The table below shows what happened to private premiums during 2001-2010, when per beneficiary spending under Medicare Parts A and B grew by only 67 percent. According to Towers Watson, health costs per active employee shot up 119 percent. Much of the difference between the public and private sector growth rates was attributable to cost shifting—that is, providers levying extra charges on private payers to cover losses incurred treating public beneficiaries. Current law budget projections suggest that the worst may be yet to come. Per-beneficiary Medicare spending is slated to grow only 21 percent during the coming decade. If history is any guide, cost shifting will grow explosively in response. Consumers, employers and insurers must brace themselves to resist this tsunami.
Indeed, two other factors will generate even more pressure to shift costs. The recent bipartisan debt-ceiling deal not only endorsed the current-law Medicare targets, it upped the ante with a budget enforcement mechanism that would cut provider payments by an additional two percent of program spending. In addition, the number of Medicare enrollees will grow by 30 percent over the next decade, expanding the pool of money-losing beneficiaries.
In recent years, hospital business models have become more dependent on cost shifting. The typical hospital turned a profit on Medicare patients in the early 2000s, but today loses about five percent. The good news comes from recent MedPAC surveys showing that hospitals in more competitive markets turn profits on Medicare patients. As much as 30 percent of health spending is waste. The problem is that the U.S. health system, which is so quick to take up medical technology, lags up to a decade behind our OECD counterparts in adopting the kinds of information technology needed to track and manage costs.
If payers are to avoid a new and disastrous round of cost shifting, they will have to insist on improvements in medical productivity. Allowing the least efficient providers to prosper at the expense of private health plans weakens the business case for improving productivity and unjustly diminishes American living standards.
