looked at the amount private insurers and patients pay after negotiated discounts.

Sacramento, where CalPERS, the country's third-largest purchaser of healthcare, and many of its members are located, and the South Bay region were the costliest areas in the state, according to the study. For example, the average cost paid by insurers to hospitals in the Sacramento region, an area dominated by hospitals affiliated with Sutter Health and Catholic Healthcare West, is nearly 30 percent higher than the state average, even after adjusting for regional wage differences. Officials from CalPERS said the study's results validate the fund's decision three years ago to drop the costliest hospitals from its network, reported The Chronicle.

In the San Francisco region the cost for hospitals to operate is 6.2 percent higher than the state average—after accounting for wage differences—but the hospitals collect close to the average for services. Greater competition in the Bay Area accounts for the difference, according to the study sponsors.

According to The Chronicle, hospital officials, for their part, found the study confusing and questioned its significance and accuracy. Jan Emerson, spokeswoman for the California Hospital Association, a trade group based in Sacramento said “we don't really understand it. The numbers don't make any sense to us.”

Emerson said private insurers have long had to make up for shortfalls caused by Medi-Cal and Medicare. "We all know we have a broken healthcare system," she said. "We all know government payers don't pay their share, so commercial purchasers have to make up for that."

Kaiser Permanente hospitals were not included in the study due to the fact that the state does not collect comparable billing data from Kaiser because it's a prepaid system, according to the Office of Statewide Health Planning and Development.