One of the most frequently cited ways that insurers used to reduce costs for the new ACA compliant plans was to engineer new provider networks, primarily HMOs, with lower fee-for-service reimbursements, referred to as  per-member-per-month arrangements. These networks were reviewed at the state level for adequacy. In fact, the new networks were substantially smaller, as many physicians opted out of them due to reduced reimbursement rates or capitation necessitated by the new rules carriers must operate under due to Obamacare.

The federal government decided that this won’t be acceptable for 2015.  In a draft letter from the Centers for Medicare & Medicaid Services (CMS), insurers will be required to include 30% of “essential community providers” (ESPs) in their network.

ESPs serve primarily “underserved” populations, including community health centers, HIV/AIDS clinics, family planning clinics and children’s hospitals. From Insurance Business: “In order to assure this is the case, CMS plans to establish its own process for certifying adequate provider networks, cutting out the role of state regulators.” See the full story here.

CMS, in 2013, stated that, for 2014, they would “rely on state analyses and recommendations when the state has the authority and means to assess issuer network adequacy.” See the full text of the earlier guidance here. For 2015, with CMS expanding the ESP requirement,this will likely increase premiums further, due to an increase in network providers mandated by CMS.

Other changes that will have a cost effect on premiums include changes to stand-alone dental plans, and a new requirement to pay for a 30-day supply of any new drug that a new customer had been taking—even if the drug would not have ordinarily been covered.  For the complete 2015 guidance, go here.

Insurers are rightfully concerned about the new requirements, with America’s Health Insurance Plans (AHIP) already expressing its disapproval in comments filed on the proposed changes. Insurers have just weeks to present their changes, with some deadlines beginning in April of 2014.

Health industry officials say Obamacare premiums will likely double, and in some cases triple, in certain parts of the country next year, in part because of the flawed launch of the new exchange marketplaces mandated under The Affordable Care Act. Announcements of rate hikes could come within months, with the most significant cause of rate increases related to projections about the number of young healthy individuals and families who would enroll, which have proved to be way off the mark.

The projection of double or triple-rate increases fly in the face of remarks by HHS Secretary Kathleen Sebelius, who said that “the [rate] increases are far less significant than what they were prior to the Affordable Care Act,” in testimony before the House Ways and Means Committee last week. This runs contrary to the way health insurance industry officials view rates in the coming year.

We’ve all been hearing about how younger people aren’t signing up in anywhere near the numbers needed or projected. So, why are young people important? In a phrase: adverse selection, which means, far more older, sicker people than younger, healthier ones in the pool, which creates – wait for it – higher claims costs that are almost certainly not supportable by current premiums.

In an article entitled Young Invincibles Are Killing Obamacare, Megan McArdle writes for Bloomberg View: “Young healthy people, and a lot of them, are needed to keep the market stable and premiums low. As we head into the final few weeks, we have a pretty good idea of how many young healthy people there will be, and the answer is: a whole lot fewer than the healthcare wonks were expecting.” Unfortunately, her dismissive analysis of the coming “death spiral” of Obamacare was flawed, even if she herself says that reaching anywhere near projections for young enrollees is “not likely”. Surprisingly, she concludes: “… it is now probably impossible to achieve the demographic mix that the government has been forecasting. And keeping it from happening may well prove very expensive for the federal government”.

How expensive? In his blog ACA Death Spiral, Seth Chandler, a law professor at the University of Houston Law Center, writes a thoughtful analysis on the Kaiser Family Foundation study of early, low enrollment of younger participants in Obamacare, cited by Ms. McArdle in her column. His analysis and conclusion is posted as “The Kaiser analysis of ACA enrollment has problems”, and is a good, if somewhat dense, analysis of how difficult it is to make an accurate projection, and why the projected deficit in insurer profits isn’t 2.4%, as projected by KFF, but “rather a  [deficit] projection of 4.5%”.

This is not good news for premiums, or for costs related to Obamacare that the federal government will be required to pay for. With rates for 2015 likely being filed this summer for approval prior to 2014 open enrollment, it increasingly looks like Obamacare will be the election year issue of 2014.

Kaiser Health News is reporting that the Obama administration is preparing to implement yet another rule change in the rollout of Obamacare that would relax the enforcement of the medical loss ratio (MLR) provision for health insurers.

To review:  The MLR provision, which took effect in 2012, requires all insurers in the individual and small-group  health insurance market to spend 80% of every insurance premium dollar (85% for insurers in the large-group market) on medical care and expenses for customers, according to specific guidelines developed by the government. Only the remaining percentage of 15-20% can be used for administrative costs and profits. If an insurer does not meet its minimum-loss ratio, it must issue a rebate to its customers.

From Heritage.org: “In the Federal Register, the Department of Health and Human Services signaled it may give insurers a temporary break on the ratio requirements, citing “the special circumstances” of the disastrous launch of Obamacare’s federal exchange website (HealthCare.gov). The administration also made other last-minute political changes during open enrollment, which ends on March 31.”

The minimum-loss provisions have been roundly criticized in this and other forums, as insurers would have little reason to manage claims costs below the MLR, since they will be penalized for doing so. It essentially sets the allowable limit for profit, regardless of how efficient or how successful a carrier is. In other words, health insurance carriers are regulated as utilities (a concept I first ran across in a well-known industry publication more than fifteen years ago).

The issue appears to be that insurer costs relating to the botched launch of Obamacare will make it difficult if not impossible to meet the MLR. Of course, at that point, if losses due to claims and other costs exceed revenue (likely, in my opinion), then the next big crisis will be “risk corridors”, which will compensate health insurance carriers for unanticipated losses. An understanding of this can be found here. And yes, it is a bailout, since the government agreed to compensate insurance carriers, who are required to meet claims and loss guidelines mandated by the government, for losses under The Affordable Care Act.

That it is considered to be a bailout by conservatives and not-a-bailout by progressives is a given. The reality is that the taxpayer is on the hook for outflows from companies who agreed to participate in the health insurance exchanges, if inflows don’t meet requirements for claims and costs (very likely, given that much lower numbers of previously-uninsured applicants, as well as applicants who are in the younger ages that the plan requires, have actually enrolled in Obamacare). In fact, many in the media get it completely wrong, as detailed here.

It is puzzling to me why some Republicans are quick to introduce legislation forbidding insurer compensation (known as the risk-corridor provisions) for losses incurred in meeting the requirements of Obamacare. They’d be better off simply allowing the Act to come apart on its own, which is what will happen, given the amount of panicked fiddling that is occurring with its implementation, and replacing it with something that will work, minus all of the social re-engineering. Eliminating the risk corridor provisions of Obamacare will simply bankrupt most carriers who agreed to participate in the exchanges, since they will be unable to sustain the losses that will occur given the conditions as they exist “in real-ville”. It’s been obvious for some time that the estimated number of uninsured, by most left-of-center pundits and think tanks, including FamiliesUSA, was optimistic; those numbers were used to justify and support all of the projections needed to make Obamacare work. That it isn’t working shouldn’t now be a surprise, and bankrupting insurers will simply provide Democrats with the end game they’ve always wanted: the death of the private health insurance market. Republicans should brandish the “no bailouts!” banner with great trepidation.

Today, The Wall Street Journal reports on  Obamacare’s secret mandate exemption. An amazing read!

A few choice quotes below:

“last week the Administration quietly excused millions of people from the requirement to purchase health insurance ..”

“the mandate suspension was buried in an unrelated rule that was meant to preserve some health plans that don’t comply ..”

“shifting legal benchmarks offer an exemption to everyone who conceivably wants one.”

The article concludes: “The larger point is that there have been so many unilateral executive waivers and delays that ObamaCare must be unrecognizable to its drafters, to the extent they ever knew what the law contained.” Indeed.

Senate Concurrent Resolution 13-002, a measure introduced by Sen. (Dr.) Irene Aguilar, D-Denver, will create a single-payer, government-run health care system in Colorado via the amendment process. Run by a health care “board”, the legislation, if allowed to become law as a constitutional amendment to the Colorado Constitution, would impose a capitated, single-payor health care system in Colorado. By capitated, we mean capping health care expenditures, and reducing, eliminating, or forgoing costs of care: in essence, rationing.

The measure builds on a bill, first proposed, and then shelved, by the Democrats in the run-up to Obamacare. The bill establishes a so-called non-governmental health care authority that on the surface is not part of the Colorado state government, but is in fact controlled by the political structure and funded by payroll tax dollars, estimated to cost around $16 billion yearly once the system is in effect.

The measure, 19 pages long, would provide the authority to seek waivers from the requirements of the Affordable Care Act and would replace it for all Colorado residents. According to a press release from Co-Operate Colorado, a single-issue advocacy group that appears to work closely with Sen. Aguilar on health care issues, the cooperative would “offer comprehensive and accessible health care, including dental, vision, and mental health services”.

OK, there – I said it. It will be an unmitigated disaster. The relationship between The State and The Citizen has now been forever altered. I’m of course speaking of Obamacare, a.k.a. The Affordable Care Act. But, from now on, we’ll just call it Obamacare for short. Has such a great ring – after all, hasn’t The Prez himself now embraced it?

It will not be our place, going forward, to rail against the excesses of the great unwashed masses who really did vote for “stuff”, including “free” health care, such that it is. Rather, it will be our  pleasure to point out all of the unintended (really – unintended? but I jest) consequences of the greatest piece of social engineering that has ever hit a nation, short of the Russian Revolution. Stay tuned, as this is going to get really entertaining – or, perhaps not, depending on your viewpoint (you small business owners, who have just been reclassified as a “large business” – you know what I’m talking about).

Obviously, I’m no fan of this legislation (thankfully, having an opinion isn’t a hangin’ offense – yet). Obamacare is, of course, the opening gambit in the final throes of a complete government takeover of the health care sector – whether five years or twenty years from now. In spite of the near-complete abdication by the media of their responsibility to report what is factual and accurate about Obamacare, some truths have filtered out. So, one of our responsibilities will be to elaborate on these “truths”, in spite of the near-total blackout you’ll get from most in the media, so that you, my dear readers, can begin to understand the enormity of what one-party rule and flagrant “gifting” to minority coalitions can create. Havoc, in other words.

(My sympathies in advance of those who will look back fondly on these pre-Obamacare days of full-time employment – meaning, forty hours a week, that is. Working two part-time jobs is really going to be stimulating!)

Beyond that, there will be numerous changes (hell, I might as well say it – changes in the thousands!) to health insurance, health insurance regulation, health insurance markets, health insurance policies, health insurance coverage, health insurance taxes – you get the idea – over the coming five years, as we rush headlong into the full implementation of Obamacare, which doesn’t fully  land on everyones doorstep until 2018. We will be here, barring some unforeseen event, giving you all of the gruesome details, so that you can watch the unfolding train-wreck with us. Get the popcorn. Lock the door.

By the way, as of this writing, SCOTUS has decided that the Liberty University lawsuit, essentially about religious liberty and the new contraceptive mandates, should be heard, and apparently will be tracked to eventually wind up with the Justices. This may or may not be a side-show: it may give the Court a second bite of the apple when it comes to the constitutionality  of Obamacare. Yawn. I don’t think this is going to change much – I mean, what are we now 0 for 3? – not counting an election. I feel somewhat better about the Courts’ recent decision (9-0) regarding religious liberty, but beyond that, I don’t see this impacting the roll-out of Obamacare except in certain narrow ways – and this Administration will just do what it wants anyway. And besides – who ever said that Obama wants religious groups, such as the Catholic Church, delivering health care anyway? Better to turn it over to non-profit and completely controllable Accountable Care Organizations. They’re easier to unionize, anyway.

Next week I’ll talk about the new federal health plan option for states that have decided to back-hand the feds and refuse to start their own exchanges. Yes, we finally now have a “public option”. Stay tuned…

Well, I can’t pick horses, either.

With the stunning decision by the Supreme Court of the United States this morning, Chief Justice John Roberts reminded me of the history surrounding another Chief Justice, Earl Warren, appointed by President Dwight D. Eisenhower. Eisenhower, when asked, made the point that many may make about Roberts in the not-too-distant future – that it was, after all, a bad decision to elevate this juror to the Supreme Court, given his now-apparent political unreliability and left-leaning nature. Roberts has now proven, in at least two decisions this year, to be at least as politically unreliable as Justice Warren, and has firmly relabeled the Supreme Court as “the Roberts Court” rather than “the Kennedy Court”, since Justice Kennedy sided with the minority, all conservative, in the dissent to the bizarre and unsupported decision concerning the Affordable Care Act. Chief Justice Roberts, flatly, sided with the liberals on the Court in upholding the constitutionality of The Affordable Care Act.

It’s not as if the Court hasn’t previously made law out of whole cloth: but what’s interesting about this decision is that Mr. Roberts has essentially told the Obama Administration, and the country, that, while the individual mandate exceeds the Commerce Clause authority, the mandate can and will be considered a tax, something that the Administration itself argued wasn’t the case, until it had to be argued, and then promptly reversed itself, again, during oral arguments before the Justices. Chief Justice Roberts in essence said, yes, I think this is a tax, notwithstanding the Solicitor Generals’ previous denial, and as such you can proceed. He did what all Constitutionalists fear: he warped reality and invented law, conveniently, to advance an ideological position, from the bench.

The Affordable Care Act now becomes the biggest issue of this Presidential election, or perhaps any election since 1936. While Republicans have always espoused “repeal and replace” as the ultimate solution, in light of the devastation wrought by this decision, Republicans will be galvanized (or should be!) like never before to do just that, as, given the breathtaking depth and breadth of the societal changes wrought by Obamacare, they face the prospect of permanent isolation in the wilderness of politics, or, alternatively, complete disintegration as a political organization, if Mr. Obama is handed another four years to build a permanent majority of government-dependent voters who will fully embrace a government-dominated socialist society that promises them everything at the expense of the producers who, flatly, create the bounty we now enjoy. With this election, and this enormous landmark legislation now seemingly upheld, voters will be handed a stark contrast, one that favors liberty and individual freedom and one that favors “equality” and government intrusion. It is not inconceivable that, if Mr. Obama is re-elected, a permanent Democratic majority will come into power for decades, based only on the power of a newly created “dependency class” to continue voting to receive government largesse. And the bottom line is that, if you want to see the outcome of such a majority, take a good look at Europe today.

“That sound you hear is the marching of libertarians into Camp Romney, with noses held, knowing that the libertarian and conservative coalitions must unite to defeat Obama and Obamacare.” – Eric Erickson, Redstate.com

As I’ve written before, one of  the central defenses for the Affordable Care Act, as put forth by the Administration and echoed by all of it’s supporters, is the case for uncompensated care. Briefly stated, the Administration argued that uninsured patients drive up the costs of the delivery of health care sharply, and that cost is borne by all who are insured – hence, the primary reason for Obamacare.

I’ve also stated that this is, in fact, a canard – the total cost of uncompensated care is a scant fraction of the cost of Obamacare, now estimated by the Congressional Budget Office at somewhere around $1.76T for the first ten years (and this figure will rise, probably rise to more than $2T within the next year or so, unless the entire statute is declared unconstitutional or repealed). Spending the functional equivalent of $2T to fix a problem of less than $100B is not efficient – it’s one that only the federal government would develop, support, and champion.

The data that was used to make much of the argument around uncompensated care comes from a study done by FamiliesUSA, an ultra-left wing group that is on record as supporting a single-payor system. In that study, published in 2009, the cost of uncompensated care was estimated at $43 billion, the figure used by the Obamacare lawyers in it’s brief before the Supreme Court.

But as it turns out, there are major flaws in that study, and it should come as no surprise to anyone who follows how the left uses suspect statistics and shady reasoning to advance an agenda, the flaws inflate the costs to arrive at a foregone conclusion. David Hogberg, writing for Investors Business Daily Online, details the specifics here.

Researchers, led by Jack Hadley at the Urban Institute, examined uncompensated care and arrived at a different conclusion in the Kaiser Commission on Medicaid and the Uninsured: that uncompensated care was “most likely about $8 billion. Given that total private health insurance expenditures in 2008 are estimated to be $829.9 billion (from NHEA projections), the amount potentially associated with cost-shifting represents less than one percent of private health insurance costs.” Documented here.

If the feds were really serious about “uncompensated care”, they’d look no further than their own under-compensated reimbursement scheme for Medicare, which dictates what Washington pays for its care under Medicare and other social welfare medical programs – which is in fact a far greater cost-shift to the private market than the care that is delivered to the uninsured. The accounting gimmick used – price fixing by Medicare through the HHS – transfers billions in costs directly to every American with a health insurance policy, and dwarfs any amount spent for uncompensated care that the Administration is touting as its primary reason for Obamacare.

The Supreme Court of the United States, beginning this week, will hear arguments in the case against Obamacare, brought by 26 states against the federal government. Their legal ruling, due sometime this summer, will determine, in the words of David B. Rivkin and Lee A. Casey, writing in an op-ed in the pages of The Wall Street Journal, “the Constitution’s structural guarantees of individual liberty, which limit government power and ensure political accountability by dividing that power between federal and state authorities”.

In their article, published today, attorney’s Rivkin and Casey may be giving us a sneak peek at how Paul Clement, the attorney arguing against Obamacare, will craft his arguments to the Court. Mr. Clement is the former United States solicitor general charged with arguing that Obamacare “represents an unprecedented overreach into the personal lives of Americans”, according to Jess Bravin, writing in the WSJ (“Courtly Battle in Health Case”). Mr. Clement is lead counsel in the case, brought by 26 states to overturn the Affordable Care Act, notoriously known as Obamacare.

Given that there are any number of ways, on any number of separate issues, that the Supremes could rule, I will refrain from making any predictions. It is interesting to note, though, that health insurers, who have been reluctantly complicit in the birth of Obamacare, the major negotiating point in their favor being the individual mandate, presented the court with a brief that was remarkably neutral, suggesting that, if the individual mandate is overturned, then the entire bill must be overturned. This is nothing more than window dressing: the insurers know that their survival, at least at the time, required a healthy dose of government-imposed regulation on their business model, turning them into crony-capitalist utilities in exchange for the chance to continue profiting from a system that many Democrat legislators have decried as “evil” and have vowed to destroy. What this means is that insurers signed on to Obamacare as soon as the government promised them that everyone must be on coverage, essentially mandating a compulsory market (with compulsory profit, too). As it turns out, given the kind of remarks we’ve heard from former Administration officials and the Secretary of HHS, their flight to regulatory safety was ill-advised and will result in their ultimate demise. Perhaps they should have stood their ground and made a fight for it, rather than make a pact with the devil.

The Department of Health and Human Services (HHS) has just announced that any and all FDA approved “contraceptive methods, sterilization procedures, and patient education and counseling for women with reproductive capacity,” will be provided under ObamaCare “without cost” in college/student-based health plans, and for women of college age but not attending school.

Senators John Barrasso, R-WY, and  Sen. Tom Coburn, R-OK, have co-authored a report detailing the disaster known as Obamacare. Senators Barrasso and Coburn have a unique perspective on the emerging octopus of centralized/federalized health insurance: they are both physicians.

Some excerpts from the 38 page report:

• Warned the health care law could eliminate about 788,000 jobs. CBO Director Doug Elmendorf confirmed in Congressional testimony that the health care law would reduce the workforce by approximately 800,000 jobs.
• Concluded the Medicaid expansion’s “extra costs forced upon state taxpayers and state governments could climb into the hundreds of billions of dollars”. In fact, according to a tally of state estimates, the law will impose about $120 billion in additional costs on states, just in the first few years of the law’s implementation.
• Explained the Community Living Assistance Services and Support (CLASS) program was “a budget gimmick to appear to offset new spending” and warned the program could “expose taxpayers to tens of billions of dollars of loss” because it was would eventually collapse. The Department of Health and Human Services (HHS) has admitted CLASS was unworkable, and shuttered the program.
• Cautioned “the appearance of Medicare‘s extended solvency is actually only a mirage. In reality, under the new law, Medicare‘s unfunded liabilities will grow worse”. The Medicare Actuary late concluded that Medicare’s unfunded liabilities are made worse by about $2 trillion under the law.
• Warned that “as the new law is being implemented, millions of Americans are in danger of losing their current health insurance.” HHS concluded that, under the law, between 39 and 69 percent of businesses will lose their status as “grandfathered health plans”—plans largely unaffected by the law’s new mandates. HHS estimates by 2013, up to 80 percent of small businesses will lose their grandfather status.
• Noted that “rather than fixing an issue everyone in Congress agreed was a problem, Congressional leaders left the doc fix out of the final health bill” because of “budgetary shenanigans” to decrease the appearance of the bill’s cost. We warned that this policy omission “could endanger access to care for millions of seniors. In fact, Congress has already had to intervene several times to prevent severe cuts to physician reimbursements that would harm seniors’ access to care.

An eye opening report that every employee worried about their employer abandoning their health care, and every employer worried about the spiraling cost of benefits, should read.

Many people are puzzled by media reports that center on “the doc fix” and other aspects of the Medicare and Medicaid programs, and this is to be expected, given that media outlets do a spectacularly poor job of explaining any aspect of federal health care policy, in my opinion. I’m writing this article in an attempt to broadly illustrate a basic tenet of federal health care spending, namely, price controls, and the cost-shifting to private patients that occurs because of centralized price-fixing at the federal level. I submit that this centralized pricing, which purchases on demand and without contract, health care at below-market prices, is a hidden tax passed directly to all Americans who purchase health care, or health insurance, and is a major driver, if not THE major driver, in ever increasing health care costs.

[Disclaimer: federal health care spending is so complex and obtuse that it’s extremely easy for the average person to get “lost in the weeds”, a situation tailor-made for policy wonks who feel we are all too ignorant to draw basic conclusions without their help.  This article is intended to cut through the chaff and provide a common-sense rationale for much of the current premium pricing debacle that we face. Frankly, given the behavior of regulators at the federal level, it’s astonishing to me that private insurers aren’t forced to demand double digit premium increases yearly from private payors just to stay in business.]

This column is in direct response to a clients’ question: how is the federal government purchasing health care at below-market rates? The client asked me to send him additional information on this topic, since I brought it up in a meeting. I must first confess that I provided him with a statistic, incorrectly stated: I inadvertently transposed a percentage when detailing the true costs of  federal health care costs as compared to the costs related to the private delivery of health care. I’ll fix that with this post, and provide substantial ammunition to support the idea that it is imperative that the federal government get out of the business of centralized price-controls in the health care arena. Sadly, it is very unlikely that this will happen, as the two sides on the issue are separated by a divide the size of the Grand Canyon on the heart of the matter – how to pay for and deliver health care to the nation, and by extension either control health care delivery at the federal level via central planning, or allow the free-market, and private insurers, working in harmony (important consideration) with various regulators to provide solutions to the health care woes of the nation with insurance programs that avoid rationing and expand care.

On one hand, progressive Democrats view insurance as evil, and wish to have health care costs borne by a progressive system based on a social policy of wealth redistribution through the tax code, the word “insurance” not being in their vocabulary. Conservative Republicans view health care, on the other hand,  as a free-market product that insurers, using standard reserve techniques, can provide far more economically and efficiently, without the centralization or government control demanded by progressives in their march towards utopia (a rationed utopia, at that). And it should be pointed out that Democrats have done a superb job of forcing the market conditions that have created a health care system in which there is little if any competition, where the federal government pays substantially less than the true cost of care for its Medicare/Medicaid programs, and where continued market and pricing stresses, literally created by Democrats intent on their end goal of a single-payor system, provide the perfect excuse for the federal government to proclaim that it alone can save the day, when in fact they have created the very problem they will now take pains to “fix”. But we are getting into partisan waters here, and it’s best to stick to the facts, and answer my clients’ question.

That the federal government purchases a great deal of the nations’ health care is beyond dispute. According to the Department of Justice, federal, state, and local governments pay for approximately 45 percent of total U.S. expenditures on health care. This figure, first published in 2003, is likely higher today. The problem is that Congress, rather than any free-market mechanism, approves the reimbursement schemes for much of that care – and we all know how well centrally planned price-fixing schemes usually work out. And herein lies the true problem: the controversy concerning Medicare or Medicaid isn’t that it under-pays health care providers and facilities, but that the under-payment is over-stated, or even, depending on whom you are listening or talking to, non-existent or even irrelevant. In fact, there does appear to be two schools of thought, which, coincidentally, mirror the two different philosophies of the left & the right. The left views the “underpayment” of costs related to its share of health care costs as unimportant, even illusory, due to the scale of care they are “purchasing”, and point to the complex (and politically tainted) process of Medicare price-setting as proof that all’s well with the way the feds pay for care. To explain, Medicare’s physician and other fee rates are based on the relative cost of providing services determined by what’s known as the Resource-Based Relative Value Scale (RBRVS), a system of “comparable worth” in medicine, and is itself based on “the objective theory of value, one of the fundamental tenets of Marxist economics”. This cumbersome process, updated every 5 years or so, is guided by input from the AMA, as well as others, but is ultimately set by the federal government, under the Federal Health Care Financing Administration, part of HHS, and then submitted to Congress. In the words of Michael F. Cannon, director of health policy studies at the Cato Institute, “The Medicare bureaucracy is somehow supposed to divine the correct prices for more than 7,000 distinct physician services in each of Medicare’s 89 physician-payment regions (yep, some 623,000 separate prices). And – unlike market prices – these price controls don’t automatically adjust to reflect the value of goods and services.” Central planning, at its finest.

The conservative right enthusiastically supports a contrarian view, and points out that “the hydraulics of health care“, which the left takes great pains to vigorously support as somehow necessary and equitable, and at the same time labels as overblown, is real and impacts every non-federal health care transaction. This controversy serves the left well, as it obscures the true costs associated with below-market federal reimbursement. It is, indeed, the 800 pound gorilla in the room.

To say that there is a lack of any consensus would be an understatement, and this explains the lack of clarity when discussing the impact of cost-shifting. And there is plenty of evidence, outside of left-wing policy wonks trying to re-define “costs” and “shifting”, to support the notion that federal reimbursement is below-market. Much of the evidence, as illustrated by this report, is troubling: cost shifting as a percentage of premium more than tripled over a five year time period, and appears to me to be accelerating. In fact, “employers and consumers in California pay up to 10 percent more for health care coverage because of government underpayments”, according to data compiled by Milliman for Blue Shield of California a few years ago. Even the Colorado Division of Insurance, in its most recent Annual Report, acknowledges that “..members of..Medicaid and Medicare.. typically pay less than commercially insured populations” when discussing cost-shifting.

So, an acknowledgement that cost-shifting is real and has an impact on, at least, premiums. But, how much is that impact, and how much more do private carriers and health care facilities wind up paying? In this study, The Lewin Group addresses cost-shifting relative to Medicare and Medicaid reimbursement. Lewin defined “cost-shift” as “not simply a set of differential prices as seen in the airline industry, but rather higher prices (above cost) systematically paid by one payer group to offset lower prices (below cost) paid by another payer group”[italics mine]. The study goes on to show a payment “hydraulic” (payment-to-cost-ratio) of 1.22 for private payers, compared with .95 for Medicare and .92 for Medicaid (1.00 would be cost). With a cost advantage of 5 to 7% below cost, and private insurers obligated to provide a profit to physicians and carriers in response, this represents a 30% increase in private payor costs compared to federal programs. In another article, entitled “At the Intersection of Health, Health Care and Policy”, published in Health Affairs, the authors acknowledge the Lewin Study and make note of  “The Cost Shift As A Form Of Premium Taxation” :

• “The cost-shifting dynamic places hospitals in the unenviable position of playing the role of private-sector tax collectors, to maintain their financial solvency. To the extent that public programs are not adequately funded through general tax revenues and trust funds, and the uninsured get care for which they do not fully pay, hospitals must attempt to “tax” the privately insured to make up the shortfall. Some of this shortfall is absorbed by increased hospital efficiency or a decreased emphasis on hospitals’ social missions, but much of the difference eventually resurfaces in the form of increased health insurance premiums. Employers indirectly fund the cost-shifting tax through their purchase of health insurance. They bear not only the cost of health care insurance for their employees but also a portion of the under- and uncompensated care pool. This is one reason why—aside from the underwriting cycle—private-sector employers’ payments rise faster than underlying health care costs..”

This hidden tax is estimated at 32% by some observers (in 2007, hospital payments for the care of privately insured people were equal to about 132 percent of their actual costs of care; Shields, House Ways & Means hearings). And the “cost shift” appears to be increasing: In 2007, Medicare paid on average only 91 percent of the actual cost of hospital care for Medicare patients, as shown in the original Milliman report.

America’s Health Insurance Plans (AHIP), through a spokesman, goes further: “Right now, Medicare only reimburses hospitals about 85% of their cost. It’s employees and families that are paying $1500 a year to subsidize the Medicare program.” Given the 20% or higher differential that private payors, through their insurers, pay, this translates into an almost 40% differential between what Medicare reimburses and what private payors are expected to pay for the same services.

The consensus, then, is that, even if the left characterizes “cost-shifting” as an exercise akin to differential pricing with airline tickets or new cars, pricing hydraulics exist in health care, made all the more problematic by price controls that are neither realistic or flexible, and serve to exacerbate the current difficulty with fewer and fewer insureds paying a higher and higher tariff for more and more people who, by virture of mandated government cost-shifting in the form of reduced payments for services, are provided with services at less-than-cost, primarily to save the federal government from the true cost of its social welfare programs. This, then, is the “taxation without representation” present in your health insurance premiums.

I’ll address “the doc fix” is another post, since the reduction in Medicare payments for physicians services relates directly to the hydraulics of health care, and was a central feature in the purported “savings” that Obamacare was to provide in its first ten years – an estimate that has already been wiped out with further CBO estimates, not to mention Congress’ restoring the cuts to avoid political damage to a powerful lobbying group.