In the article they cite an example where private insurance paid 100x the Medicare rate. That's not to say private insurers pay, overall, 100x the Medicare rate. It's closer to 2x per procedure in the aggregate. I don't understand why a private insurer would ever pay 100x the Medicare rate in any case.
The article went on to say how Dr. Mu, despite his title as Chief of Neurosurgery, does "probably not very lucrative" work due to low Medicaid rates. So this is a case where private insurance is subsidizing the public system.
Cost shifting is well known in the industry. The 30% of the revenue paid by Medicare corresponds to significantly more than 30% of the services/cost. Operating a hospital is analogous to operating an airline, where you can sell 30% of seats at a price that would be grossly unprofitable if the whole plane sold that way. My hypothesis is that as more care becomes public, the price per procedure that Medicare (or whatever it's called then) will be dramatically higher, because there won't be anyone left to shift the costs onto.
I was able to find some data which demonstrates this; 'Aggregate Hospital Payment-to-Cost Ratios for Private Payers, Medicare, and Medicaid, 1992 - 2012' - http://www.aha.org/research/reports/tw/chartbook/2014/chart4.... There's a subtle point that this data hides, that the article shows, which is although private payments exceed costs, in aggregate, by ~150%, the billing is highly selective. So some private payers may pay close to the Medicare rate (85% of cost) where some private payers are paying 10,000% the cost, like in the case in the article with Dr. Mu.
It's exactly this highly selective billing which I think people should be protected from. Both from an Dr/ethical standpoint, to the necessary legislation which could more clearly protect against this, rather than relying on more general statutes.
I don't really care to discuss "how newspapers work" but I do think while NYT is trying to tell a story about an industry, all I hear is anecdotes. Anecdotes are important, but in a story about industry billing practices, I also need to know if these anecdotes are crazy outliers, or everyday occurrences. You need to anchor your anecdotes with something if you want to tell a story bigger than the anecdote -- I think that's basic reporting, but yes, perhaps too much to expect.
"They cite an example where private insurance paid 100x the Medicare rate"
Is that the line "If the surgery had been for a Medicare patient, the assistant would have been permitted to bill only 16 percent of the primary surgeon’s fee"?
If so, Dr. Mu received the $117,000 as a private check from Mr. Drier, and not from a private insurance company. There's nothing which says that Dr. Mu wouldn't have accepted the lower Medicare rate, or that someone else would have been the assistant if Dr. Mu's primary interest was the extra income, or that a private insurance company would had other preconditions in place to prevent a $117,000 bill. It's hard to have an idea in part because Dr. Mu did not respond.
The only other 100x I can find is the out-of-network vs. in-network bills for a muscle and skin graft. But that's not the Medicare rate.
"Probably not very lucrative" is quite far from "subsidizing the public system." If the doctor makes $120K/year with Medicare patients only, and $500K/year with only non-Medicare patients, and the hospital is profitable both ways, then where's the subsidy? While an extra $380K/year is very lucrative.
If what you are saying is true, then there should be a mass wave of hospitals and doctors which don't accept Medicare. While some hospitals and clinics don't accept Medicare, they are relatively few. In fact, hospitals and medical centers will advertise that they accept Medicare. For example, this billboard for a clinic - http://www.yourwestvalley.com/topstory/article_73ac64db-fc44... .
It's very hard for me to accept that the payment-to-cost ratio chart you linked to is meaningful. That appears to be the average cost across everyone. A better chart would be the cost of Medicare treatment vs. the reimbursement by Medicare, and the same for the private insurers. Otherwise, this could be showing that Medicare does a better job of cost containment than private insurers, so that private insurers end up paying for more medically needless but profitable procedures than Medicare. (For example, http://content.healthaffairs.org/content/22/2/230.full argues that Medicare is better at cost containment than private insurers.)
> Most of the analyses and commentary based on descriptive, industrywide hospital payment-to-cost margins by payer provide a false impression that cost shifting is a large and pervasive phenomenon. More careful theoretical and empirical examinations suggest that cost shifting can and has occurred, but usually at a relatively low rate. Margin changes also are strongly influenced by the evolution of hospital and health plan market structures and changes in underlying costs.
Regarding newspapers, I'm saying that you are getting peeved because you don't understand how newspapers work. The old phrases are "if it bleeds, it leads" and "When a dog bites a man, that is not news, because it happens so often. But if a man bites a dog, that is news." and "You never read about a plane that did not crash."
People read a newspaper in part because they want crazy outliers. The good papers try to fit it in a larger context, biased of course by the overall ideology of the editors and writers. (Eg, the WSJ is pro-market.) But complaining about the lack of complete context and details in a newspaper article is like complaining that the sky is blue.
Dr. Mu did not received the $117,000 as a private check from Mr Drier.
"When Mr. Drier complained to his insurer, Anthem Blue Cross Blue Shield, that he should not have to pay the out-of-network assistant surgeon, Anthem agreed it was not his responsibility. Instead, the company cut a check to Dr. Mu for $116,862, the full amount."
"If the surgery had been for a Medicare patient, the assistant would have been permitted to bill only 16 percent of the primary surgeon’s fee. With current Medicare rates, that would have been about $800, less than 1 percent of what Dr. Mu was paid."
So at least we should agree that this is a perfect example of cost shifting / price gauging.
> If the doctor makes $120K/year with Medicare patients only, and $500K/year with only non-Medicare patients, and the hospital is profitable both ways, then where's the subsidy? While an extra $380K/year is very lucrative. If what you are saying is true, then, there should be a mass wave of hospitals and doctors which don't accept Medicare
Well, that's the very definition of subsidy, so I don't know quite how to respond. Where's the subsidy? Right there! Very few people become chief neurosurgeons for $120k per year. A lot more become chief neurosurgeons for $500k per year.
As I a said, running a hospital has massive fixed costs, so like an airline, taking on patients which pay 85% of cost is still better for the bottom line, as long as your hospital is running below capacity. So Medicare is an overall good deal for the hospital, even though it pays below cost, as long as it doesn't exceed a certain percentage of the overall patient population. If the patient population was entirely Medicare, then the hospital would not be profitable.
> "It's very hard for me to accept that the payment-to-cost ratio chart you linked to is meaningful. That appears to be the average cost across everyone. A better chart would be the cost of Medicare treatment vs. the reimbursement by Medicare, and the same for the private insurers."
The better chart you ask for--the cost of Medicare treatment vs. the reimbursement by Medicare, and the same for the private insurers--is exactly what this chart shows. It shows separately for Medicare, Medicaid, and Private Insurance, what percent of the cost of the procedures is actually paid. Medicare has lately been covering 89% of costs, while private insurance has ballooned to 150% of cost. Here's the full set of charts; http://www.aha.org/research/reports/tw/chartbook/ch4.shtml
> Otherwise, this could be showing that Medicare does a better job of cost containment than private insurers, so that private insurers end up paying for more medically needless but profitable procedures than Medicare.
Quite clearly Medicare does a fantastic job of containing its costs. You can strike the "medically needless" part from that, since I think it's unsupported. Private insurers absolutely pay for more profitable procedures, as indicated by the chart; private insurance pays 150% of cost overall. But obviously ACA legislation setting a lower payment rate does not inherently make the procedures being paid for actually cost less to perform. But it does certainly force the hospital to search for ways to make up the difference.
> Instead, I find papers like "How Much Do Hospitals Cost Shift? A Review of the Evidence
I'm somewhat confused by this paper, since it reads like an op-ed. After a bit a searching, it appears Frakt has quite a few editorials claiming hospitals lack the market power to meaningfully shift costs to private insurers, despite abundant and uncontroversial data showing Medicare pays below cost.
Frakt himself has the following to say, quite amusingly, in a editorial titled 'The End of Hospital Cost Shifting and the Quest for Hospital Productivity';
"The ACA will permanently reduce the Medicare payments hospitals would otherwise receive. Its ‘productivity adjustment’ will scale payments downward by the average rate at which private nonfarm businesses’ productivity increases. That rate has been estimated to be 1.1 percentage points per year…Actuaries for [CMS] have estimated that by year 2040, Medicare payment rates to hospitals will be half those of the commercial market, and lower still thereafter."
I didn't know that the ACA puts downward pressure on rates equal to the average rate at which private nonfarm business productivity increases. Since that productivity rate increases significantly higher than the historical productivity gains in healthcare, and is expected to do so for some time, CMS states this will require new legislation to fix, or else payment rates will be so low as to significantly effect availability and quality of services. That's pretty scary, to have built a failure mode like that into the system.
"Dr. Mu did not received the $117,000 as a private check from Mr Drier."
You are correct. I misread it.
I agree that it's price gouging.
"that's the very definition of subsidy,"
A broad definition of subsidy could include a bribe. For example, one interpretation is that people won't become chief neurosurgeons unless you bribe them. In any case, it was an example to illustrate the difference between subsidize and not very lucrative. I'll change the numbers to $500,000 with only Medicare patients (this is about what they make in the UK, so surely enough that people will decide to be chief neurosurgeons) and $3,000,000 with only non-Medicare patients - a very lucrative income indeed.
I see that part of my confusion in understanding the topic is that there are multiple definitions of "cost-shift". In economics - I earlier quoted from an economics paper - it's a "dynamic response by hospitals to a reduction in Medicare payments, in the form of a fully or partially compensating increase in prices charged to private insurers. In the policy debate over Medicare payments, however, cost shifting is defined broadly as payments that fall short of the costs incurred by hospitals in the treatment of Medicare beneficiaries, as measured through negative hospital margins on those patients." (Quote from http://content.healthaffairs.org/content/30/7/1265.long )
I was talking about the former, which excludes price discrimination. The chart you link to shows the latter, which is a broader category. Indeed, the paper I just referenced, titled "Hospitals Respond To Medicare Payment Shortfalls By Both Shifting Costs And Cutting Them, Based On Market Concentration" goes into the details. It's quite a lovely paper.
> [Abstract:] The study presents empirical evidence that, faced with shortfalls between Medicare payments and projected costs, hospitals in concentrated markets focus on raising prices to private insurers, while hospitals in competitive markets focus on cutting costs.
> ... Payment rates from Medicare to hospitals have lagged behind the growth in hospital costs over recent years, leading to negative hospital profit margins on publicly insured patients.1,2 These negative Medicare margins have reignited the long-standing debate over whether the public insurance program is partially responsible for the high prices charged to private insurers, as hospitals seek to offset losses on one set of patients with profits from another.3–7
> Recently, however, the Medicare Payment Advisory Commission (MedPAC) staff has proposed an alternative explanation for negative Medicare margins, one that reverses the direction of causality and interprets Medicare payment slowdowns as a means toward the reduction of hospital costs rather than a shifting of costs from public to private payers.8
As I understand it, the MedPAC model gives an explanation of why the chart you pointed out isn't an example of cost shifting in the economics sense of subsidy. The paper then assesses the viability of the two models and finds they are complementary strategies. The key factor to choose one over the other is the "degree of concentration or competition in the local hospital market."
I liked the observation about the non-economic factors that go into raising revenue rather than lowering cost:
> It generally is more desirable, from a hospital management perspective, to increase revenues than to reduce costs, because the former merely alienates insurers, but the latter alienates employees, physicians, and potential patients. The cost-shift perspective highlights the revenue-enhancement hospital response to Medicare payment shortfalls.
The economic model of Frakt and others, which says that in a competitive marketplace there is no cost-shifting in the subsidy sense is not new, so you needn't track down more from that author to investigate any specifically unusual personal bias. See for example http://www.ebri.org/pdf/briefspdf/1296ib.pdf for a similar paper from 1996, which says:
"Rather than cost shifting [in the subsidy sense], the existing evidence points to hospital competition limiting the provider's ability to raise prices. Whatever market power hospitals once enjoyed is disappearing—and with it the ability to cost shift."
Under this model, the payment shortfall charts are actually a measure of how competitive the hospital environment is.
I read some of the CMS paper you linked to. It comments how "When the Medicare inpatient hospital prospective payment system was introduced in 1984, Congress applied reductions of 0.4 to 3.8 percentage points to the annual payment updates for most of the first 20 years of operation without causing hospital bankruptcies or withdrawal from the Medicare market."
I think that's a very good indicator, though perhaps not the best socially. I therefore think it's odd that they use "Hospitals have been pushing back in recent years against payment reductions aimed at further reducing inefficiency, a signal that much of the achievable gains may have already been made" as a more recent indicator. I know from the 1996 paper that there was a large debate on the topic already in the 1990s, so how does the Office of the Actuary judge if the pushback now is stronger and more meaningful then 20 years ago. Shouldn't they be using the same measure? Has there been an increase in the number withdrawals from the Medicare market?
In any case, I agree with the overall tone of the paper. I agree that there will have to be changes in the Medicare system some time in the next 50 years. I don't agree that the lack of a perpetually effective system is of great concern. If we could do that, we wouldn't need any legislative branch.
The article went on to say how Dr. Mu, despite his title as Chief of Neurosurgery, does "probably not very lucrative" work due to low Medicaid rates. So this is a case where private insurance is subsidizing the public system.
Cost shifting is well known in the industry. The 30% of the revenue paid by Medicare corresponds to significantly more than 30% of the services/cost. Operating a hospital is analogous to operating an airline, where you can sell 30% of seats at a price that would be grossly unprofitable if the whole plane sold that way. My hypothesis is that as more care becomes public, the price per procedure that Medicare (or whatever it's called then) will be dramatically higher, because there won't be anyone left to shift the costs onto.
I was able to find some data which demonstrates this; 'Aggregate Hospital Payment-to-Cost Ratios for Private Payers, Medicare, and Medicaid, 1992 - 2012' - http://www.aha.org/research/reports/tw/chartbook/2014/chart4.... There's a subtle point that this data hides, that the article shows, which is although private payments exceed costs, in aggregate, by ~150%, the billing is highly selective. So some private payers may pay close to the Medicare rate (85% of cost) where some private payers are paying 10,000% the cost, like in the case in the article with Dr. Mu.
It's exactly this highly selective billing which I think people should be protected from. Both from an Dr/ethical standpoint, to the necessary legislation which could more clearly protect against this, rather than relying on more general statutes.
I don't really care to discuss "how newspapers work" but I do think while NYT is trying to tell a story about an industry, all I hear is anecdotes. Anecdotes are important, but in a story about industry billing practices, I also need to know if these anecdotes are crazy outliers, or everyday occurrences. You need to anchor your anecdotes with something if you want to tell a story bigger than the anecdote -- I think that's basic reporting, but yes, perhaps too much to expect.