One factor that contributes to the high cost of health care for individuals and employers is a process called cost-shifting.
Cost shifting occurs when hospitals and other providers try to make up for lost revenue on Public Sector patients (Medicare and Medicaid) by charging Private Sector payers more than the expenses they incur.
In order to control program costs, both the Federal and State governments pay hospitals and other providers less than the cost of care. According to one study, Medicare pays hospitals about 95% of the cost of the care delivered. The reimbursement for Medicaid is even lower.
To make up for this short fall, hospitals and other providers charge Private Sector payers more. A study by the actuarial firm Milliman estimates the cost shift adds $1,800 to the cost of health care per American family.
To put this in terms of hospital profits, the hospital’s profit margin on Medicare is a negative 9.4%, while for Medicaid it is a negative 14.7%. To make up for this, the profit on the commercial population is slightly over 23%.
Not all hospitals shift cost to the private sector. According to a report commissioned by the National Business Group on Health, of 65 U.S. cities studied, 16 hospitals delivered high-value care to Medicare patients with little or no cost shifting to the private population.
Denver was one of nine cities that provided high value care to Medicare patients but did so by charging private payers much more than Medicare.
The problem of cost shifting could get worse.
The expansion in the number of people eligible for Medicaid under the health care reform bill will put further pressure on hospital margins. Medicare will also reduce the annual increase it pays (the Market Basket Adjustment) to hospitals to compensate for rising costs. The Congressional Budget Office estimates the hospital reductions alone will reduce Medicare hospital payments by $113 billion over a ten year period.
A third pressure is the flood of Baby Boomers into the Medicare program.
Taken together, Milliman estimated providers will collect 12% less in the charges they bill over the next 10 years. Milliman goes on to conclude “old strategies of shifting costs onto private insurers simply won’t sustain itself much longer” and reductions in reimbursement will go “straight to the providers’ bottom lines.”
To avoid this, providers will need to significantly improve their efficiency in order to preserve their existing profit margins and standards of care.
Many provider organizations have begun initiatives to do just this and, as the National Business Group on Health reports, some have already succeeded.
Those providers who fail to improve their efficiencies will find it increasingly difficult to compete in a market. We will all suffer if this is the case.
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