The Simple Mathematics of Cost Shift
If you had to identify the single biggest problem with the Affordable Care Act (ObamaCare) what would it be? I’m not talking about what the critics don’t like. I’m considering the bill from a supporter’s point of view.
If you really want the health reform bill to succeed, what’s the biggest obstacle to that success?
Answer: The bill makes promises that are not paid for.
My back-of-the-envelope calculations suggest that for every $2 of promised benefits, only $1 is paid for with tax increases or spending reductions. If the Medicare cuts turn out to be politically impossible, the ratio of benefits to “pay fors” is four to one.
So how do you promise benefits you are unwilling to pay for? Answer: You set up institutional structures you hope will result in the shifting of costs from a group you want to reward to groups you hope will pay for those rewards. In the parlance of health policy, that’s called “cost shifting.” How do you explain this to the groups that will bear the burden?
You deny it ever happened.
“I need more of you” (Think of the “you” as “money”) Per Uwe Reinhardt
More than one-third the cost of the legislation is said to be paid for by a reduction (against trend) in Medicare payments to providers. Yet the administration insists there will be no diminution in quality or access to care for the elderly and the disabled. How is that possible? It isn’t unless the real burden is shifted to other payers. Looking out to midcentury, the ACA envisions that Medicare will pay doctors and hospitals only half of what private payers pay. The bill also envisions a large expansion of Medicaid enrollees, getting a quality of service equal to what everyone else is getting. But Medicaid pays providers less than 60% of what private payers pay. How can the services provided to the elderly, the disabled and the poor be the same as services provided to people who pay as much as twice the fees their plans pay? They can’t — unless costs are shifted so that private-pay patients pay even higher fees in order to subsidize Medicare and Medicaid.
This is only the beginning. The bill envisions an enormous cost shift at the workplace. Employees earning $15 an hour, say, are going to be required to obtain health insurance that costs almost $6 an hour (family coverage). Either they will have to take a pay cut equal to almost half their gross wage or the burden will somehow have to be shifted to other (higher-paid) employees.
There is another type of cost shift anticipated within the newly created health insurance exchanges. With community-rated premiums, healthy people will have to be overcharged so that sicker people can be undercharged.
The entire cost-shifting exercise depends on the reliability of institutions to carry out the redistribution of burden. But suppose they can’t. It’s hard to cost shift from Medicare to non-Medicare patients if the latter are able to see doctors and enter hospitals that do not accept Medicare. Ditto for Medicaid. It’s hard to shift the cost of health insurance from low- to high-income employees if the latter reorganize in firms that do not include the former. It’s hard to shift costs from the sick to the healthy, if the latter can enter pools that the former cannot easily access.
Austin Frakt has posted some material on hospital cost-shifting that may be of interest to more technically-minded readers. (See here, here and here.) David Cutler found dollar-for-dollar cost-shifting in the old days (1980-1985), with each $1 decrease in Medicare payments leading to a $1 increase in private payments. But over the period of 1990-1995, Cutler found no evidence of cost-shifting — meaning that each $1 decrease in Medicare payments led to a $1 decrease in costs instead. More recently (1996 and 2000), Vivian Wu estimated that each dollar lost from Medicare leads to 21 cents of cost shift to the private sector and 79 cents reduced spending on Medicare patients.
I believe the period we are entering will be one of segregated markets, with hospitals supplying each market exactly what it is willing to buy. Lower Medicare fees will mean fewer amenities and less access to expensive technology. Instead of private rooms, seniors may be forced to share in 4- or 6-bed wards (as is common in other countries). Instead of gourmet menu choices, they may be given the civilian equivalent of meals-ready-to-eat. They may have access to MRI scans, but not PET scans, etc. (See my post on the losers in health reform.)
One way to think about all this is to see the ACA as a sham of sorts. Long before the passage of the bill public opinion polls consistently showed over many years that the average voter was willing to pay only $100 or so to insure the uninsured. If you think about it, everything that has come out of the White House and other administration officials is consistent with that finding. ObamaCare, we are being told, is one big free lunch. No one’s premium will be higher. No one’s wage will be lower. Millions of people are supposed to benefit and no one is acknowledged to be the slightest bit worse off because of it.
Cost shifting is politically appealing only if people can be fooled. The trick is to tap the unsuspecting and pretend that nothing bad has happened to them.
Will this charade work out? I suspect not.
I like the song.
This is one enormous con job. But eventually deceptiveness catches up with you.
Your mention hospitals shifting Medicare/Medicaid patients to wards as reimbursement rates fall vis-a-vis private patients. One way nonprofits could reduce their expenses per patient is to double up patients on the public side and permanenetly close entire hospitals or hospital wings. In the U.K. and Canada, it seems, they go apoplectic if there is a single available hospital bed that is unoccupied for one night.
Good post. This is what no one in the Obama administration wants to talk about.
Excellent analysis of cost shifting in terms of money and some amenities. But the biggest cost to “payers” will be paying with their lives. Seniors and those with “hopeless” diseases will be deemed not having lives worth living. If you don’t think that’s coming, just take a quick analysis of the articles in the recent leading medical journals on how much Medicare spends in the last 6 months of life and ditto for the articles on hospice and palliative care. Bundled payments to ACOs mean death panels with a vengeance all done with scientic evidence based guidelines.
Well said Brant…
Those who authored and passed ACA are saying that we have too much health care: We have too many treatments, too much technology, and too many people receiving treatments; we have too much medicine, too much diagnostic equipment used too often, too much innovation, and too many experts. ACA certainly fixes those “problems”
Excellent post. I’m amazed at how many people don’t like to do the math on health care. You can’t spend an extra dollar on one service without taking a dollar from other one.
It’s hard to predict the future, but this surely cannot stand. There is no way that the federal government can preside over a “system” in which Medicare beneficiaries (who vote lots) get lower access to care than the privately insured (who vote less). If and when this becomes understood by the Medicare population, politicians will have to change it to survive.
As Dr. Goodman and others have concluded, many millions more people will be enrolled in Health Benefits Exchanges than was advertised by the ruling facition. They will receive benefits according to a “public utility” model, as will the rest of us once the fictitious “grandfathering” provisions of current employer-based benefits fall away.
So, the political class will be in a position to limit the privately insured population’s access to care and minimize the gap between Medicare and the privately insured. The result will be lower access to care for all.
The biggest problem, in my opinion, is the massive transfer of power from private individuals to the barely representative executive branch. That is why, even if the numbers DID work, the program would need eradication.
I predict there will be very little cost shifting from the elderly to the nonelderly. Instead, Medicare cuts will lead to health care rationing.
John,
As usual you are right on and call it like it is. Thanks for doing all you do which benefits all of us both as healthcare industry professionals and consumers of health care.
Best,
Wendy
Trust me , I know this is true John. I left Canada 6 years ago because my wife was crippled by a 2 1/2 year wait for surgery which she never got and now she has so much titanium in her foot, that it hurts when she kicks me!! That’s why MediBid.com is a good solution for Canadians on a waiting list. They won’t get it at home.
Thanks, John, for posting the song. It is played at every health-care provider conference and I have grown fond of it over the years. As John notes, “you” at these conferences refers to money.
I agree with John that we are cruising toward a sharply tiered health care delivery system, not because of the ACA, but in spite of it.
After all, is there any other health reform proposal that Congress would vote for that does not end up in a tiered system? Don’t tell me Rep. Boehner’s plan would prevent it.
To me it has always been amazing how long the US health system has slouched toward egalitarianism on the delivery side. It has done so because our doctors and nurses and hospital excetutives have for decades been trained to operate in an egalitarian mode, even though voters virtually have sreamed at them with monetary signals that they want a tiered system, with a better one for themselves than they would finance for the poor.
Health care has been the only human services system in the US that is not sharply tiered. Surely education is, and even more so the administration of “justice.”
So it is only a matter of time before our health system moves in the direction both John and I believe it will move. Repealing the ACA would not make one damn bit of different. It probably would speed the pace of the transition to an overtly tiered system.
If I properly understand Mr.Reinhardt’s concept of a “tiered” healthcare delivery, I would ask, “why not?”. If it is okay to have “tiered” delivery of housing (manors vs. apartments, transportation (BMWs vs. Civics), and food (steak vs. stew), why should some be prevented from seeking a higher quality of medical care?
As long as the care itself is assured, why should the quality (whether perceived or real) not be subject to the same market forces as just about any other consumer product or service?
The fact is it (market system) is the only system that “actually works”, and this country is one of the few that people have the capability of moving from one “tier” to another within the system.
Uwe Reinhart is accepting the reality of some form of a tiered system? That is HUGE……
I will go the prior posting about food one further. On the hierarchy of human needs, the most basic is water. Health care is not more important than water. Water is supreme on the list of basic human needs.
Yes, we have a public water system, and no one dies for lack of water. If, however, you want Evian, or Fiji, or some other special water, you pay the market price for it.
Why is this so problematic for people to accept when it comes to health care?
Isn’t the system already tiered? Don’t the Medicaid patients and low-income uninsured go to community health centers and safety net hospitals. And whatever the quality of care in these places (at Parkland, in Dallas, the med students do a lot of the surgery) the amenities are surely not the same.
John-
Conventional wisdom is that virtually all catastrophic care (>$100,000)is paid for by the government through cost-shifting.
Do you have the references on this?
-Bob
Robert, I’m not sure how far we are following the money trail in asserting that “virtually all” cat care is paid for by the government through cost shifting.
You don’t have to be in the insurance business to know that all non Medicare related health costs are paid for through the premiums charged by the insurance companies. “Cat claims” are generally pooled by carriers as different risks relative to “non cat” claims, but in the end they too are funded through premium charges to the insureds.
However, if the quest is to find why the cat expenses are as high as they are, one cannot ignore the impact of government cost shifting to the private sector. It doesn’t take an accounting or economics degree to understand that providers of medical services have to make up for government imposed price controls (Medicare/Medicaid, etc.) by over charging those with “deep pockets” that do not have legal protection or recourse. Of course if they did (have recourse) we would have no medical care (or certainly nothing resembling what we have now).
This is why it is absurd to have two economic models working within the same (healthcare) system. How can the true value of a service be determined when 50% of the buyers can dictate what they want to pay while the other 50% has to make up the difference? It’s economic insanity.
Robert, the “conventional wisdom is almost certainly wrong.
In glancing at the other posts, I did not see the point made that cost shifts are made toward those without political clout and collective wealth (a lot of it). Individuals, with the least wealth, will be at the bottom, bearing much of the cost if they can afford it. Comsumer disposable is nothing compared to the wealth of the insurance industry and the pharmaceutical industry. Consumers are at the bottom of the food chain.
Next to the bottom are physicians, whose political clout is limited not only by our inability to unite but also by the limited disposable wealth to contribute to political causes. Therfore we will be taking pay cuts.
Insurance companies and the pharmaceutical industry are at the top with lots of money and lots of political pull. They will give up the least and perhaps actually gain from it.
Notice there is no discussion of “sacrifices” already made by the pharmaceutical industry. Their copay coupons do not really cost them a dime. They give away something and receive more (when patient gets out of Medicare donut, than they would have received if the patient had simply gone off the medication. And they get a big tax write off. The government pays full prices for Medicare prescription drugs and, as far as I know, that is not even on the table.
The insurance company ranks just as high as the pharmaceutical industry. Do you think they really spend 80 cents of every dollar for patient care. It is my understanding that they are able to count all their nurse and physician reviewers who are in place under the guise of patient care; however, their main job is to deny patient care and widen the margins of profits for the insurance companies. Likewise, personnell needed to deny prescription drugs is part of patient care, so that expense is not counted.
Also high on the food chain are drug stores, who are able to purchase generics for as little as 0.01 each and sell 30 of them for $40. A concrete example is generic Ambien, with a pill costing around 0.05 or less. They jack up the price from $ 1.50 a month to as high as $60 per month (although some drug stores do have it for less and one large US pharmacy offers 100 Ambien for $11 !!
If you are high on the food chain, you will come out relatively unscathed or even with higher profits. If you are low on the food chain, you will be footing the entire bill.