HFMA VIEWS

Richard L. Clarke, DHA, FHFMA
President and CEO, HFMA

“We wanted to shine a bright light on the fact that there essentially is a hidden tax on employers and employees because the government is underpaying for services that are being rendered.”

This quote from David Joyner, Sr. Vice President of Blue Shield of California, summarizes the intent behind a recent study by two insurers to quantify the impact of underpayments from Medicare and state Medicaid programs on commercial insurance premiums ("Confronting the Medicare Cost Shift," MargaretAnn Cross, Managed Care, December 2006).

The study, conducted for Blue Shield and Washington State’s Premera Blue Cross by the actuarial and consulting firm Milliman, quantified the growing effect of this hidden tax on insurance premiums. The study revealed that in California the cost of this tax grew from 3.6 percent of premiums in 2000 to 9.5 percent in 2004. As a result, an additional $951 was added to the cost of a family health premium in 2004.

This hidden tax, the consequence of cost shifting due to underpayments from governmental payers, has existed for years. Almost immediately after both Medicare and Medicaid were enacted in the mid-1960s, policy makers worked to reduce the rate of increase in payments by these programs below the rate of medical inflation. The compounding effect of this policy has been to continually shift the shortfall to private payers. As demonstrated in this most recent study, the impact on private insurance premiums is growing. These results also were demonstrated in a nationwide study conducted by Allen Dobson and others in an article entitled “The Cost-Shift Payment Hydraulic” published in Health Affairs, January/February 2006.
 
The problem with this hidden tax is that it is not well understood by the public, employers, and insurers, and it impacts different providers and different payers based on the provider’s payer mix. That is, a provider with an unusually high level of Medicare and especially Medicaid patients must shift more of its overall cost to private payers. In an era of consumerism and price transparency, this social good (taking care of a greater share of elderly or indigent patients) results in a competitive disadvantage for the hospital or physician group providing the care--I guess no good deed goes unpunished.

Insurers are finally taking notice of this problem and quantifying its impact. Blue Shield’s Joyner said, “Insurers need to do a much better job of highlighting this issue and bringing a greater sense of urgency to it.…Through our silence we are allowing this issue to continue to grow.”

As healthcare financial leaders, we need to highlight this issue with our communities, payers, and employers to ensure that this hidden tax doesn’t remain hidden any longer.

More Information on Cost Shifting

“No Small Change” by Martin J. D’Cruz and Terri L. Welter, hfm magazine, December 2005. Overview of cost- and risk-shifting dynamics among payers, providers, and patients.

“What’s It Worth?” by Ray B. Lefton, hfm magazine, December 2003. Explanation and examples of cost-shifting and the effect on the uninsured.

“The Foundation, History and Implications of the Cost-Shift Hydraulic,” presentation by Allen Dobson et al. at the Federation of American Hospitals’ Future Hospital Care symposium, July 2005.