What If the Health Care Cost Crisis Solves Itself?

Conventional wisdom is that cutting Medicare rates shifts the burden to the private sector, but an intriguing article in Health Affairs reaches a counterintuitive conclusion:

Conventional wisdom is that cutting Medicare rates shifts the burden to the private sector, but an intriguing article in Health Affairs reaches a counterintuitive conclusion:

“Cuts in Medicare payment rates have not caused the rapid rise in private rates. In fact, private rates might have grown even more rapidly if Medicare had not kept its rates in check.

The Affordable Care Act permanently slowed the growth in Medicare hospital payment rates, producing large savings for the federal government. One criticism of those rate cuts is that private insurers will get stuck with the tab. My results indicate the opposite: Private insurers may actually see the growth in their payment rates slow as a result of the act…”

The author, Chapin White, of the Center for Studying Health System Change isn’t definitive in his conclusion about the mechanism by which these results are occurring, but has a theory:

“Intuitively, when Medicare cuts its payment rates, Medicare patients become relatively less financially attractive, and private patients become relatively more financially attractive. Hospitals then seek to increase private volume, and the way to do that is by lowering the private payment rate.”

I think he may be right. Another simple explanation is that health plans tend to follow Medicare rates and do little to independently establish and negotiate price levels. As mentioned yesterday I’d like to see the Affordable Care Act modified to give health plans greater incentives to control costs; hospital rate negotiations would be a prime way to do it.

On a related note, constrained health care spending is helping bring down the budget deficit from crisis levels. The Washington Post and others say this is a bad thing because it reduces pressure for a “grand bargain” on the federal budget. But I don’t see a grand bargain happening anyway (despite the sequester, which was supposed to be more than sufficient motivation), so anything that defers the need for a budget deal is fine with me. If we’re lucky things will continue to improve and we won’t need the Congress to come to its senses.

(healthcare crisis / shutterstock)