Why Medicare May Be Costing Even More Than You Think

December 4, 2011
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Everyone who’s looked at the data knows that the cost of Medicare is killing the federal budget. The Medicare payroll tax only covers about half the direct costs, with the rest coming from general expenditures.  But as HealthLeaders points out, an increase in cost shifting from Medicare onto commercial plans may also be taking place.

Everyone who’s looked at the data knows that the cost of Medicare is killing the federal budget. The Medicare payroll tax only covers about half the direct costs, with the rest coming from general expenditures.  But as HealthLeaders points out, an increase in cost shifting from Medicare onto commercial plans may also be taking place.

The author, John Commins, notes that per capita costs in the commercial market grew more than 8 percent over the past year, while Medicare growth was just under 2 percent.

Robert Zirkelbach, spokesman for America’s Health Insurance Plans, agrees… that the different rates of growth for commercial plans and Medicare can be attributed to cost-shifting.

“Medicare simply dictates the prices they will pay for services, and often those prices are well below the cost of providing those services,” Zirkelbach told HealthLeaders Media. “So, what happens is doctors and hospitals charge more to people with private insurance to cover the costs of those services.”

A couple of other federal policies may further exacerbate the situation:

  • With the minimum Medical Loss Ratio requirements of the Affordable Care Act, health plans may not care that much about higher medical prices. After all, their administrative costs (including profits) are capped as a percentage of premiums. All else being equal, higher premiums equals higher profits in dollar terms
  • Providers are preparing for federally-authorized Accountable Care Organizations (ACOs) by consolidating. In the near-term that provides them with greater market power in negotiating with commercial payers. As Zirkelbach says:
    • “Our members are getting rate increase requests from providers by as much as 60% and 70% in some markets across the country,” he says. “There is a growing body of evidence and research showing that as hospitals consolidate, that leads to higher prices for services. In some markets there is only one ‘must-have’ hospital in a region that is able to charge significantly more for services, often 200%, 300%, 400% of what Medicare pays for the same services, and that is having a direct impact on the cost of care.”
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