“Despite the current health care spending crisis, President Obama’s budget does little to significantly reform the existing entitlements (Medicare and Medicaid) and maintains the implementation of Obamacare—which creates two new entitlements and adds more than $1.8 trillion in new spending by 2023.” -Heritage Foundation, The Foundry

The biggest news in this article is the continued war on seniors which isn’t being discussed in any detail by the mainstream media. With newly-proposed drug “rebates” (a hidden tax paid by Medicare enrollees) and a new Part B surcharge equivalent to 15% of the average Medigap premium, seniors will be disproportionally impacted – just as the Obama administration is gutting the Medicare Advantage program, forcing many seniors back into Original Medicare. So much for choice!

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probably rise to more than $2T within the next year or so, unless the entire statute is declared unconstitutional or repealed).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.

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.