Public-private payment gap widens

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The problem is well known, though hard to quantify, and was a key part of the Care New England-Blue Cross & Blue Shield of Rhode Island contract dispute.
Care New England said it was losing money on Medicare and Medicaid patients and feared even bigger shortfalls in the future, so it wanted Blue Cross to boost its pay scale to offset the losses. Blue Cross said it would provide a fair margin, but not subsidize the government.
Both companies have since resolved their differences, privately, but a new study sponsored by insurers and the American Hospital Association shows how big an issue this is nationwide.
Prepared by Milliman Inc. and released in December, the study shows commercial plans essentially subsidize public payers at a rate of $88.8 billion a year – measured as the difference between what they currently pay and what they’d pay if both sides paid the same rates to hospitals and doctors, with actual costs remaining equal.
“Essentially this cost shift is a hidden tax by the government onto employers and employees,” said James E. Purcell, president and CEO of Blue Cross, in a recent interview.
Stephen J. Farrell, president and CEO of UnitedHealthcare of New England, said the cost shift is a factor in every contract negotiation, especially with hospitals, because insurers can’t afford to just drop an institution from their network.
“That provides them great leverage,” Farrell said. “They’ll say, ‘If you want to have us in your network, then you have to pay us. Here’s my costs and here’s where I’m losing money. … I need you to make up the difference.’ ”
On a national scale, the Milliman study used revenue and expense data from the 2006 American Hospital Association Survey – covering about 3,200 hospitals – to gauge how well payments from private insurers, Medicare and Medicaid matched the hospitals’ costs.
On Medicare, the study found, hospitals lost an average of 9.4 percent; on Medicaid, 14.7 percent and on other government payers and uninsured patients, 25.1 percent. Commercial payers, on the other hand, provided a 23.1-percent profit, which after combining all categories left hospitals with a 3.8-percent operating profit.
The gap between private and public payers has also gotten worse, the study found: While in 1999, there was a roughly 11.3-percentage-point gap between Medicare and commercial payers, and a 16-point-gap between Medicaid and commercial, by 2006 the gaps had widened to 32.5 points for Medicare and 37.8 points for Medicaid.
If public and private payers were all giving hospitals a roughly 6-percent profit margin, on the other hand, the study found, Medicare would have paid an extra $34.8 billion and Medicaid an extra $16.2 billion, while commercial insurers would have saved $51 billion.
On the doctor side, the Milliman researchers used Medicare and Medicaid fee scales, plus data from three proprietary insurance-claim databases, to determine the pay rates for common procedures. They found Medicare rates were about 89 percent of the average rate for all three payer types, while Medicaid was at about 60 percent and commercial insurers at 114 percent.
If they all paid the average, the study found, Medicare would pay $14.1 billion more, Medicaid $23.7 billion more, and commercial payers $37.8 billion less.
Because all these costs get passed on to subscribers, the study’s sponsors noted, the cost shift has a “devastating” impact on the affordability of health insurance, a particularly serious problem now when increasing numbers of employers, and workers, are having to forgo coverage or take skimpier coverage with big out-of-pocket costs.
But locally, at least, the picture may be a bit more complicated.
Christopher F. Koller, the state health insurance commissioner, noted that last year, the community hospital task force looked at some of these issues and found that Medicaid actually provided “generous” payments for inpatient services, but “inadequate” rates for outpatient care. Medicare’s pay system, he added, favors academic medical centers and more specialized facilities, at the expense of community hospitals.
Yet the exact differences between public and private payers’ rates can’t be quantified, Koller said, because while Medicaid and Medicare rates are public, commercial insurers’ are not. And there may be some hospital costs, he added, that are not really justified.
Edward J. Quinlan, president of the Hospital Association of Rhode Island, offered a similarly nuanced view. He said there is “indisputable evidence” from many studies, not just this one, showing that Medicare and Medicaid under pay, but he also stressed that in this state, the differences between public and private payers are less dramatic.
In a news release on the new study, Scott P. Serota, president and CEO of the Blue Cross and Blue Shield Association, said cost-shifting should be an area of focus as the nation embarks on comprehensive health care reform. Locally, Purcell agreed, saying the federal government “has to show the way by being responsible about its own programs.” •

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1 COMMENT

  1. The business community tends to oppose a Government financed health system on ideological grounds, but they are shooting themselves in the foot. A tax based system would spread these costs more equitably than a direct cost shift onto business, which is what we have now. Otherwise, politicians will always favor a cost shift over an unpopular tax if they can get away with it. Think of it as pragmatic rather than ideological.