Medicare Cost-Shift Theory Debunked

Medicare

Via Jon Walker on FDL (emphasis added):

A new study in Health Affairs appears to disprove the commonly cited myth that public insurance programs “cost-shift” onto private insurance.

…In reality, the study found lower Medicare payment rates actually reduce what private insurance companies pay.

…This study reinforces that the real issue at play is market power, not cost shifting. Compared to other countries with single-payer or all-payer systems, providers in the United States have more power to demand higher prices.

Something to think about before attempting to voucher-ize Medicare.

More info:
How Much do Hospitals Cost Shift? A Review of the Evidence (PDF)
A Review of the Evidence on Hospital Cost-Shifting (PDF)

Chapin White’s abstract:

Contrary To Cost-Shift Theory, Lower Medicare Hospital Payment Rates For Inpatient Care Lead To Lower Private Payment Rates

Many policy makers believe that when Medicare constrains its payment rates for hospital inpatient care, private insurers end up paying higher rates as a result. I tested this “cost-shifting” theory using a unique new data set that combines MarketScan private claims data with Medicare hospital cost reports. Contrary to the theory, I found that hospital markets with relatively slow growth in Medicare inpatient hospital payment rates also had relatively slow growth in private hospital payment rates during 1995–2009. Using regression analyses, I found that a 10 percent reduction in Medicare payment rates led to an estimated reduction in private payment rates of 3 percent or 8 percent, depending on the statistical model used. These payment rate spillovers may reflect an effort by hospitals to rein in their operating costs in the face of lower Medicare payment rates. Alternatively, hospitals facing cuts in Medicare payment rates may also cut the payment rates they seek from private payers to attract more privately insured patients. My findings indicate that repealing cuts in Medicare payment rates would not slow the growth in spending on hospital care by private insurers and would in fact be likely to accelerate the growth in private insurers’ costs and premiums.

  1. #1 by cav on May 8, 2013 - 8:22 am

    Health care spending growth has famously slowed over the past five years, significantly enough that the Congressional Budget Office recently revised its projections of Medicare and Medicaid spending over the coming decade downward by hundreds of billions of dollars.

    Now, research papers suggests the recent slowdown doesn’t just reflect temporary economic weakness, but also structural shifts in how health care is delivered and financed — possibly attributable to the Affordable Care Act — and thus might be a harbinger of a longer-term trend.

    If they’re right, and the trend continues, it means workers can expect higher wages and the country’s projected medium term deficits are significantly overstated, which in turn suggests lawmakers’ continuing obsession with the current budget deficit, and deficits over the coming decade, are misguided.

    Clearly this is bad news for Democrats….

    The fight against medicare is really the capitalists/employers fight against their having to put in 50% of the cost. That may sound like a lot but it’s only 1.45% of wages. But, you see, that’s money that could be going to PROFITS!!!

  2. #2 by Richard Warnick on May 9, 2013 - 4:31 pm

    I really thought brewski would rise to defend the Medicare cost-shift theory.

  3. #3 by brewski on May 9, 2013 - 10:04 pm

    I would like to respond. It is an important question. A snarky piece from FDL doesn’t cut it. Unfortunately, the snippet you posted is very short and the link only takes one to an abstract. I’d like to read the whole study.

    I emailed a friend of mine who is a non-profit hospital CFO to ask what he thinks about it.

    It is an interesting set of observations. I suspect there is some sort of multicollinearity going on here too. But if the researcher is worth his salt, then he should have figured that out.

    Taken to its logical conclusion, Medicare could force hospitals to treat some patients (those who qualify for Medicare) for free, and that would lower the costs for all of the non-Medicare patients. Somewhat hard to imagine. But that is what this guy is saying.

    I am sure this will get hashed out in the health economics journals. Should be interesting.

  4. #4 by Richard Warnick on May 10, 2013 - 9:26 am

    Thanks for engaging. All I know for sure is that the other relatively wealthy countries in the world provide the same quality of health care (or better) as the USA at half the price.

    Both major political parties have ruled out single-payer, and ACA failed to provide workable cost controls. Health care consumers find it hard to shop for lower-cost providers. But this week the federal government did start up a website that revealed some hospital pricing secrets.

  5. #5 by brewski on May 10, 2013 - 10:26 am

    “All I know for sure is that the other relatively wealthy countries in the world provide the same quality of health care (or better) as the USA at half the price.”
    Not relevant to the question above.

    From my hospital CFO friend:

    “Interesting, but I am not sure they established the causal relationship? One factor may be that hospitals and payors are much more transparent about negotiating aroundMedicare rates than you might expect. Payors know they are going to be asked to pay more per case than Medicare, but they are only will to pay x% more and tie their negotiations to Medicare case rates.

    Another factor would be payor mix, and the percentage Medicare makes up of the hospitals totalrevenue base. A hospital with a high percentage of Medicare, would need to be much more aggressive in making up Medicare losses by charging private insurance more than say a hospital that is primarilyOB/Gyn and little Medicare, though that wouldn’t explain the regional correlation.”

    • #6 by Richard Warnick on May 10, 2013 - 11:13 am

      I beg to differ. We know high-quality health care can be provided much more cheaply. That puts the burden of proof on our health care and health insurance industry to show why it’s unaffordable in the USA.

      Health-care horror stories abound. An Arizona woman with a scorpion sting was charged $83,046 for a three-hour hospital visit. They gave her two anti-venom shots that actually cost $200.

      Another story is one I can relate to. This guy ate a pepperoni pizza, had indigestion, and ended up with an $11,000 hospital bill even though there was nothing wrong with him. A little over a year ago I fell down the stairs and broke my collarbone, had to go to the the emergency room because it was Sunday (InstaCare was closed), and they insisted on doing all kinds of diagnostic tests on my heart – which was working fine. I spent a whole day in the hospital for no good reason. If I didn’t have insurance, I would have checked myself out against medical advice. The bill was over $15,000.

      • #7 by brewski on May 10, 2013 - 11:46 am

        Our doctors are paid twice as much.

        Why not go after them rather than the insurance companies?

        • #8 by Richard Warnick on May 10, 2013 - 2:00 pm

          The health insurance corporations (specifically Liz Fowler, a former VP of WellPoint) basically wrote the ACA. If they are suffering, it’s their own stupid fault. But I seriously doubt that they are. The ACA forces people to buy their product, and they are jacking up the individual insurance rates 25-30 percent.

          There is some good news. In some states, insurance companies will be forced to compete for customers with a standard package of benefits. This might help control costs.

          Back in the 1970s, I attended a speech by Senator Ted Kennedy at the Georgetown University School of Medicine. His proposal at the time was for the government to cover med school tuition if the doctors would agree to two years service as primary care physicians. It went nowhere.

          • #9 by brewski on May 10, 2013 - 3:05 pm

            “The health insurance corporations (specifically Liz Fowler, a former VP of WellPoint) basically wrote the ACA.”

            How did that happen considering not one GOP voted for it.

            Hmm, let’s see. Whom to blame. Hmmm, let me think…

            “Back in the 1970s, I attended a speech by Senator Ted Kennedy at the Georgetown University School of Medicine. His proposal at the time was for the government to cover med school tuition if the doctors would agree to two years service as primary care physicians. It went nowhere.”

            Because the doctors make so much. Whom to blame. Hmmm, let me think…

  6. #10 by brewski on May 10, 2013 - 10:40 am

    For me it is clear that we are shooting the messenger. Everyone seems to blame the insurance companies when they are not the ones causing the problem. For almost all large employers insurance companies are only claims processors and are not the ones actually paying the claims. Also, insurance company profits on a per-insured basis are razor thin. The whole blame against for-profits is also misplaced. There are plenty of people who work for not-for-profit employers, who have insurance through not-for-profit insurance providers and go to not-for-profit hospitals. Their costs are not any lower than their for profit peers. So this ranting about for-profits is also without any evidence.

    The problem is much much deeper and requires a much more revolutionary overhaul.

    Watch:

    • #11 by Larry Bergan on May 10, 2013 - 8:26 pm

      The video makes perfect sense brewski, but your take on it is Greek to me.

  7. #12 by brewski on May 10, 2013 - 3:07 pm

    Listen to yourself:

    ” If I didn’t have insurance, I would have checked myself out against medical advice. The bill was over $15,000.”

    So what YOU JUST SAID is that because you had insurance you were willing for the hospital to perform unnecessary tests. So whose fault are the extra tests? The hospitals? You? Or the insurance company? You think the insurance company wants to pay for extra tests?

    • #13 by Richard Warnick on May 10, 2013 - 3:49 pm

      The doctors said the tests were necessary. I didn’t agree, but:

      (1) I never went to med school, and

      (2) Why not have my heart thoroughly checked out? I deserve some value in exchange for my hefty insurance premiums.

      I admit I was part of the problem, not part of the solution. However, I missed a night’s sleep, I was in pain, my wife was worried about me (she also went without sleep), etc. So I didn’t argue with the doctors.

  8. #14 by brewski on May 10, 2013 - 3:14 pm

    From 2007 through 2010, the annual median net profit margin for the ten largest health insurance/managed care companies ranged from 2.1% to 4.4%.

    as compared to 6.9% for electric utilities, 8.2% for gas utilities, and 12.0% for water utilities

    Drugs, Generic 6.0%
    Medical Instruments & Supplies 13.6%
    Drug Manufacturers, Major 16.7%

  9. #16 by brewski on May 10, 2013 - 8:42 pm

    Return on book equity is not an apples to apples measure of anything since this reflects to a large degree the leverage of the company, and not its profit margins. Nice try.

    15% is not phenomenal.

    • #17 by Richard Warnick on May 11, 2013 - 10:24 am

      The market average ROE is around 12%, anything above that is a great deal for investors. But OK, let’s talk profit margins.

      From Bloomberg:

      Insurers led by WellPoint Inc. (WLP), the biggest by membership, recorded their highest combined quarterly net income of the past decade after the [ACA] was signed in 2010, said Peter Gosselin, the study author and senior health-care analyst for Bloomberg Government.

      …[T]he companies saw their average operating profit margins expand to 8.24 percent in the six quarters since the overhaul became law, compared with 6.88 percent for the 18 months before it was passed.

      Of course, record profits didn’t stop insurers from raising rates.

      • #18 by brewski on May 11, 2013 - 11:13 am

        Are you trying to be transparently deceitful, or do you really not understand what you are saying?

        • #19 by Richard Warnick on May 11, 2013 - 1:00 pm

          Unlike you, I gave a link. So you can check the source.

          • #20 by brewski on May 11, 2013 - 1:05 pm

            Doesn’t matter what your source is or what the source says. The substance of it on its face is either dishonest, uneducated, or both.

  10. #21 by Richard Warnick on May 11, 2013 - 1:07 pm

  11. #22 by brewski on May 11, 2013 - 1:14 pm

    Your link is entirely irrelevant to your point. And if you make fun of the Blaze then you are not allowed to use thinkregress, alter net, FDL, or any other rag of that ilk.

  12. #23 by brewski on May 11, 2013 - 1:16 pm

    http://voices.washingtonpost.com/ezra-klein/2011/02/health-insurance_industry_stil.html

    “But just squeezing insurers and hospitals won’t control costs unless the insurers and hospitals can figure out some credible way to either squeeze drug and device makers or somehow ration their products.”

    Ezra Klein, teabagger

  13. #24 by Ronald D. Hunt on May 11, 2013 - 4:04 pm

    http://www.nytimes.com/2013/05/08/business/hospital-billing-varies-wildly-us-data-shows.html?hp&_r=1&

    Their is plenty of savings to be had from the increased transparency Obamacare is providing.

    Provider corruption is being exposed on mass.

    And we have long known that their is plenty of room to squeeze drug companies, the CBO 10year cost savings of Medicare directly negotiating drug prices was in the range of $300 billion dollars.

    And this is easy to observe, just look at the Walmart-Humana preferred Rx plan, they get to charge Medicare the full retail price of drugs, even know Walmart has used its negotiating power to lower many drugs to mere fractions of their retail price, many drugs can be picked up for $1 for a weeks supply, all at tax payers expense, to provide walmart and humana giant profit margins.

  14. #25 by brewski on May 11, 2013 - 10:45 pm

    RDH,
    Richard is blaming the insurance companies and not the providers.

    You are agreeing with me.

  15. #30 by Ronald D. Hunt on May 12, 2013 - 6:59 pm

    “Yes, and that has nothing to do with the fact that their margins are extremely thin relative to everyone else.”

    Depends on how you measure them. The insurance industry reports their profits as a function of there gross reciptes, rather then a function of margin over their administrative costs.

    If the industry were to report their profits as a function of margin over their administrative costs, there margins would be in the 30-50% territory.

    Siminal to a bank, that is if a bank where to report their profits relative to the amount of savings deposited in a year, their profit margins would look very small as well.

    Obamacare now regulates this behavior, to a limited degree. Some insurance companies may try and buy out an HMO(if they don’t already own one) and shift where they pull their profits out, but that is going to be increasingly difficult given the incredible amout of transparency Obamacare is shining onto the health care system.

    http://www.hhs.gov/news/press/2013pres/05/20130508a.html

  16. #31 by brewski on May 12, 2013 - 10:09 pm

    Then that is not an apples to apples comparison, as we say. It doesn’t make much sense to redefine profit margin for one company differently when comparing it to the profit margins of another company. So if we are comparing profit margins of various industries across the health care sector, insurance companies are the lowest no matter how you want to redefine it. So Richard’s fetish with insurance companies and their 4% profit margin compared to much higher margins for everyone else reveals itself to be just that; Richard’s fetish.

  17. #32 by Ronald D. Hunt on May 13, 2013 - 2:55 am

    No need to redefine it, they fundamentally are a financial institution. They work much like a bank does in many respects.

    Customers make deposits with the intent of withdrawal at a later date. The money deposited isn’t in any way shape or form, the insurance companies money.

    The way insurance companies are ran at present would be like if a bank charged you 20% of any money you deposit before allowing you to accrue interest in the account.

    Financial institutions, be it bank, insurance company, whatever; make their money from the management charges, and interest returns of invested deposits; and NOT from the initial deposit itself. Health insurance works differently from this, taking their cut directly from the insurance premium, and interest returns.

    Aetna for example is actually from the SEC’s point of view actually a bank, Aetna promised the SEC when they converted their corporation to a bank that health care would be no more then 5% of the total transactions they processed.

    And it most certainly does matter how we look at it. When we look at how much profit these companies make as compared to what their administrative costs they; their margins are very high, as I said 30-50%.

    These companies go to great lengths to hide this, they report total customer receipts and premiums as net gross income rather then as insurance deposits, they also often use third party billers to move profit off of their own books and bring it back in a less transparent fashion, And finely after Nixon it has been popular for insurance companies to own their own HMO’s and Hospital systems further allowing them to musical chair their customers premium deposits away is non transparent ways.

    Dumping the insurance complex for a single payer system would save a great deal of money, it would cut wall-street out, but then that is a good thing.

  18. #33 by brewski on May 13, 2013 - 7:52 pm

    Then why didn’t Obama even allow it to be proposed?

    The biggest advantage to single payer isn’t cutting out the insurance company. It is the creation of a monopsony which would lower prices paid to doctors, hospitals, drug makers, device companies, etc. In addition, is also creates a monopoly for enrollees who would have no where else to go so if the single payer didn’t cover something, as Medicare does today and as single payer in Canada, then you’re fucked.

    http://www.fraserinstitute.org/uploadedFiles/fraser-ca/Content/research-news/research/articles/leaving-canada-for-medical-care-2011-ff0712.pdf

  19. #34 by brewski on May 13, 2013 - 7:57 pm

    http://www.sec.gov/Archives/edgar/data/1122304/000112230413000037/form10-k.htm

    So much for Aetna being a bank according to the SEC.

    Please read and try again.

  20. #35 by Ronald D. Hunt on May 13, 2013 - 10:25 pm

    Aetna has many business units, I suggest checking their polish one!!!!..

    “It is the creation of a monopsony which would lower prices paid to doctors, hospitals, drug makers, device companies, etc.”

    Lower compensation rates, are commiserate with lower administrative overhead, If the doctor doesn’t need 4 full time secretaries to process insurance billing claims, then clearly his costs would be substantially lower. This is a cost shift force onto the doctor by the current insurance industry.

    Similarly, if a hospital doesn’t need 1 administrative staff person PER bed as they do now, then clearly the hospital’s costs would be substantially lower as well.

    ” In addition, is also creates a monopoly for enrollees who would have no where else to go so if the single payer didn’t cover something, as Medicare does today and as single payer in Canada, then you’re fucked.”

    No you are thinking of an NHS style system like in the UK.

    Canada has private hospitals and doctors, and privately ran supplemental insurance for coverage above the national plan.

    Canada has a National 1 tenth the population of the United States, Many services that are not available in Canada are still covered, with the creavet that the services are performed in the United States.

    Ohh and you can also buy supplemental insurance to get coverage above and beyond that of basic Medicare.

  21. #36 by brewski on May 14, 2013 - 8:03 am

    Why don’t you provide me with your authoritative source in Aetna’s Polish business unit which the SEC considers to be a bank.

    No I am not thinking of the UK NHS. The UK has private hospitals too. Let me rephrase, yes, if you are a rich Canadian then you are not fucked. Just all the other Canadians are fucked if their beloved single-payer doesn’t cover it.

    For example, not covered in Ontario “Syringes and other diabetic supplies such as lancets and glucometers, ”

    So if you are a diabetic in Ontario, you are fucked.

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