qotd: Widening gap between private and public payments for hospital care

Health Affairs
December 2015
The Growing Difference Between Public And Private Payment Rates For
Inpatient Hospital Care
By Thomas M. Selden, Zeynal Karaca, Patricia Keenan, Chapin White, and
Richard Kronick

Medicare's payment rate in 2012 for the average inpatient stay in that
year was, in inflation-adjusted dollars, similar to what Medicare would
have paid in 1996 for the average stay in that year.

During the period 1996–2001, differences in predicted standardized
payment rates were relatively small across primary payers, and payment
rate differences remained relatively constant. Since 2001, however,
payment rates for stays covered by private health insurance have
diverged sharply from payment rates for those covered by Medicare and
Medicaid.

The predicted percentage difference between the rates of private
insurers and those of Medicare has increased substantially over time. In
1996 private insurers paid 106.1 percent of Medicare payment rates, a
payment rate difference of 6.1 percent. This payment difference rose to
64.1 percent in 2011 and 75.3 percent in 2012. Medicaid payment rates
averaged approximately 90 percent of Medicare payment rates throughout
the study period, with differences in most years that were not
significantly different from zero.

Our findings can offer insights into policy prescriptions, including the
recent recommendation to cap private insurance payments at 125 percent
of Medicare rates. Our findings suggest that such a cap would affect far
more than just the most egregious cases.

Our findings also highlight the following important questions for
further research. To what extent, if at all, is the private-public
differential due to cost shifting from public to private payers, given
the growing body of evidence that challenges the existence of such cost
shifting? Or to what extent is the differential due to hospitals'
exploiting market concentration or engaging in a technological "arms
race," in which they invest heavily in expensive diagnostic and surgical
equipment? To what extent have the declines in private inpatient
hospital stays between 2008 and 2012 (from 13.6 million stays to 11.2
million) contributed to the widening differential? More important, what
are the impacts of the growing differential on consumers? Has the
differential had any effect on access to or quality of care for public
patients, or on private patients' financial burdens?

http://content.healthaffairs.org/content/34/12/2147.full.pdf

***

The Milbank Quarterly
March 2011
How Much Do Hospitals Cost Shift? A Review of the Evidence
By Austin B Frakt

From the Discussion

Cost shifting is just one of many possible responses to shortfalls in
public payments to hospitals (another is cost cutting). Moreover,
private payment-to-cost margins change for many reasons other than cost
shifting (another is changes in the balance between hospitals' and
health plans' market power). Indeed, the theoretical literature on the
subject shows that cost shifting can take place only if hospitals both
possess market power and have not fully exploited it. This limits both
the conditions under which cost shifting is possible and its extent.
Once market power is fully exploited, as it would be by a
profit-maximizing firm, there is no more room for cost shifting. The
theoretical literature also reveals the potential endogeneity of public
prices in models of private ones, the role of costs and that of
hospitals' and plans' market power.

Given these findings, what can be said about the likelihood of cost
shifting in the future? Relative to the period in which cost shifting is
most likely to have occurred at a relatively high rate (when indemnity
plans were the norm, from 1987 to 1992), plans now are better able to
resist price increases due to network-based contracting. Conversely,
relative to the period in which there was likely no cost shifting (when
tightly managed care dominated in the mid-1990s), price competition is
now weaker because consumers are less accepting of networks with the
same level of restrictions as existed then. To the extent that hospitals
still have some unexploited market power, perhaps some cost shifting is
possible, but given the results of papers I reviewed, it is likely to be
at a rate closer to twenty cents on the dollar than the
dollar-for-dollar rate suggested by industry-funded reports.

The exploitation of market power is the privilege of private industry,
subject to antitrust regulation, from which our market-based health
system is not immune. Plans' and hospitals' market power may shift again
with the new health reform law. The PPACA calls for pilot programs of
the accountable care organization (ACO) payment model, which will
compensate integrated groups of providers on a capitated basis for all
the care for a population (Gold 2010). This will encourage providers to
integrate, possibly increasing their market power (Frakt 2010b;
Reinhardt 2010). If plans' market power holds constant or is weakened,
it is likely that private prices will increase, even without changes in
public payments.

http://www.ncbi.nlm.nih.gov/pmc/articles/PMC3160596/

***


Comment by Don McCanne

Medicare has long been credited with being a more efficient purchaser of
health care than has the private insurance industry. Evidence of that
has been lower payments made by Medicare compared to the higher payments
made by private insurers.

Private insurers have claimed that lower Medicare payments have shifted
costs to the private insurers. But Austin Frakt and others have shown us
that it is primarily the market power of the hospitals and provider
groups that have driven up private insurer payments, while Medicare
payments have held steady independently of what private insurers are paying.

The report from the Agency for Healthcare Research and Quality (AHRQ),
published in the current issue of Health Affairs, confirms that Medicare
payments, adjusted for inflation, have held steady for the last two
decades, whereas private insurance payments have continued upwards at an
increasing rate, such that, as of 2012, private insurers pay 75 percent
more than Medicare.

Medicaid, another public payer, has maintained payment rates at about 90
percent of Medicare's, also at a steady rate adjusted for inflation.

Where should the balance be? Our public payers have been able to hold
rate increases at the level of inflation, and that benefits the
taxpayers. Our private insurers have been able to infuse more money into
the health care delivery system, and that benefits the providers of
health care. But private insurers pay higher rates at the cost of higher
premiums, benefit reductions, and greater patient cost sharing. The
private insurers have been much less effective in moderating the high
rate of health care inflation, and that harms patients financially.

We should be concerned about the movement on multiple fronts to further
privatize public health insurance programs. Medicaid is being shifted to
private managed care programs. Enrollment in private Medicare Advantage
plans continues to expand. Efforts to convert Medicare into a premium
support program (vouchers to purchase private plans) are intensifying.
Of course, private plans place a very costly administrative burden on
our health care system. Do we really went to do this when the private
insurers have already proven to us that they cannot adequately control
health care prices?

Health care providers do not think that they are being paid too much by
the private insurers. But when they see how much less the public
insurers - Medicare and Medicaid - are paying them, they are likely to
join the chorus of demanding that our public insurers be replaced with
private plans.

Under further privatization of our health care financing, it will be the
patients who are stuck with the public (tax) and private (premiums and
cost sharing) bills. The pain would be much less with a well designed
single payer national health program.