MedPAC Debunks Cost-Shifting Claims of Hospital, Insurance Industries

A report done for Health Care for America Now [1]

A recent Milliman, Inc. analysis on behalf of America’s Health Insurance Plans (AHIP) argues that Medicare doesn’t pay hospitals enough, causing private payers to pay well above costs to keep hospitals solvent. This is referred to as ‘cost-shifting.’ (1) The non-partisan Medicare Payment Advisory Commission (MedPAC) refutes this argument and finds that a hospital’s relative market strength – and not Medicare-related cost-shifting – determines what a hospital is paid by private payers. This issue is central to the current debate on establishing a new public health insurance plan option and the authority of the new plan to establish reasonable provider rates.

History of Hospital – Private Payer Relative Market Strength

The history of private insurers and hospital price negotiations is a telling one, as MedPAC explained in its March 2009 report to Congress. (2)

Hospital leverage: From 1987 through 1992, hospital profits from private payers grew, and from 1987 through 1993 the rate of hospital cost growth was above the rate of inflation in goods and services purchased by hospitals.

Insurer leverage: From 1994 through 2000, managed care restrained private-payer payment rates, and hospital cost growth fell below the rate of inflation in hospital-purchased goods and services.

Hospital leverage returns: “By 2000, hospitals had regained the upper hand in price negotiations due to hospital consolidations and consumer backlash against managed care,”(3) MedPAC reported.

With the loss in leverage over hospitals, private insurers have in turn passed along these costs through higher premiums to enrollees and employers. MedPAC reported, “While insurers appear to be unable or unwilling to ‘push back’ and restrain payments to providers, they have been able to pass costs on to the purchasers of insurance and maintain their profit margins.”(4)

Findings on Hospital Revenues, Costs and Pricing

Hospitals with the greatest resources are less aggressive about containing costs and therefore have the highest Medicare ‘losses’ (the difference between Medicare rates and a hospital’s average costs). The most profitable and powerful hospitals spend more and increase their costs per unit of service. Hospitals with high profits, low financial pressure, large endowments or robust fundraising have the highest costs, and a higher cost base leads to lower Medicare margins. If Medicare were to increase payment rates, hospitals with market power would be unlikely to voluntarily cut prices charged to insurers and reduce revenue. Instead, hospitals might spend some or all of that revenue, pushing costs higher still. (5)

Hospitals in markets with little or no competition force private insurers to pay excessive rates, driving prices too high. That is the finding of MedPAC,(6) corroborated by insurance industry leaders, including AHIP President Karen Ignagni, who said hospital industry consolidation had increased hospitals’ market power, thereby reducing insurers’ ability to negotiate discounts.(7) In areas with more robust hospital competition, insurers have the power, much like Medicare, to set provider rates.

The real issue is not whether private plans pay doctors and hospitals more than government programs, but what is a fair rate based on the actual cost of providing quality care. The Milliman report itself discloses the limitations of its study, noting that it "does not assess appropriate levels of payment.” (8) It only compares how much different payers reimburse providers for the same service. MedPAC reports that Medicare aims to establish payment rates that cover costs that reasonably efficient providers would incur in furnishing high-quality care, thereby rewarding providers whose costs fall below the payment rates and giving an incentive to those with costs above the payment rates to become more efficient. (9)

MedPAC concluded, “Increasing Medicare payments is not a long-term solution to the problem of rising private insurance premiums and rising health care costs. In the end, affordable health care will require incentives for health care providers to reduce their rates of cost growth.” (10)

Relation of Cost to Quality
Although efficient hospitals have lower costs, they often deliver better medical care, MedPAC found in a separate study. (11) In a review of 300 hospitals that performed well on a mix of quality measures and costs, the agency found these hospitals tended to have lower patient death rates than other hospitals.

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1. Milliman, “Hospital & Physician Cost Shift: Payment Level Comparison of Medicare, Medicaid, and Commercial Payers,” December 2008. Accessed at http://www.milliman.com/expertise/healthcare/publications/rr/pdfs/hospit... [2].
2. Medicare Payment Advisory Commission, “Report to the Congress: Medicare Payment Policy,” March 2009. Accessed at http://www.medpac.gov/documents/Mar09_EntireReport.pdf [3].
3. Ibid. Pg 58.
4. Ibid. Pg. 59.
5. Ibid.
6. Ibid.
7. “Daschle to Face Tough Questions on Competition in Health Insurance,” Robert Pear, The New York Times, January 8, 2009. Accessed at http://www.nytimes.com/2009/01/08/us/politics/08daschle.html [4].
8. “Consumers and Employers Paying Almost $90 Billion Due to Under-Payments to Hospitals and Physicians by Medicare and Medicaid,” Press Release, America’s Health Insurance Plans, December 9, 2008. Accessed at http://www.ahip.org/content/pressrelease.aspx?docid=25218 [5].
9. Medicare Payment Advisory Commission, “Hospital Acute Inpatient Services Payment System," October 2008. Accessed at http://www.medpac.gov/documents/MedPAC_Payment_Basics_08_hospital.pdf [6].
10. Ibid, p 64.
11. Medicare Payment Advisory Commission, “Statement for the Record,” March 10, 2009, Committee on Ways and Means.