Shifting costs from public to private payers

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. 

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 Baker is the president and CEO of Harvard Pilgrim Health
. This post first appeared on his blog, Lets Talk Health Care.

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22 replies »

  1. Great Post. I’ve Linked the report to my blog.
    There is a need to provide incentives to small business owners for providing employer based insurance and not punish them with higher premiums because Medicare/Medicaid is lacking.

  2. Hi —
    Sorry to enter the discussion late, but I’m interested in hearing from people as to the proposal for a Federal Health Board that has been proposed by Tom Daschle. Is this a way to look at costs — isolated from the political system — but without going to a single-payer model? (Sorry, Peter — I had to ask).
    Paying for value is the key to payment reform — the trick will be to agree on what value is. The Mayo Clinic Health Policy Center (based on the consensus of participants) would define value as “better outcomes, better service, better safety divided by the cost of care OVER TIME” — we need to stop looking at payment for service or for episode and take a more wholistic look at health and wellness — especially as it related to care for chronic disease. How do we reward providers and patients for better health rather than paying them more when people are sick?

  3. I am always surprised and annoyed when analysts lump Medicare and Medicaid in one basket in the discussion of medical financing and health care programs. The two programs are vastly different, and any intellectually honest discussion of compensation rates must seperate the two programs in order to have a valid discussion.
    Medicaid is run by each of the 50 states as a seperate program, tends to have constant battles with funding issues at both state and federal levels, and was originally designed as a stop gap program to provide some small amount of compensation for doctors and hospitals caring for people who would otherwise receive free care. In my practice Medicaid paid less than 30% of my R and C and around 40% of the amount paid by private insurance. I know practitioners who get less than 20% of R and C from Medicaid, and some who get payments for some services that do not cover the cost of billing.
    Medicare, on the other hand, pays fees set by the federal government and private contractors working under federal supervision and is entirely federally financed. In my practice Medicare paid 67% of R and C, within 10% of the private payers. The cost of billing with Medicare was much lower (about 15% of the cost) than the cost of billing with private insurers, which almost completely covered the differences in payments.
    I am aware that hospitals, doctors in some specialties, and doctors in areas where the R and C is much higher than in the rural midwest do not find Medicare so generous.
    However, for any intellectually honest discussion of the issue of payment by public programs, Medicare and Medicaid must be seperated.

  4. Charlie —
    From my original post I cited about $300 billion as the taxpayer subsidy on private insurance through tax deductions guessing an estimated $600 billion in private payer premiums.
    Paul Krugman and Robin Wells wrote an article in the New York Review of Books http://www.nybooks.com/articles/18802 in March 23, 2006 citing $150 billion for the tax deduction subsidy on private insurance. No source is cited and it is probably based upon 2005 data. For 2008 data that number is probably 20% (7% health inflation per year) higher or about $180 billion.
    But doing my own back of the envelope calculation, using a 2007 Kaiser Family Foundation Report citing 2005 health care expenditures http://www.kff.org/insurance/upload/7692.pdf
    For 2005 45% of spending was from the public (not certain if this counted the tax deduction public subsidy of private premiums in which case it would increase to perhaps 50% from 45%) and 55% from private sources of which:
    64% private insurance
    23% out of pocket
    13% other private sources (e.g. philanthropy)
    So private insurers will be paying 64% of 55% or about 35% of the health care pie. This amount was about $2.4 trillion in 2008 for about $850 billion. You cite in your blog post that the public payer to private payer cost shift of $90 billion adds 10% to 11% private employers and their families are paying for health care means pre-shift amount of about $900 billion three fourths of which is borne by the employer (according to the linked press release) would indicate a $700 billion number. At a 30% tax rate write-off that means the pre-tax payments without the taxpayer subsidy would be $850 billion x 1/.70 = $1.215 trillion subtracting the $850 billion actually paid for private insurance would be $365 billion taxpayer subsidy on private insurance. Using the $700 billion number instead of $850 billion would be about $300 billion.
    On the public to private cost shifting side of the equation also goes the uncompensated EMTALA care which is underfunded federally mandate care for which an estimate 55% of EMTALA costs are picked up by the hospital and shifted to private insurance and then there is other uncompensated care together estimated to be $40 billion in a 2004 Kaiser Commission on Medicaid and the Uninsured or about (assuming a 20% increase) $50 billion today. http://www.acep.org/patients.aspx?id=25932 . Adding the $50 billion to the $90 billion in your article demonstrates a total cost shift onto private plans of $140 billion.
    By examining the press release you linked to in your posting the $90 billion cost shift adds an additional employee average share of $400 or about $600 with the EMTALA and other cost shifting.

  5. JD – I think anything that happens with health care financing almost always happens over time. DRGs were probably as close to “right away” as we’ve gotten on changes in payment policy. I’m probably not speaking for my industry colleagues when I say that I think Medicare pretty sets the tune for the rest of us on payment policy, so I’m as interested in having Medicare change the way it pays for services as I am in having Medicare pay more. If Medicare moves, the rest of us will follow. And let’s not forget that Medicaid almost always pays a lot less than Medicare, and that once upon a time, providers and plans just accepted it – because Medicaid served low income populations, and it wasn’t that hard, on the margin, to cover that deficit with other people’s money. But now that Medicaid is 10-15-20% of many hospitals’ patient volume, the fact that it pays so little creates huge problems for both the providers and the private payors.
    Deron S. – I’m a former member of a Governor’s Cabinet in Massachusetts and my dad served under two Cabinet Secretaries in Washington, DC – so I’ve seen this movie from a lot of different sides over the past 40 years, and I think there’s plenty of blame to go around. Interested parties on all sides tend to behave in self-interested ways. But sure – my industry owns a piece of it.
    Matt H. et. al. – I share your collective opinions that without big changes in either public policy or private behavior, it’s hard to imagine major change to the overall system. But we all own a piece of that problem. For years, the consumer was told by everyone involved in the health care world (well, almost everyone) that you could have whatever you wanted whenever you wanted it and wherever you wanted it – and it would be “mostly free.” Needless to say, that’s not quite true, but we have never figured out how to engage the user in any other conversation. Until we figure that out, big system change is a long way off.

  6. “They are simply allowing increases to happen each year without demanding that hospitals and physicians become more efficient.”
    Exactly the reason for single-pay. Which industry group do you see as accomplishing this for all companies? How do you expect a group of insurance companies to act together and exact concessions without being charged as acting as an illegal trust that quashes competition? No mechanism exists to accoumplish this right now. When the financial industry discovered its practises were unsustainable and threatened its survival, even that did not prompt an inside industry fix. Why do you think this will happen with healthcare?
    If healthcare were like any other product/service the market could determine value for cost. Simply comparing private pay to government pay and trying to determine who is right is NOT the question if you are truly attempting to get the right answer.

  7. Matthew/jd – I agree 100% that we need to bring value into the equation. Competitive forces are wonderful things, but they cannot be unleashed unless the consumer bases decisions on cost/quality. It will take quite along time to shift the mindset.
    Back to cost shifting: I’d like to get inside the head of private payers. At negotiation time, do payers actually think “The government payers aren’t paying enough so we need to make up the diffence.”? I doubt it. They are simply allowing increases to happen each year without demanding that hospitals and physicians become more efficient. I assume they fear that they can’t lose a hospital from their network or they will lose business. What’s it going to take to change that conversation and make the relationship more of a partnership?

  8. Matthew,
    You are certainly right on your main point. The non-public purchasers of care–individuals, corporations and unions–are (a) not concerned enough, (b) not informed enough and (c) not coordinated enough to effectively bring about deep cuts in revenues to the healthcare system overall. Any delivery/payment system reforms in 2009 will be nibbling at the edges, and at most setting the stage for a bigger confrontation down the road.
    This is why I’ve been saying that access reform should come before delivery system reform, even though it seems irresponsible. If we want to precipitate delivery/payment system reform, we need to take access reform largely off the table and focus attention on the terrible value delivered by the system.

  9. I’m a little confused about cost shifting. If (and as tcoyote points out it’s a big “if”) the taxpayer is paying less than they should, then private well insured citizens, via their employers, are paying more. So to make this equitable the solution is either that those citizens pay more taxes so that Medicare/Medicaid pay more to the hospitals, or that they pay less via their insurers & employers so that private rates are driven down to Medicare/Medicaid rates.
    Now in the insane “system” that we have some people–usually poor and uninsured–get completely screwed. But I dont think in aggregate it makes any difference whether the public sector is gouging the private sector or vice versa.
    The key issue is how much in total the non-health care sector of the economy is paying to the health care sector. And you won’t be surprised to know that I think that amount is too much. I suspect that AHIP, the AHA, AMA et al disagrees, but then again it wouldn’t be the first time I’ve disagreed with them.
    Essentially the problem remains the same. The healthcare sector puts up its costs, the non-health care sector doesn’t know what to do about it and keeps paying. To change this tune, someone (the taxpayer, the consumer, the Chinese central bank) has to REALLY care about how much is being paid for health care and be REALLY willing to do something drastic about it. I dont see that on the horizon.

  10. Charlie – I appreciate your response to the comments so far. This is a great conversation. I’m hoping you can address a follow up question.
    Regarding #4 and #7 in your response: Are you, as a private payer, prepared to acknowledge that you have contributed to our high cost system by creating and/or perpetuating complexities that add unnecessary cost to the system?

  11. Charlie, thanks for the response.
    To follow up on one point of yours:
    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.
    That’s certainly true if the change happened all at once. What would have to happen is an equalization over time….by which I mean, a reduction in payments from private payers over time compared to the current cost trend. In other words, at most a freeze in rate increases for several years. This would put hospitals on a diet, and though they would scream, and due to mismanagement many would face insolvency, in point of fact almost no hospital need go under. Instead, they’d have to cancel plans for their next MRI or new cardiac center, etc.
    The tricky part is creating the mechanism that will achieve this reduction (in real terms) of payments over time. And as you say, it can’t just be a matter of keeping the same fee structure. We need to pay based on value and outcomes, or some other non volume-based scheme.

  12. The big cost shifting charade aka “managed care” is coming to an uneventful end. Sniveling that government payors (Medicare and Medicaid in particular) get more favorable treatment, i.e., bigger discounts, distracts attention from the failed system in which its special interest agents (aka pigs at the trough) have prospered, and to some degree garnered job security and trade group visibility.

  13. 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) Somebody else mentioned the tax deductibility of health benefits as an offset to the cost shift – an idea I hadn’t considered before. I think the tax deductibility of health benefits is worth about $120 billion, not $300-600 billion – but it’s still real money. My response on that would be the feds created the deduction to encourage employers to purchase coverage, thereby supporting the idea of expanding coverage – and using, mostly, someone else’s money to pay for it. I would argue the government’s now doing exactly the same thing on the buy side – funding its share of health care services for its own beneficiaries on the margin, and letting the private sector take up the slack.
    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.
    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) I got asked the other day if I thought this 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.
    6) Moreover, I don’t think the cost-shift is even 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 programs 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.
    7) With all due respect, no one manages their turf more aggressively than the Congressional Committees of the federal government and the bureacracy at CMS. We health plans are pikers compared to those guys when it comes to protecting one’s turf. Really.

  14. We have to get past the “turf protecting” if we’re going to develop real reform. All of the professional associations are transparent in their reform proposals. AHIP, AHA, AMA, they all do it. That’s why the various stakeholders need to come up with a joint proposal in which everyone gives a little to make the system better. The level of social responsibility in the healthcare realm is probably at the lowest levels it’s ever been.

  15. 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.
    Regarding the Kaiser model, it is my view that if the payer owns the hospital and employs its own medical personnel, then a huge conflict of interest is created.
    R. Garth Kirkwood MD

  16. The Kaiser model allows a payer to better control costs. If the payer owns the hospital and employs all its own medical personnel, then the payer is not subject to anti-competitive hospital pricing practices. In the future, the payers which survive will be those which control health care territory and boots-on-the-ground. Those which choose to exist only in the ether won’t make it.

  17. It’s the “whatever they can get away with” part that needs serious attention, DX. Look at Charlie’s home market, Boston, where a single “merger” of the two most influential teaching hospitals in town has jacked up prices charged to insurers, not just for hospital care but for affiliated physicians, by as much as 40%. There are dozens of markets like Boston where private insurers simply don’t have a choice because of anti-competitive or out right monopolistic practices by local hospitals. There are big potential savings here, and expect a renaissance of regulatory attention paid to them by the new Administration.

  18. @tcoyote and jd: I think you two are pretty much on target. What I can’t figure out is why the AHIP thinks its members are going to get a significant share of all this money the AHA wants government to pay hospitals. If insurers had even the slightest leverage, would there be any disparity? It seems more likely the hospitals will just add it to their bottom line, and keep charging insurers whatever they can get away with.

  19. True costs are shifted from public payers to private payers but then the private payers get a tax deduction (of about 30% I was told by a government tax economist) for paying for health care premiums thus shifting their health care costs onto the public. I think I read that private health insurance is at least $600 billion per year paid so that means private companies get about a $300 billion cost shift onto the public.
    If one is worried about cost shifting, consider the amount of health care costs attributed to smoking that is not paid for by smokers but by the public and private firms. Boeing estimated that last year they paid $60 million additional costs for premiums for smokers and that does not include the public to private cost shift in this blog posting so the real amount Boeing pays for smokers might be $80 million. Now take that over a 10 year period and including health inflation this adds up to more than $1 billion for Boeing alone.
    This is the most authoritative report on smoking costs:
    State estimates of total medical expenditures attributable to cigarette smoking, 1993
    Which states that 12% of health care costs is due to smoking. 12% of last years $2.1 trillion was $250 billion for 18 billion packs smoked or $13/pack. Making people pay for the health care costs of smoking helps to induce them to quit (and teens to never start) because increased cigarette costs decrease smoking.

  20. Fantastic comment, tcoyote. I was thinking something similar but less articulate as I read Charlie’s piece. Does this disparity between private and public payment rates indicate that the public rates are too low? Not at all. If hospitals could be forced to be disciplined by similar rates for private payers as well, we would remove a nontrivial chunk of the bloat and out-of-control cost trend from our medical system.
    At the same time, I would agree with Charlie in this: in the current system in which private insurers are unable to negotiate effectively with hospitals to control costs, the fact that Medicaid and Medicare pay below the level needed to sustain hospital growth means that private insurers must take up the slack. Of course, he wouldn’t phrase it that way, at least not here, since the AHA co-funded the study.

  21. Medicaid and Medicare pay what they can afford, and what they can afford varies with the state of the economy, filtered through our political system. Do we ask anyone else what something “costs” when we buy it from them, except when we buy a car? We pay what we can afford.
    The biggest problem here is with doctors, who by and large have far fewer cost management options than hospitals do. Most hospitals have run their operations on a “pass through” basis where health plans and the uninsured are the residual payer, not as businesses with customers. That is why there has been so little obvious progress in improving efficiency in hospital operations.
    The cost shifting argument is the beginning of a hospital industry effort to retain disproportionate share subsidies in the event that health reform removes the burden/obligation of the uninsured. It is a slippery slope and a losing argument.
    While we must fix the payment inequities for physicians, what we need from hospitals is an end to the whining about being “underpaid” by public programs and a serious effort to improve their operational efficiency and accountability to society for the $600 billion they are already getting.

  22. I’m not sure how it is in other states, but Pennsylvania Medicaid only pays physicians $22 for an annual preventive exam. Most private payers pay over $100. Medicare doesn’t pay for it at all. Do the government payers feel that preventive care is not important?

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