Not everyone agrees that the higher costs commercial insurers pay to hospitals can be blamed on government underpayment. The Medicare Payment Advisory Commission, or MedPAC, which advises Congress on Medicare issues, has argued that Medicare payments are adequate for relatively efficient hospitals, and that raising Medicare rates would not necessarily lead to lower commercial charges. Hospitals that make high margins from commercial payers have less pressure to rein in costs, the group has argued, leading to expenses beyond what Medicare pays.
The actuarial firm Milliman concluded that a cost shift did exist in a 2008 analysis prepared for insurers and hospitals. The firm estimated the cost shift nationwide at $88.8 billion per year, or about 15 percent of what commercial insurers spend on hospital and physician services. The report defined cost shift as the difference between actual payments and payment amounts that would produce equal margins for each payer.
But more recent Milliman research has suggested that cost shifting is not the only option for hospitals, and that they might have little choice in the future but to become more efficient. The firm identified cities that have “high-value” hospital care, with low per capita inpatient costs for both Medicare and commercial insurance, and positive hospital margins.
“Considering cost shifting to be inevitable ignores both the potential for cost management within hospitals and hospitals’ flexibility to set commercial prices,” one report said. “The data demonstrates that hospitals can prosper in some low-Medicare cost regions without cost shifting to commercial payers for their inpatient services.”
You’ll find the cost-shift mentioned toward the end of this article, just click to page 4 and read the author’s 4th and 5th conclusions. He calls the cost shift “welfare reimbursements”. The amount in his analysis is $10.00 added to the daily hospital cost of $60.00, resulting in a total billed charge of $70 per day (remember this was 40 years ago) – - in other words, the need to recover federal cost underpayments in 1970 resulted in a daily hospital charge 16% higher than it would otherwise have been. Remarkably, just about the same as Milliman finds today.
We have blogged before about how the status quo approach of shifting hospital costs from patients covered by Medicare and Medicaid to commercial payors simply can’t last, a view explained in a recent reform briefing paper. That dynamic deserves a closer look:
We can model entire systems, fully adjust for reform initiatives, anticipate provider fee movement for commercial business, etc., based on our healthcare reform modeling capabilities, but in order to calculate the status quo we have only modeled the demographic changes expected in the population as the Boomers enter Medicare and as Medicaid expands. We have not figured in differences by region, type of service provider, or other sources of variation, nor have we tried to anticipate changes to the status quo and how those changes would be reflected in various cost relativities. By their very nature, those changes are dynamic and highly variable, and will depend on a number of factors, including the eventual success of provider efforts to pursue efficiency instead of cost shifting…
If action is not taken to minimize status quo cost drivers, the yield on current equivalent billed charges is projected to fall by 2020 in our most likely scenario. Specific localized areas could see a shift significantly more detrimental based on current payor mix, an aging population, and/or a heavy percent of low-income newly Medicaid eligible members. Our projection in Figure 2 shows a 12% decrease in average yield over the next 10 years before the influence of trend by payer. With governments limiting increases and little or no room left for cost shifting, this mix issue will go straight to providers bottom lines over time.
Many hospitals use a strategy known as cost shifting. Hospitals make up for the lower unit costs on Medicare and Medicaid patients by shifting costs to commercially insured patients. In 2008, Milliman research estimated that cost shifting contributed to an additional $1,800 in shifted cost per American family—10.7% more than the total cost in an environment without cost shifting.
The understanding of cost shifting evolved again with a March 2010 study commissioned by the National Business Group on Health. The study looks at 65 cities and confirms that hospitals are in many cases cost shifting in the inpatient setting. But the study also identifies 16 cities where hospitals do not shift costs. Hospitals in these cities find ways to become more efficient and operate with a suitable margin on all their work—commercial, Medicare, and Medicaid.
Cost shifting is not inevitable, which is fortunate, because it is unlikely to remain a sustainable strategy in the healthcare environment that is now emerging. The combination of an aging population and universal healthcare will expand the population of Medicare- and Medicaid-eligible patients. This population shift will put a real strain on hospital bottom lines unless they can become more efficient.
A recent study seeks out locations where hospitals are able to provide high value care to both Medicare and commercial patients. Here is an excerpt:
Many private payers are concerned that current government (Medicare and Medicaid) provider payments get translated into higher provider charges to commercial payers, which increases private payer premiums and claims costs for self-insured plans. This study was commissioned to look at actual data from commercial insurers to help answer this question:“Are cities that are high value for Medicare inpatient care also high value for private payers, or do they look better because private payers were charged more to enhance inpatient revenue?”
There are important policy implications, depending on which part of the question above is correct. It is important to reframe the high value definition as those cities and hospitals that provide the best inpatient hospital value for all payers, consumers and the community as a whole.
So where are the high value cities? Here is the list:
There are many provisions in the bill that can save in the long term. Most are pilot programs that need to be tested to see if they work—a process that will take about five years….Covering most of the uninsured should reduce cost shifting to private plans but not eliminate it. Private payers currently pay higher costs because hospitals and doctors charge them more to compensate for care that is provided to those without insurance as well as those in Medicare and Medicaid. Families USA recently estimated that families pay about $1,000 more on average each year because of this cost shifting.
Obviously, with more of the uninsured covered, this cost shifting should be affected, but given the fact that half of the newly covered will be in Medicaid, cost shifting will still go on, since Medicaid reimbursements are below market. A 2008 actuarial study by Milliman, a consulting and actuarial firm, found that Medicaid reimburses hospitals at an average of 67% of private plan rates and pays doctors at an average of 53%.
Surprisingly, researchers said, the hospitals that provide high-value care to Medicare and commercial payers share no specific characteristics that separate them from those that provide low-value care to either Medicare, commercial payers or both, said Bruce Pyenson, a New York-based principal and consulting actuary at Milliman, during the news conference.
He said researchers found there is considerable variation among the hospitals studied in cost drivers including wages, payer and hospital competition, location, and ratio of primary care to specialist physicians.
However, researchers found that certain hospitals that provide good value for Medicare and commercial payers generally have greater medical efficiency and lower admission rates, Mr. Pyenson said.
So what could explain this variation? As Pyenson said during the press briefing for the new study, “Other factors are less important than management, than business decisions. I realize this may sound funny from an actuary. The point is that cost-shifting is not inevitable. We are not victims of our circumstance.”
A December 2008 study by Milliman, Inc. projects that this cost shifting essentially imposes a surtax of $88.8 billion annually on privately insured patients, increasing their hospital and physician costs by 15 percent. This study concluded that annual health care spending for an average family of four is $1,788 higher than it would be if all payers paid equivalent rates to hospitals and physicians. The transfer of these costs to those with private coverage cannot be sustained and is critical to addressing concerns over affordability.
One of the Town Hall panelists, Will Fox (FSA, MAAA), testified before Congress on September 19. He spoke about how low Medicare rates (and lower Medicaid rates) are increasing the cost of commercial insurance.