Medicare, Medicaid underpayments cost consumers, employers $90B

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Low Medicare and Medicaid reimbursements to hospitals and physicians have lead to significantly higher health insurance costs for consumers and employers, according to a study released by Milliman.  

The report found that annual healthcare spending for an average family of four is $1,788 higher than it would be if Medicare, Medicaid and private employers paid hospitals and physicians similar rates, with total provider reimbursement unchanged.

The continued underpayment of providers by public programs could has devastating consequences for families and employers that are struggling to afford healthcare coverage, Milliman said. The underpayments create a payment gap to hospitals and physicians that privately insured employers and consumers must close through a ‘cost shift’ or ‘hidden tax.’

Milliman measured the cost shift as the difference between actual payment rates and average payment rates for Medicare, Medicaid and private payors; total payment to hospitals and physicians is held constant. The study did not assess appropriate levels of payment, but rather the disparities among current payment rates.

The study found that cost shifting:

  • Adds about $1,512, or 10.6 percent, to the average premium for a family of four;
  • Of this amount, employers pay about $1,115 and the employee share is $397; and
  • Families pay an additional $276 in coinsurance and deductibles.

“As businesses struggle to cut costs to match sagging revenues, employee health benefits are increasingly at risk,” said Rich Umbdenstock, president and CEO of the American Hospital Association (AHA). “The faltering economy makes fair payment by Medicare and Medicaid more important than ever.”

In 2006, the hospital cost shift from Medicare was $34.8 billion and $16.2 billion for Medicaid.  In 2007, the physician cost shift was $14.1 billion for Medicare and $23.7 billion for Medicaid. Taken together, the estimated annual cost shift is $88.8 billion.

Overall, report found that the cost shift represents 15 percent of the current amount spent by commercial payers on hospitals and physicians. If there were no cost shift, hospital and physician costs for privately insured patients would be 15 percent lower.
“This study quantifies the ‘hidden tax’ that cost-shifting imposes on families and employers across the nation,” said Karen Ignagni, president and CEO of America's Health Insurance Plans (AHIP). “As Congress and the new administration focus on health care reform, they should confront this issue.”

Milliman noted that hospitals and physicians in some areas may not be able to offset low public payments with higher commercial payments creating additional financial pressures. In addition to the hidden tax, the privately insured also must bear the costs associated with bad debt and charity care provided to individuals without insurance, which is not separately quantified in the report.

Milliman is an independent consulting firm that was engaged by AHIP, AHA, Blue Cross Blue Shield Association and Premera Blue Cross to develop a best estimate of the U.S. cost shift. Hospital findings are based on analysis of the 2006 AHA Survey data, which. includes data on the 4,927 short-term, community hospitals across the country.  The data represent each hospital's fiscal year 2006 results. The physician findings are based on 2007 fee schedule levels for Medicare, Medicaid and commercial payors.