Medicare Breaks the Inflation Curve
Besides her comments on the growing lack of influence of the AMA on Healthcare reform Maggie Mahar at Health Beat Blog writes about Medicare breaking the cost curve of the healthcare industry.
Medicare Breaks the Inflation Curve
Today, S&P released data tracking the growth of health care costs which showed that over the year ending March 2011pending rose at an annual rate of 2.78% posted for the Medicare Index in its six-year history. (Hat-tip to Kent Bottles for calling attention to this report on Twitter). This news is, as Bottles says, “very important”, not to mention timely, given the deficit debate in Washington.)
By contrast, over the same 12 months, health care costs covered by commercial insurers rose by 7.57%. Still, as the chart below shows, even these costs (tracked by the “commercial index”) have been falling, down from a peak inflation rate of nearly 10 percent in the 12 months ending in July 2010 to 7.5% in the 12 months ending March 2, 2011.
Why is health care inflation decelerating? In the commercial sector, the recession no doubt plays a major role. Insured patients often have high deductibles that must be paid before they receive care. As a result, hospitals report that patients are putting off elective surgery. Thus, commercial insurers are paying out a lower share of premiums. (See for example, Cigna’s most recent financial report which shows patients’ “relatively moderate use of medical services”.)
At the same time, it’s worth noting that commercial insurers’ reimbursements to hospitals continue to rise; the Hospital Commercial Index’s annual growth rate hit a peak of 9.36% in May of 2010, and as of March 2011, it still stands at an unaffordable 8.36%. This suggests that, even if hospitals are seeing fewer patients, they continue to “do more” to those patients who come through the door, billing insurers for more tests and treatments.
Meanwhile, hospitals with market clout have been ratcheting up their prices. Commercial insurers who want brand-name hospitals in their network have no choice but to over-pay. They then turn around and raise their premiums, passing the cost on to their customers. (Some claim that hospitals charge private insurers more because Medicare underpays—and thus they must make up for their losses by “shifting costs” to the commercial insurers. But economist Austin Frakt (The Incidential Economist) has written a compelling paper http://theincidentaleconomist.com/wordpress/the-latest-paper-on-cost-shifting/ which reveals
If one is talking about hospital prices, perhaps a shift of 20 cents on the dollar is a justifiable estimate—which means far less than that ends up in premium increases.
Other economists agree that “cost-shifting” is greatly exaggerated. In some cases, marquee hospitals are simply gouging insurers.)
As measured by the Hospital Medicare Index, the amount that Medicare is paying out to hospitals, has fallen sharply and down from 8.30% in August 2009 to 1.18% in March 11. This is surprising. Medicare patients have less reason to postpone care:
• their deductible for Medicare Part B is just $162 (as of February, 2011),
• while their Part A deductible for hospital care ($1,132) is significantly lower than the $2,000 to $5,000 deductible a growing number of privately insured patients pay.
Medicare patients also have not been hit as hard by high unemployment and they may not be able to find a part-time job, but at least they don’t lose their Medicare if they lose a job.
Why are Medicare costs slowing? It appears that “costs for Medicare patients are being better contained than those covered under commercial insurance plans,” observes David M. Blitzer, chairman of the S&P Index Committee. And the provisions in the Affordable Care Act that will put Medicare on the road to financial solvency haven’t even begun to kick in. Meanwhile, conservatives argue that we must privatize Medicare, because taxpayers cannot affords “runaway” government entitlement programs. I wonder how they explain the S&P report.
I’m sorry, but I have got to simplify this. Does what you wrote above mean that the cost of Medicare is increasing much slower than the cost of health care in general? In other words, the increase in what Medicare pays out is increasing much slower than the increase in what private health insurance pays out?
AMA is ~ 15-20% of all doctors in the US. A 5% drop from 2009 to 2010. Their refusal to particpate in ACOs lacks strength
The title of the post should be “Medicare Breaks the Reimbursement Curve.”
Medicare doesn’t address costs at all. It just says “we are huge customers, here is your fee, take it or leave it.” All you have to do is exceed marginal cost and be below average cost and the other insurers, providers, and customers pay the difference.
Is this supposed to be support “If one is talking about hospital prices, perhaps a shift of 20 cents on the dollar is a justifiable estimate.”?
Funny, the standard argument for market competition is that competition limits price increases, and so forces a choice between efficiency and failure. “Costs” are held down not by some benevolent fairly, but by market forces.
When Medicare is involved, though, somewhat that argument doesn’t count. At least not for sammy. Pressure from consumers – through their association with Medicare – somehow doesn’t matter to cost containment when it isn’t convenient to sammy’s argument.
KH, argument by sarcasm and ridicule get you nowwhere and actually shows you have a weak argument.
I agree with Sammy, that when the elephant trumpets, the dwellers in the elephant’s area listen. Medicare, the elephant if that analogy eludes you, sets and thereby controls many/most medical reimbursements. Unless it can be shown that the Medicare price controls are not working in the way I described, then Sammy is far more correct than you.
If you are the view that sarcasm shows one’s argument to be weak, then you don’t know much about how a good argument is made. Sarcasm is irrelevant to the strength of my argument. The argument stands or falls on its own strength. I have made my argument fairly clearly, I think, but you have chosen to address the tone of my argument instead of its substance.
I will not stoop to the same shoddy workmanship you have exhibited, by claiming that your decision to dodge may argument means you don’t actually have an answer to it. I invite you to answer the substance of my argument. You often pretend to understand economics, and my argument was based on a view of how competition works. Let’s see what you’ve got, squeaky.
Oh, and this bit —
“Unless it can be shown that the Medicare price controls are not working in the way I described, then Sammy is far more correct than you.”
By declaring your own argument to be correct, it becomes so? That’s the standard you want to use? Let me say again – address the substance of the argument I made. All you’ve done is say “elephant” and claim that you are right because you say you are. Good comedy, but not actually convincing.
OK, KH, it’s much nicer to have a discussion with you than a name calling contest, even though you still couldn’t resist, squeaky.
You said: “Pressure from consumers – through their association with Medicare – somehow doesn’t matter to cost containment…” Pressure from consumers? To whom are you referring, providers or patients/users.
You also made this statement: “Funny, the standard argument for market competition is that competition limits price increases, and so forces a choice between efficiency and failure.” With these two statements you show you do not understand how Medicare payments work for the growing elderly population, and how it perturbs pricing in the healthcare industry.
Payment process and pressure: Medicare payments are the baseline for the providers serving the elderly. Any difference from that baseline is paid for by the patient or their private insurance if/when they have it. In that environment how does the consumer/patient pressure (your word) the Federal bureaucracy and their contractors managing Medicare?
Patients’ appeal process is based upon individual service/drug decisions. Relying on the bureaucracy’s benevolence to aggregate and manage those appeals does not put much external pressure on that bureaucracy.
Providers are more likely to appeal decisions, but it doesn’t take many denials to send a message to the providers.
Stultifying Competition: Medicare has established standardized rates for services. It is also the near/mandatory provider for a large and growing portion of the high volume user community. For a variety of reasons, but primarily because its available, the insurance providers base many of their payment rates on the same list. So where’s the competition?
KH, you’re applying normal market economic factors to a relativley closed market.