Low Medicare, Medicaid pay rates impact private costs

Cost-shifting was the focus of an insurer-hospital survey.

By Doug Trapp — Posted Jan. 5, 2009

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Consumers and employers could pay less for private health insurance premiums if public programs increased physician and hospital pay, according to a study sponsored by hospital and insurance associations.

The report, by consulting firm Milliman, estimated private payers paid an additional $89 billion a year in 2006 and 2007 after calculating how much physicians and hospitals might be relying on private insurance pay to make up for lower federal rates.

"The faltering economy makes fair payment by Medicare and Medicaid more important than ever," said Richard J. Umbdenstock, American Hospital Assn. president and CEO. The AHA, America's Health Insurance Plans, the BlueCross BlueShield Assn., and Premera Blue Cross sponsored the report.

The study does not establish a causal relationship between low public program pay and higher private insurance rates, but instead calculates the disparity using survey and claims data, said study co-author John Pickering, principal and consulting actuary with Milliman.

The study calculated the money consumers and employers would save if -- without increasing overall hospital and physician pay -- private coverage reduced fees while Medicare and Medicaid increased fees to the same level, Pickering said. Average annual health spending for a family of four would be $1,788 lower under such a situation, including $1,512 less in private insurance premiums.

AHIP spokesman Robert Zirkelbach said that lowering Medicare and Medicaid fees does not reduce overall health care costs. "It just shifts those costs through the system, and it's ultimately consumers and employers who end up paying more."

"As Congress and the new administration focus on health care reform, they should confront this," said Karen Ignagni, AHIP president and CEO.

The American Academy of Family Physicians would not support equalizing public and private pay as outlined in the Milliman study, said Ted Epperly, MD, AAFP president.

The AMA said it appreciated the attention of study sponsors to the issue of inadequate Medicare and Medicaid physician pay.

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Out-of-balance billing

Insurers say relatively low Medicare and Medicaid pay for physicians and hospitals shifts costs to private insurance. If this shift had been eliminated, by boosting public program pay and lowering commercial insurer pay to the same levels, without changing the overall amount spent on hospital and physician fees in 2006 and 2007, the yearly tab for private payers would have been nearly $90 billion less.

Here's how that hypothetical situation would have broken down, in billions:

Medicare Medicaid Private insurance
Hospital $34.8 $16.2 -$51.0
Physician $14.1 $23.7 -$37.8
Total $48.9 $39.9 -$88.8

Source: "Hospital & Physician Cost Shift: Payment Level Comparison of Medicare, Medicaid and Commercial Payers," Milliman report, December 2008 (link)

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