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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. 

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

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Public Health BugleJane JacobsPatrick SchoenfelderPeterMatthew Holt Recent comment authors
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Public Health Bugle
Guest

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.

Jane Jacobs
Guest

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,… Read more »

Patrick Schoenfelder
Guest
Patrick Schoenfelder

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… Read more »

David MD
Guest
David MD

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,… Read more »

charlie
Guest
charlie

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… Read more »

Peter
Guest
Peter

“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… Read more »

Deron S.
Guest

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… Read more »

jd
Guest
jd

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… Read more »

Matthew Holt
Guest

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… Read more »

Deron S.
Guest

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?

jd
Guest
jd

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,… Read more »

Gregg Masters
Guest

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.

charlie
Guest
charlie

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 –… Read more »

Deron S.
Guest

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.

R. Garth Kirkwood MD
Guest

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,… Read more »