Monday, December 15, 2008

Pay Too Little, or Cost Too Much?

On December 9, the leaders of three national groups — the American Hospital Association (AHA), America’s Health Insurance Plans (AHIP), and the Blue Cross Blue Shield Association (BCBSA) — jointly released a study by Milliman, Inc. designed to measure the aggregate amount that was being “cost-shifted” to private insurance plans due to underpayment by Medicare and Medicaid.* The study estimated that, nationally, private insurance plans pay $34.8 billion more in hospital costs due to cost-shifting from Medicare and $16.2 billion in hospital costs due to Medicaid cost-shifting, and they pay $14.1 billion more in physician costs due to Medicare cost-shifting and $23.7 billion more in physician costs due to cost-shifting from Medicaid. All told, the study said that $88.8 billion is being shifted to private health plans from Medicare and Medicaid. The study said that because of cost-shifting, hospital and physician costs for private insurance payments were 15% higher than they would be otherwise.

At the press conference when the study was released, reporters repeatedly asked if AHA, AHIP, and BCBSA felt this meant that Medicare and Medicaid spending should be increased by $88.8 billion. No one was willing to say those exact words; they merely re-emphasized the magnitude of the cost-shifting that was going on and urged that it be taken into account as national healthcare reform plans are formulated. In the press release the groups issued, Karen Ignani of AHIP called it a “hidden tax” on families and employers.

Unfortunately, no reporter asked the obvious question — Is it possible in some cases that Medicare and/or Medicaid are actually paying an appropriate price for hospital or physician, and that private insurance plans are merely subsidizing inefficiency? There is no doubt that there is inefficiency and overuse in healthcare; some have estimated that as much as 40% of the spending in healthcare is wasted on inefficiencies and unnecessary treatments. Even if that is only half-true, eliminating the inefficiencies would mean that Medicare and even Medicaid may be paying closer to the correct amounts, at least in aggregate.

The study did not attempt in any fashion to determine whether the amounts Medicare or Medicaid were paying were sufficient to actually deliver good-quality care. It merely looked at what hospitals and physicians reported as their average costs, and measured the difference between what commercial plans were paying relative to those costs vs. what Medicare and Medicaid were paying.

No one really knows for sure what it really costs to deliver specific types of care, or what it could cost if obvious inefficiencies were eliminated. It’s likely that in some cases, commercial insurers are overpaying, and in other cases, Medicare and Medicaid are underpaying. In some cases, such as with primary care, both commercial insurers and Medicare are underpaying. But there is certainly no basis for saying that Medicare and Medicaid are underpaying by a total of $89 billion simply because they’re paying that much less than commercial insurers are.

What is needed is a system that enables healthcare providers to define clear prices for their services and then to compete on those prices as well as on the quality of care they provide. Then it would make sense for all payers to pay the same amount for those services.

*If (a) it costs a healthcare provider $1,000,000 to provide a service to 100 people, i.e., $10,000 per person, and if (b) the 100 people are covered by two different insurers and one of the insurers only pays $8,000 per person for its 50 members, then (c) if the other insurer pays $12,000 per person in order to cover the provider’s total costs instead of $10,000, it is said that $200,000 has been cost-shifted from the first insurer to the second insurer.