Still another reason your insurance premiums go up: cost-shifting from public to private payers is getting worse and worse

A recent editorial in the New England Journal of Medicine makes an interesting contrast between the approaches public and private health plans have taken in controlling costs. It points out how governmental health programs — Medicare and Medicaid — have long focused on controlling costs by focusing on the unit cost of things. So they have paid less attention to how many of something, say a surgical procedure, gets done and more attention to the cost of each one. What can happen in this approach is that doctors do more and more of whatever it is in order to make up the lost revenue. This can be quite bad for patients. Overutilization of health services is already a huge problem; some estimates are that a quarter to a third of medical care provided in America is unnecessary. More care is not better care, although that notion in some way seems to go against our national ethic.

Private insurers have generally tended to take another approach: instead of largely focusing on the unit cost of providing a service, they have tried to control the number of times the service is provided, using such things as preauthorization requirements. The result has been predictable — the gap between the unit cost paid by private insurers, always more than public programs paid, has been getting steadily larger. In 2000, providers on average billed private payers about 15% more than public ones for the same procedure; by 2009, the difference was 30-40% more for the private ones. In the same period, public payers on average cut by 10-15% what they would pay for the procedure. So if you add up the math, you can see what has happened: in order to maintain revenues, providers are shifting the costs to the private payers. This cost shifting has been known in the healthcare world for years, but it is getting worse and worse. It represents a sort of hidden tax on all of us, and it is one of the things driving healthcare costs even higher.

I recommend the editorial. It’s short and easy to understand. It’s also eye-opening as to the magnitude of the cost-shifting phenomenon.