Contrary to Conventional Cost-Shifting Wisdom, Lower Medicare Hospital Payment Rates Lead to Lower Rates for Private Payers

Health Affairs Study Puts Hospital Cost-Shifting Myth to Rest; Hospital Markets with Relatively Slow Growth in Medicare Inpatient Payment Rates Also Have Slower Growth in Private Rates

News Release
May 6, 2013

FURTHER INFORMATION, CONTACT:
Alwyn Cassil (202) 264-3484 or acassil@hschange.org

WASHINGTON , DC—Contrary to the notion that hospitals charge private payers higher payment rates to offset lower Medicare rates, it turns out the opposite is true—lower Medicare payment rates lead to lower private rates for inpatient care, according to a study by the Center for Studying Health System Change (HSC) published in the May Health Affairs.

Historically, private insurers have paid higher rates than Medicare for inpatient hospital care, and the gap between Medicare and private rates widened from 45 percent in 1995 to 57 percent in 2009, the study found. The average Medicare payment rate per discharge in 2009 was $11,031, while the average private rate was $17,286. There are two possible explanations for the gap—either hospitals charge private payers more to compensate for lower Medicare payments or hospitals can and do charge private payers more because of other factors, such as negotiating leverage.

“The study found that when Medicare pays lower rates for inpatient hospital care, private insurers’ rates end up growing more slowly, too—it’s the opposite of what hospitals would have the public believe,” said  HSC Senior Researcher Chapin White, Ph.D., the study’s author. “Hospital executives, understandably, want higher payment rates from private payers. To put a socially acceptable spin on higher rates, they blame Medicare for being a stingy payer—this study should put that notion to rest.”

The 2010 Affordable Care Act permanently slows the growth of Medicare payment rates for inpatient hospital care, and the study concludes: “Repealing the cuts in Medicare payment rates would not only increase federal spending but would also accelerate the growth in private insurers’ costs and premiums.”

Funded by the nonprofit, nonpartisan National Institute for Health Care Reform, the study used a unique data set that combined market-level private payment rates with Medicare cost reports from hospitals in 257 markets across the country from 1995 through 2009. During that period,  Medicare payment rates increased 3.00 percent annually on average compared to 3.56 percent  a year for private rates, the study found, noting that while the difference of just more than half a percentage point seems small, the cumulative effect on total spending on the privately insured is quite large.

The study divided the 257 hospital markets into three groups—low-, medium- and high-growth markets—based on the rate of Medicare payment rate growth.  Over the 15 years of study data, Medicare rates in low-growth markets increased 2.43 percent annually on average, while private rates grew 3.04 percent a year. In contrast, Medicare rates in high-growth markets increased 3.63 percent annually, while private rates increased 4.15 percent a year on average. The implication is that slow growth in Medicare payment rates has somewhat reined in the growth in private rates.

The study also found that a hypothetical 10-percent reduction in Medicare payment rates would lead to an estimated reduction of private payment rates of 3 percent or 8 percent depending on the statistical model used.

Unlike previous research on the existence of hospital cost shifting, the study used discharge-level claims data to calculate case-mix-adjusted private payment rates, and it measured trends in those rates over a 15-year period during which Medicare payment rates were adjusted repeatedly.

The Center for Studying Health System Change is a nonpartisan policy research organization committed to providing objective and timely research on the nation's changing health system to help inform policy makers and contribute to better health care policy. HSC, based in Washington, D.C., is affiliated with Mathematica Policy Research.