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COST: Estimating and Explaining the "Cost-Shift"

In a webcast this afternoon, the American Hospital Association, the Blue Cross Blue Shield Foundation, America's Health Insurance Plans, and Premera Blue Cross debuted a new report by Milliman, Inc. on the "cost-shift" in health care. Unlike similarly named studies that evaluate the hidden tax shifted on to insured individuals from uncompensated care generated by the uninsured (see Nichols & Harbage, Holohan & Hadley, Thorpe/Families USA, Axeen & Carpenter for examples), the Milliman study focuses specifically on the "cost-shift" that results from insufficient Medicare and Medicaid payment rates and its effect on family and employer premiums and payments.

The study finds that there is a total cost shift of $88.8 billion (or 15 percent of commercial payments) from Medicare and Medicaid onto commercial (private) payers. This amount equates to 18 percent of commercial payments to hospitals (or $51 billion) and 12 percent of commercial payments to physicians (or $37.8 billion).

At first glance these numbers seem truly staggering—especially when considering that previous studies have found the cost shift from ALL uncompensated care (including care for the uninsured) to be in the ballpark of $50-60 billion a year. But, on closer inspection of Milliman's formula, the discrepancy becomes apparent. In Milliman's calculations of the "cost-shift," they hold hospital and physician revenues constant and then calculate the cost shift by assuming equivalent payments for all payers.

For those of you who don't speak numbers as a second language, I'll do my best to explain their calculations. First, they assumed that what providers make is static—that is, regardless of who's paying, doctors and hospitals will make the same amount. Second, given the pot of money that should (and will) be paid to providers, they assert that Medicare, Medicaid, and private payers should pay the exact same rate as one-another—so if Medicare is responsible for 30 percent of the patients, they should foot 30 percent of the bill.

So to understand how they arrived at their cost-shift amount, you can think of it this way (even though their calculations are far more precise). They take all of the money paid to providers and divide by the amount of care that is given for that pot of money. This creates a sort of payment per instance of care rate. That care is then added up in separate columns based on who is paying for the patient (Medicare, Medicaid, or private payers). Finally, they subtracted what those payers actually paid for from what they should have been paying (if all payers had equivalent rates) to arrive at the "cost-shift."

While this is a perfectly logical and legitimate way to determine how much more commercial payers pay than Medicare or Medicaid for the same care, it is not really a true evaluation of the "cost-shift" in health care. Among other things, it ignores the important (and expensive) amount of uncompensated care for the uninsured that is pushed on to the insured through higher prices for services which in turn lead to higher health insurance premiums. Also, and perhaps even more important, it ignores the fact that all of this care whether paid for by Medicare, Medicaid, commercial payers, or uncompensated care could be provided much more efficiently and cost-effectively.


Please see link. Issue of

Please see link. Issue of cost shift for uninsured not so clear: