Insurance Companies and Hospitals Join Forces to Protect their Profits and Bash Public Plan

Three industry trade groups, America's Health Insurance Plans (AHIP), the Blue Cross Blue Shield Association (BCBSA), and the American Hospital Association (AHA), commissioned a report to bash Medicare and Medicaid in an underhanded attempt to discredit the idea of including a new public plan option in health care reform.

The report, Hospital & Physician Cost Shift: Payment Level Comparison of Medicare, Medicaid, and Commercial Payers, tries to make the case that Medicare and Medicaid payments to providers are too low, which forces the providers to charge the private insurance companies more, which in turn raises the costs of health insurance premiums.

Prepared by the actuarial and consulting firm Milliman, the report only compares how much different payers reimburse providers for the same service. It makes no attempt to determine how much is appropriate payment for any given service. Even the press release for the report makes that very clear:

"The study does not assess appropriate levels of payment, but rather the disparities among current payment rates."

Richard Umbdenstock, President and CEO of American Hospital Association apparently didn't read the report or even the press release about it very carefully. He started the press conference releasing the report with the following unsubstantiated claim:

"Medicare and Medicaid are paying less than the cost of caring for beneficiaries...When Medicare and Medicaid don't pay their share, privately insured patients must make up the difference, otherwise the hospital can't make ends meet."

Not surprisingly, Mr. Umbdenstock ignores the fact that Millman did not attempt to figure out if hospitals and other health care providers are charging fair prices or delivering care in a cost efficient way. It only looked at what private insurers pay on average and compared it to what Medicare and Medicaid pay on average, and concluded that the public programs should pay more.

I have to assume if Millman compared what people pay for a flat screen television in a high-end store on Fifth Avenue to what people pay for the same flat screen television at Wal-Mart, Millman would conclude people at Wal-Mart need to pay more so the manufacturer doesn't shift the cost of making the television to those Fifth Avenue customers.

But most people understand that the manufacturer makes a profit either way. The question is how big a profit and how much is the middleman getting in the process.

Listening to Mr. Umbdenstock you might conclude hospitals are on the brink of bankruptcy. But don't cry for them just yet. According to Mr. Umbdenstock's own organization, in 2007 the country's community hospitals saw "the largest single-year jump in profit margins in at least 15 years," posting $43 billion more in revenue than expenses.

And don't feel bad for the insurance companies who claim they are "having to make up the shortfall." The top seven for-profit health insurers had combined profits of $12.6 billion in 2007, an increase of 170.2% from 2003.

Anyway, do you really think the hospitals would charge private insurance companies less if Medicare paid the hospitals higher rates? They would just continue increasing their profits. In addition, if insurers were really concerned about cost-shifting, they would disclose what each insurer is paying, not an average. The reality is big insurance plans must get better rates from providers than small plans so, using their methodology, cost-shifting must be happening between private plans as well.

What is most remarkable, however, is not that for-profit companies (hospitals and insurance companies alike) want to keep out of the market a public plan that can break the stranglehold of the large hospital conglomerates to demand a fair payment rate, it is that no one seems to know how much it actually costs hospitals to provide services or whether they are operating efficiently. According to A Study of Hospital Charge Setting Practices, a report, prepared by the Lewin Group for the Medicare Payment Advisory Commission:

"The Medicare Payment Advisory Commission (MedPAC) has expressed concerns about the accuracy and fairness of the current Medicare hospital in- and out-patient prospective payment systems (PPSs). Payment rates for these systems are based, to varying degrees, on hospital charges. However, little is known about how hospitals set their charges...

"Disparities between charges and costs has been growing over time as many existing charges were set before hospitals had a good idea of their costs and/or were set in response to budgetary and competitive considerations rather than resource consumption. Hospital charges are set within the context of hospitals' broader communities, including their competitors, payers, regulators, and customers. These factors vary significantly depending on an individual hospital's market position, mission, ability to estimate costs, and overall financial circumstances. These competing influences and hospitals' efforts to address them often produce charges which may not relate systematically to costs. For instance, outside of supplies and pharmacy, hospitals did not seem to have a system for tracking or adjusting for falling costs of equipment and technology as they became more widely used. Thus, when charges are initially set high for a new technology, they may not be lowered later when the equipment or procedure is no longer as expensive, unless there are market pressures to do so.

"The fact that charges are often not closely tied to costs implies that the current Medicare payment systems may not be closely tied to resource utilization. The findings from this study suggest that in certain instances, relative charges may not accurately proxy relative costs. Therefore, the impact of using charges to set payment rates in Medicare should be investigated more closely." [Emphasis added.]

As Dean Baker, Co-Director of the Center for Economic Policy and Research put it:

"Where public health care plans, like Medicare, have competed directly against private plans, they have almost always had lower costs. Remarkably, the private insurance sector is now blaming the public plans for being more efficient. It is understandable that the private sector plans would prefer to make public sector plans less efficient so that they can more effectively compete, but the public has no interest in wasteful health care spending."

Don't believe their hype! Support a public plan option as part of comprehensive health care reform.

Views expressed on this page are those of the authors and not necessarily those of Campaign for America's Future or Institute for America's Future