The enduring myth of cost shifting

Introduction

Health insurance executives and lobbyists have for years told us that one of the main reasons they charge us so much for coverage is the cost shifting that results from Uncle Sam’s stinginess.

The story goes like this: hospitals are paid so inadequately by government programs like Medicare and Medicaid that they have to charge private insurers more to keep their doors open.

One of the regular communicators of this theory is Karen Ignagni, CEO of America’s Health Insurance Plans, the industry’s biggest PR and lobbying group.

Ignagni pushed this line incessantly during the health care reform debate. She even cited it in response to a question about why the industry was so opposed to the creation of a government-run “public option” health plan.

“What we have is a significant amount of cost shifting because the government underpays,” she said. “Our [premium] rates are higher as a result of that. If you set up a public structure, whatever you call it, and it has the benefit of government rates, we are still being disadvantaged because of the cost shifting.”

A few months later, on March 23, 2010, to be precise, the day President Obama signed the Affordable Care Act, Cigna CEO David Cordani, predicted that cost shifting was only going to get worse because of the new law. He was quoted as saying that the “cost shift from Medicaid to private insurance would worsen as millions of eligible people are added to the Medicaid rolls.”

Three years later, Ignagni was still blaming cost shifting for higher premiums. In a 2013 speech she stated that, “In the past, when governments reduced reimbursement rates for Medicaid and Medicare, private insurers have generally paid more to make up for it.”

Health care executives have talked about cost shifting for so long it has become conventional wisdom. We’ve all come to believe it without challenging it.

But what if it hasn’t really been happening, at least not in recent years?

Health economist Austin Frakt presented compelling evidence in a New York Times op-ed last week that just because the government often pays a lower rate than many hospital executives would like, that doesn’t mean they can simply force private insurance companies to pay more. In fact, as he pointed out, reduced government reimbursement rates often result in lower—not higher—private insurance reimbursement rates.

Frakt cited a study published in the May 2013 edition of Health Affairs that found that a 10 percent reduction in Medicare payments was associated with an almost 8 percent reduction in private prices. In other words, not only did hospitals not charge private insurance companies more between 1995 and 2009 because of lower payments from the government, they actually charged them less.

It seems that about the only time hospitals can get away with shifting more costs to private insurers is when there are not many other hospitals in the same geographical area competing with them.

That was the conclusion of the authors of a 2010 Health Affairs article. They wrote that hospitals that face little competition are less efficient and have higher costs. Because of the lack of competition, private insurers have less leverage and usually are forced to cover those higher costs.

The dynamic is completely different, though, in markets with significant competition. Although hospitals in a competitive market might want to charge private insurers more, they can’t. Insurers are in a better position to say thanks but no thanks when a hospital with one or more competitors tries to gouge them.

“Put it together and it is hospitals’ underlying costs, driven by competition—not cost shifting,” that determine how much hospitals are able to charge private insurers, Frakt wrote.

So if health insurers’ talking point about having no choice but to hike premiums because of low government payments is based more on myth than reality, why do premiums continue to grow, even as hospitals in many markets actually charge them less—not more—when Medicare and Medicaid rates decline?

My hunch is that they’re able to get away with it because nobody has called their bluff. Masters of spin that they are, insurance executives and lobbyists have led us all to believe that cost shifting is the inevitable result of government bureaucrats being too tightfisted. They can get away with it because so many Americans are willing to accept as truth just about any talking point that reinforces their deep-seated belief that the government is to blame for everything that ails us.

So it’s little wonder that we’re willing to buy the insurance industry’s suggestion that our premiums would be lower if it weren’t for cost shifting.

As long as we keep buying it, insurance company bureaucrats will keep jacking up our rates by more than they could otherwise get away with. And they’ll keep grinning all the way to the bank as they do it.

Wendell Potter is the author of Deadly Spin: An Insurance Company Insider Speaks Out on How Corporate PR is Killing Health Care and Deceiving Americans and Obamacare: What’s in It for Me? What Everyone Needs to Know About the Affordable Care Act.