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Study rebuts hospitals' argument on Medicare, rising costs

May 13, 2013

Rather than aggressively raising prices on private health insurers to make up for inadequate payments from the government, hospitals across the country—including in Indianapolis—have been raising prices just because they can, according to a new study.

The study, published last week in the journal Health Affairs, found no widespread evidence of so-called “cost shifting” by hospitals. Hospitals have argued for years that, as payments from the federal Medicare program have stagnated, they have been forced to pass on higher costs to privately insured patients.

The new study found that, indeed, hospitals' inpatient prices to private health insurers have risen sharply. However, in nearly all markets where the prices paid by private health insurers were rising, Medicare payments were also rising.

Private health insurers, such as Indianapolis-based Anthem Blue Cross & Blue Shield, negotiate prices with hospitals on behalf of employers and their workers. By contrast, the federal Medicare program tells hospitals what it will pay them, without any negotiation.

Since the mid-1990s, hospitals in 55 percent of all markets in the United States have raised prices for inpatient procedures for patients covered by private health insurance faster than Medicare payments. The prices paid by private health insurers have also risen faster than hospitals' costs.

In Indianapolis, inpatient prices hospitals charged to private insurers rose 4.1 percent per year, on average, from 1995 to 2009. During that same period, Medicare inpatient payments rose 3.5 percent per year.

Over 15 years, the different growth rates meant private insurers and their customers paid 9 percent more—even though Medicare’s payments to hospitals kept rising.

And they kept rising at rates fast enough to cover hospitals’ rising costs, according to White’s study. He noted that labor costs for Indianapolis-area hospitals—which account for roughly 60 percent of typical hospitals’ total expenses—rose 3.4 percent per year—a tick less than Medicare’s payments.

“The study found that when Medicare pays lower rates for inpatient hospital care, private insurers’ rates end up growing more slowly, too—it’s the opposite of what hospitals would have the public believe,” said Chapin White, the study’s author, in a prepared statement.

White’s study, if its findings hold up in other analyses, could give significant momentum to recent efforts by the Obama administration and Congress to cut Medicare payments to hospitals in order to help reduce the nation’s budget deficit.

The 2010 Patient Protection and Affordable Care Act called for $155 billion in cuts to hospital reimbursement. Then the fiscal-cliff deal on Jan. 1 this year chopped out another $15 billion. And the budget sequester, which hit March 1, looked ready to sap another $10 billion.

Hospitals have argued that such cuts will only magnify the “hidden tax” paid by employers and their insured workers, because hospitals will have to charge them more to make up losses forced on them by Medicare.

“Hospital executives, understandably, want higher payment rates from private payers,” said White, a former staffer at the Congressional Budget Office who is now a researcher at the Center for Studying Health System Change in Washington, D.C. “To put a socially acceptable spin on higher rates, they blame Medicare for being a stingy payer—this study should put that notion to rest.”
 

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