Hospitals Shift Costs Three Ways

Safeway Store

The CEO of Safeway Stores recently offered his own company's preventive approaches as an example of what the nation can do to reduce health costs. He's undoubtedly sincere, but he's wrong; he just shifted costs to Medicare. This is only one of three ways, major ways, cost-shifting is misleading us.

Medicare

Average life expectancy is increasing at more than two years per decade, but people always eventually die. Since health care costs are heaviest in the last year or two of life, extending life will soon push nearly all those heavy terminal costs from employer based insurance -- into Medicare. To die at age 64 costs Blue Cross a lot; but to die at 65 just costs Medicare a lot, it doesn't save Society any money. From Safeway's point of view, this effect has the happy outcome that Safeway's health costs are diminished. From the point of view of society, however, lifetime health costs are the same or even greater, because they have been shifted to Medicare. Let's put it another way: dying at age 64 costs the employer and the employees; but dying at 65 costs the taxpayers. Safeway's CEO has definitely improved health care, and accomplished a wonderful result for his employees. But his claim that reduction in his company's premiums reflects a saving of money is at best unproven, and in theory probably incorrect. Increasing longevity is constantly pushing more costs from employers to Medicare, and not just in Safeway; the prospect is that soon substantially all major sickness costs will be assigned to Medicare. (To explain the failure of most employer insurance costs to fall comparably in response to this shift, one must look elsewhere).

But instead of going down that trail, let's look at a second form of cost-shifting. Government payers and monopolists are able to pay hospitals less than actual costs, and get away with it. The worst offenders are state governors administering Medicaid, where the underpayment is roughly 30%, in spite of federal reimbursement to the states for most of it at full price. The resulting profit is used for various state purposes, mainly nursing home reimbursement. For the most part, such diverted funds are used for purposes not easily eliminated, so it is unlikely there will be much cost reduction for government if the scam is acknowledged and eliminated. To avoid bankruptcy, hospitals raise the rates for other health insurance plans -- and the uninsured. Employers are paying for most of it, so they stand to gain from reform, only to face higher state taxes as matters readjust. We have yet to learn where these costs will shift if the federal government takes over the costs of the uninsured. To a major degree, the federal government and its taxpayers are already paying for a lot of this uninsured cost, through the Medicaid shift. So its present dilemma is whether to pay for it twice.

Blue Cross Blue Shield

There's still a third cost-shift. In 1983, Medicare stopped reimbursing hospitals fee-for-service (itemized patient bills are still prepared but are meaningless fictions) and for thirty years has paid by the diagnosis, not the service. Consequently, per beneficiary inpatient costs have only risen 18% in five years, while outpatient costs have risen 47%. Skilled nursing and home care costs are rising even faster.

Not only do these shifts provoke inpatient nursing shortages, they start a war for patients between hospitals and office-based physicians. The difference between a hospital which makes money and one which loses money is based on whether there is enough out-patient revenue to compensate for the hidden tax which the state effectively imposes on hospitals in order to pay for nursing homes. These splashes send off ripples in all directions, enough to fill volumes of commentary.

Just notice, for example, that neither Medicare nor private health insurance pays below costs, if you look at total national balances. Private insurers are paying hospitals 32% more than actual inpatient costs, while Medicare is paying 6% more than national cost. And yet 58% of hospitals are losing money. It could fairly be said we are just looking at a maldistribution of the uninsured, as a cost, and a maldistribution of non-inpatient revenues, as a profit, among the nation's hospitals. To what extent such maldistribution reflects uneven quality, as the losers claim, or inefficiency, as the winners would say, -- merely starts a diversion of attention which could last twenty years while we examine it.

And disruptions enough to take decades to fix. Anyone who believes that ham-fisted reform next month will save money in a situation like this, is dangerous to have around.

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