DnFree raised an interesting point in yesterday’s comments:
Both Medicare and Medicaid seem to underpay for providers and procedures. This seems unsustainable and unfair to me. I look at my Medicare EOB and I see a charge for $500 that Medicare paid $100 for, or a blood test for $100 that Medicare paid $12 for. It seems to me that private insurers greatly overpay because of how little Medicare pays. Why don’t the government programs pay closer to what the service actually costs, considering the expense of an office, a staff, supplies, etc.?
There are a couple of things going on here. First, the billed amount rarely if ever is an actual number. It is a fantasy that is only slightly more realistic and likely to be achieved than the thoughts of teenage boys on a Friday night. The service providers have every reason to ask high. Some times they have contracts where private insurers pay a percentage of billed charges. Some times they have contracts where insurers (private and public) will pay the lower of either the contracted rate or the charged rate. Some times the service is provided to people without insurance and are paying cash so a high price is either the actual price, the anchor point for a negotiation or a tax minimization strategy. But generally, a billed price is never the price that the clinician or their employer ever expects to actually get paid.
Secondly, costs are endogenous. This is a geeky way of saying that costs are influenced by prices. Some clinics serve very well insured/upper income individuals so there are automatic pianos in the lobby and fancy comfy chairs in the lounge while their is a patient concierage navigating the entire process. Other clinics serve poorer populations where the quality of care is good but the amenity package is skimpier. These two clinics will have very different cost structures. Should Medicare pay for the difference in cost structures? More importantly, Medicare payment policy is calculated to pay roughly average cost of a service. Sometimes Medicare is a little bit above that target and sometimes it is a little bit below. Medicaid payment policy varies by state, but it is usually trying to pay somewhere between marginal cost and average cost most of the time.
Finally, DnFree brings up that since government programs pay too low, private insurers pay too much.
This is known as the “cost-shifting” hypothesis. The theory is that hospitals (and other clinicians) have a revenue target in mind and if they can’t a price from one payer, they’ll get a price from the other pays. Austin Frakt has the meta-analysis of the hypothesis:
Most of the analyses and commentary based on descriptive, industrywide hospital payment-to-cost margins by payer provide a false impression that cost shifting is a large and pervasive phenomenon. More careful theoretical and empirical examinations suggest that cost shifting can and has occurred, but usually at a relatively low rate. Margin changes also are strongly influenced by the evolution of hospital and health plan market structures and changes in underlying costs.
Cost shifting, if it happens, barely happens.
The problem with the cost-shifting hypothesis is that it assumes that hedge fund owned hospitals are not acting like aggressive profit maximizers and instead act like profit and revenue satisficers. That is one weird ass assumption to make. Hospitals are usually trying to get the best price that they can in every negoatiation. If they could get an extra 3% from a private payer, they likely would have gotten that extra 3% without regard to what Medicare or Medicaid is paying.
germy shoemangler
Baud
I used to fantasize about over billing for my gigolo services.
Buskertype
A fun thing I used to do before I was insured was to ask people at the hospital/doctors office how much it was going to cost.
stupid fucking system
satby
Insurance is such a cluster-fuck on charges vs. reimbursements in optical care compared to your description of above, Richard. The main provider, Eyemed, hasn’t raised its reimbursement for a basic exam since the 90s. Since the parent company, Luxottica, also own LensCrafters, and Pearle Vision they have basically a monopoly. And like most insurance, it takes a full time person just to chase down reimbursements. Medicare is no better (they pay for medical eye exams)
I’d like to see the government take over all healthcare insurance, the wasted money in our current system across the board is appalling.
Rusty
I had always assumed there was more wide spread cost shifting. Thanks for clearing that up. It also helps explain why Medicaid expansion matters for rural healthcare. The expansion is sufficient to sustain those health systems. Not taking the expansion leaves less money coming into the system and fixed costs and costs for infrastructure are spread over a smaller base and therefor are more likely to be insufficient. (Leading to things like the closure of rural hospitals, etc.)
karensky
Terrific analysis! I had a compression fracture in a thoracic vertebra last April and it has been a long and frustrating treatment path but I keep making progress with out surgery.
Since I have Medicare A and B I get quarterly notices about what it pays for and what I might have to pay. Very helpful to my mental health!
On the other hand the additional insurance I have sends me print copies of all payments by Medicare and BCBS almost every day as I am still seeing health care providers that include physical therapy. If I had not jumped into insurance land research on my own I would be on anxiety and depression meds!
Ken
I’m trying to think if there’s any other product or service where you can’t find the price up-front, and even if you did it will have no necessary relationship to what you eventually pay. And I don’t think Kenneth Arrow, in his 1963 paper, even needed to use that particular failure of market information.
germy shoemangler
@Buskertype:
Did you ever get an answer?
Argiope
David, speaking of cost-shifting, has anyone done any analysis about the lifetime costs of unnecessary cesareans? Seems to me that one reason we’ve done so little to make practice changes that we KNOW would work (e.g. no electronic fetal monitors for low to average risk births, investing in freestanding birth centers and midwives) is that the long-term costs ( like repeat c/s, adhesion pain and surgeries to address it, the rare ruptured uterus and catastrophic outcome for babies, higher rates of asthma in children) are essentially being shifted to the next insurer since so much of our coverage is employment-based instead of single payer. No one entity has to take responsibility for a lifetime of health/well-being, so primary prevention strategies are underfunded compared to the immediate savings of using one nurse for two labors instead of one:one ratio needed to dispense with electronic fetal monitoring.
ragbatz
Small, independent physician practices seem to lead the charge on claims that “Medicare/Mediaid patients cost me money.” I’ve also seen somewhere that such practices typically receive insurer payments that are about 150% of Medicare payment, rather than larger entities that receive upwards of 200%.
Might entity size change affect the dynamics of possible cost shifting?
teakay
Thanks once again for leading us through the labyrinth that is health care. You are a gifted communicator in addition to being a really smart guy.
Another Scott
Thanks for this very clear and compelling post. The last sentence should be framed.
At work we have research funding competitions every few years. I always harp on “don’t leave any points on the table” for those who have to go through the process. It’s the same thing with hospitals – they know how the system works and will try to grab every available dollar from whatever available basket because it’s all the same color.
Thanks.
Cheers,
Scott.
David Anderson
@Argiope: Really good question.
I don’t know. I have never looked for this answer. And I have mid terms next week so I won’t be looking for the answer.
Argiope
@David Anderson: Ha! I get it. Maybe some future paper?
Buskertype
@germy shoemangler: no. Responses ranged from patronizing to outright hostile, but they never conveyed any information about the price
dnfree
Thanks for this analysis (I was out of town earlier for a medical appointment). It’s still hard for me to believe that a blood test could cost only $12, what Medicare pays. And I have encountered medical offices that have a limit on the number of Medicare patients they will accept.
Rusty’s point about rural hospitals and medical centers is well-taken. Where we lived before, my husband worked for a rural hospital, in the mental health field, which is never well-financed.
Your point about different levels of service (from clinics to deluxe practices) is also good. The difference between areas with higher and lower costs of living is also relevant, most likely. But doctors with huge loans to pay off want to go where the pay will be higher. There are a lot of factors, obviously.
When one of our daughters was newly out of college and didn’t have employer insurance, we paid for a high-deductible Blue Cross-Blue Shield policy for her. She had insurance, but in her mind she was paying for visits out of pocket, so she would tell providers she didn’t have insurance. So she DID pay the listed price. We tried to explain to her that even if they didn’t pay the bill, BCBS might have a negotiated rate that would mean she would pay less. That made absolutely no sense to her.
Áine
I’m an ER doc w experience in revenue cycle management, for background. The biggest problem I see w medicare/medicaid is that they have been stuck in a deflationary trend for 20+ years. what with the SGR and budget neutrality rules, year after year we saw no adjustment — or a negative adjustment — in medicare reimbursement. So a 99203 – new office patient, 30 minutes – paid $94 in 2002 and pays $114 now. But that $94, adjusted for inflation, would be worth like $160 now. And medicare is generally the biggest payer in a doc’s practice. And a clinic based doc certainly will have seen rents, staff salaries, etc increase dramatically over that time. So either the doc can suck up the pay cut out of his or her personal salary, or they can do things like: close their practice to new medicare patients (or cap the number they will see), try to rush through appointments and cram more visits into the day, or otherwise squeeze more efficiency out of operations. All of which certainly negatively impact the patient experience.
Áine
@ragbatz: the rates at which docs contract w commercial insurers varies wildly. Low end is typically 140% of medicare, less in some states. Better contracts can be 200-400% mc. Southern states tend to pay better, for some reason. If there’s a big local presence of a certain insurer (typically linked to a big employer in an area) that can also impact rates, as they need the local docs to be in network. The bigger the practice, generally the better rates they can command. But ironically sometimes a payer will contract at a generous rate for a small practice just bc the practice is small enough they don’t really care; it’s not going to cost them too much money. Agree generally that cost shifting as Austin narrowly defines it does not exactly impact.