Quantifying The Medicare / Medicaid Cost Shift…
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The other day, the American Hospital Association, the Blue Cross / Blue Shield Association, Premera Blue Cross and America’s Health Insurance Plans (FYI - HPHC is a member and I’m on the Board of AHIP) released a joint study on public and private payment rates. The study was prepared by Milliman, Inc., one of the nation’s most well known number-crunching health care consulting firms. Readers of this blog will not be surprised to learn that the study shows that Medicare and Medicaid pay a lot less for health care services than the Blue Cross and private health plans pay. But I must say, even I was a little surprised by the size of the differential. The Milliman data - which is actually 2006 for hospitals and 2007 for physicians - which means IT’S WORSE NOW - calculates a $90 BILLION cost shift from the public payors and onto the private plans. More specifically, Milliman indicates the cost shift is worth a $51 billion differential in hospital payments, and a $40 billion differential in payments to physicians.
Calculating hospital operating margins actually draws a starker picture. Hospitals collectively lose $30 billion on Medicare and Medicaid and earn $66 billion on commercial business, thereby generating a $36 billion gain overall on their insured patients. They lose another $13 billion on their uninsured patients, netting out to a $24 billion - or 3.6% - operating margin.
This means private sector employers and their employees and families are paying as much as 10-11% more than they would otherwise pay for health insurance - to fund the provider operating deficit created by Medicare and Medicaid.
Let’s hope this issue gets the airing it deserves as the discussion about health care reform moves forward in Washington, DC. I’m as a big a fan as the next guy about doing something to reform the way we pay for and manage health care in this country, but I think it’s important to remember that, for now, the private plans are carrying a lot of water for Medicare and Medicaid - and not the other way around.
The press release announcing the findings from the study can be found here. And the full Milliman report is available here.
Charlie - I understand your point but given the truly horrific financial projections for Medicare as the baby boomers hit, you will likely see cuts in hospital and physician reimbursements from Medicare over the next decade. Congress did the worst thing possible by adding a huge new cost to Medicare in the prescription drug plans a few years back but at some point Medicare has to start CUTTING costs if they hope to remain solvent. They can change age eligibility or have massive payroll tax increases but I just don’t see them raising provider reimbursements any time soon given the trillions in unfunded liabilities that they will face with the baby boomers aging into Medicare. The only tools they really have to control costs are change in eligibility, tax increases or cuts in reimbursement so I don’t see them making up this differential any time soon. Add in Medicaid expanding their roles with a bad economy and possible 10% unemployment and I doubt they will be coming forward with pay increases any time soon either. The Medicare problems are so huge and so costly I really fear that any solution is simply too late as we may have gone beyond the tipping point relative to that program. The cost of fixing Medicare is going to make the current bailouts look like chump change.
As I understand it, Medicare reimbursement rates are set to reflect the cost of a procedure or service performed at optimal efficiency. However, and correct me if I’m wrong, only about 25% of providers actually operate at this optimum. Do Medicare rate-setters consider the quality or outcomes of services provided by that 25%? It seems that, if lower, rates ought to be readjusted, while, if higher, the remaining 75% ought to evaluate their inefficiencies.
Let’s be honest about this public/private payor disparity and call it what it is… It is a $500 per year tax on individuals and business who do the responsible thing and buy health insurance for themselves in the private market… It is a welath transfer from the productive through the unproductive to prop a system from which the unproductive take without earning.
Charlie, thanks for raising this. The cost shift to private insurance was more than a billion dollars in 2007 in this state alone, and that was after the effect of the MassHealth rate supplement mandated by the Massachusetts Health Care Reform Law enacted in 2006. As you recall, health care reformers in this state recognized that expansion of public coverage programs without reducing underpayment would increase the cost shift, making health care even less affordable. The reform law addressed the Medicaid underpayment to hospitals and physicians by mandating catch-up in three annual increments, 2007-2009. Of course, the recent financial crisis interrupted the catch-up plan, and no state by itself can address the worsening Medicare underpayment problem. So the problem, even in Massachusetts is unabated and needs attention.
The conclusion, which I have drawn from the Milliman study, is that the ideal situation would be for each payer to experience the same payment to cost ratio (P/C) across the entire hospital industry.
If that is considered the correct goal, it would be much easier to achieve with a single payer, regardless of the operating margin defined by the ratio.
Defining the denominator, true minimal cost, is the major problem. It would require individual hospital budget analysis and approval by the single payer in the face of nationally standardized superb quality control measures and employee salary-pension packages; and then, assignment of DRG payments based on that analysis, in order to achieve the defined, common P/C ratio at each individual institution.
This procedure would be tedious and labor intense, but it could be done because the knowledge to do it is in place. If done properly, it would result in the solution to one of the major problems within our health care system: the business of hospitals.
Once true, minimal costs were accurately defined, we might learn that current Medicare payments actually achieve a P/C ratio of one or better.
R. Garth Kirkwood MD
http://www.equalhealthcareforall.org
doctor_k@equalhealthcareforall.org
All - Really useful comments. Much appreciated. My follow-up observations would be the following…
1) The fact that Medicare and Medicaid don’t cover most hospital and physician costs deserves some public discussion. I’m willing to forget for a minute about whether they under-pay or we over-pay - as long as policymakers and others acknowledge the fact that there’s a difference here - that it’s material - and it’s an important factoid as they contemplate who pays for what in health care reform.
2) I appreciate the fact that Medicare has an enormous long-term funding gap - and I also understand that its options are limited (cut payments, raise taxes, reduce or move out eligibility). It has some others. For example, it could change the way it pays for services. I got asked the other day if I thought the cost shift was the biggest problem with Medicare - and I said NO!!! I think the fact that Medicare payments favor volume, transactions, and technology over outcomes, care management and time is a much, much bigger deal. If Medicare changed the way it paid for services (more for time, more for performance) and did nothing about the cost differential, we’d all be a lot better off, and Medicare - over time - would spend less money.
I also don’t think the cost-shift is the second biggest problem with Medicare. I think the doofus-like way Medicare and Medicaid interact (NOT) with one another in meeting the needs of low income seniors who are eligible for both is the single biggest lost opportunity to save money and improve care that exists anywhere in health care in the United States. If Obama, Daschle, et. al. don’t deal with this, they’re not serious about fixing what’s wrong with health care.
3) Whether what Medicare - or Medicaid - pays for services is the right number or not - at least in the short term - doesn’t matter. The truth is, the private plans pay a lot more, and if every private payor paid Medicare or Medicaid rates, it would cripple - for some significant period of time - the provider community in this country. While Sarah’s point is technically correct - that Medicare believes it’s paying what an “efficient provider” should be paid - Medicaid almost always pays less than Medicare - and it’s hard for me to swallow the notion that a payment rate that only 20-25% of all providers can live with is consistent with efficiency. Wouldn’t one think - at a minimum - it should satisfy the costs of 50% of the hospitals and physicians?
4) I may be alone among my brethren, but if I paid Medicare rates, I believe I could offer a better, more affordable, more consumer friendly product than Medicare - and would be happy to compete against a federal agency that offered Medicare to everyone.
5) Overall, I really believe Medicare could solve a lot of problems simply by being smarter about how it structures its programs and pays its bills. But the answer for the past twenty years or so has been do what we’ve always done, just do less. I think that’s a recipe for failure.
Hmmm. Why do I get the sense this is more about HPHC and other commercial insurances launching the first strike against health care reform that provides a public insurance option. A more efficient public model will eat into profits.
Jonk - Since we have almost no profit margin, it’s hard for me to see how a new model would eat into our profits, and as I said above, I’m fine with competing against any public program, as long as it’s a reasonably level playing field. And if you’ve seen this blog before, you know this is hardly the first time I’ve raised concerns about how much Medicare pays and how it chooses to pay for services. There is much I don’t like about the way the system works in this country, and I believe Medicare’s operating model - which is FOR technology, FOR volume and FOR transactions, has had a lot to do with it.
As far as efficiency is concerned, if you’re the government, you make the rules, and everyone bends to the way you do business. That makes it pretty easy for you to be efficient. Whether or not that translates into an efficient system overall is at least debateable.
Why does everyone keep falling for the myth that Medicare and Medicaid are well run healthcare programs? Think about it, Medicare is currently facing an estimated sixty trillion dollar budget shortfall in the near future, Medicaid costs are bankrupting state budgets with its ever increasing cost overruns and these are the programs being held up as models? Please. As Charlie points out, the private market has to collect even more in premium from its paying members to make up the Medicare/Medicaid payment shortfalls to physicians and hospitals (this is even true in the United Kingdom’s socialized system of government run healthcare). Throw in the VA here in the United States as another government run healthcare disaster. Seeing as working taxpayers currently pay for their own private healthcare, pay for Medicare via payroll taxes and pay for Medicaid via federal and state taxes…. well, those people getting a “free ride” should just be happy they have things so good. It still beguiles me that I pay for my healthcare and face a sizeable deductible and have no dental coverage while someone on MassHealth has no out of pocket expenses and better coverage (including dental) than I have.
Charlie,
I would like to draw your attention the work done by The New Hampshire Center for Public Policy on this subject.
(www.nhpolicy.org/reports/biafeb202006.ppt#640,21,Slide 21)
Steve Nortan, and his predecessor, Doug Hall, calculated that the medicare cost shift adds about 17% to the commercial rates in NH thus exaserbating the death spiral of the employer based health insurance system.
Yes, it’s a fact that Medicare and Medicaid aren’t the leanest and most well-oiled machines churning out health care. Yes, it’s a fact that there’s quite a bit of cost-shifting between those who can’t afford their care and those who do to ensure that our hospitals stay financially afloat. But instead of making this research about who’s paying too much vs. too little, who’s using their hard-earned dollars to pay for someone else’s care, what if we rose above this framework of thinking and leveraged the data towards creating a win-win situation? If you look at why hospitals are being forced to shift cost towards their insured patients, it’s not only because of underpayment from Medicaid/Medicare, it’s also because people in these programs are more costly — they (especially Medicaid enrollees) are sicker, poorer, have worse access to regular care, and show up at more advanced stages of their illnesses, all of which increase the cost of their poorly reimbursed care. Again, here’s a great opportunity to point fingers and to shut these people out of the system, but it only delays their care and make them eventually more costly in our ERs. Plus the worsening economy is leaving more and more regular hard-working Americans among the ranks of those who are uninsured or on Medicaid. The solution, I think, is no longer to treat these people like nuisances or kinks in our system. If we had a system that ensured regular care to more people earlier on, that regulated the use of expensive technologies based on evidence and research, perhaps we could reduce the overall cost of care for all payers private and public. The differential in payment between public and private bodies can actually be a rallying cry for the intentional design of a more comprehensive system (as opposed to the piecemeal, haphazard system that we ended with), in which the many leverage points of large public payers, such as price- and standard-setting, data gathering, and putting in place policies that promoted both quality and competition should be the center pieces.
good addendum:
http://economix.blogs.nytimes.com/2009/01/23/how-do-hospitals-get-paid-a-primer/
govt get out of our lives, our businesses and our healthcare. Govt is the problem, not the solution. Their past involvement is why we are in the mess we are in now. Anytime the govt gets involved inflation kicks in. Loans for school, see doubling of tuition costs. Medicaid, see increases in health costs.
More doctors, less lawsuits and less govt is the key to healthcare… not more govt… more govt only means the price of healthcare will only grow at a rate equal to stamps. doubling every so often.