“Medicare Rates Bad, So Shift to Private Payers,” and Hospitalist Does What?

By  |  July 10, 2011 | 

With budget tightening and planned hospital cuts from Medicare, you will apprehend more from your administrative leaders and hospital organizations about cost shifting.  The thinking goes that due to lower payments from CMS, and thus lower Medicare margins, hospitals shift costs to private payers, i.e., commercial plans make up the difference because of government shortfalls.

Private payers complain, CFO’s push back, politicians grumble, employers go ballistic, and the wrath of least resistance is inevitably Medicare.  You might hear, “you know why we axed your physician assistant.  Medicare cut their rates.”  Conversely, you might lose your same PA, but this time because, “WellPoint would not budge and pay our asking rate.”

See below for a historical plot of Medicare versus commercial inpatient margins (and note when the Medicare slope drops, the commercial slope rises, i.e., “the shift”):

However, as we often observe in medical intervention trials (confounding), it takes deeper digging to move beyond, “if x, then y” and examine other variables that might explain a potentially narrow conclusion:

Notice the external factors (A-D) that might alter the shift assumption.  The political and market landscape induces payers to change prices due to other influences, such as their market power, reputation, or (excessive) internal costs.  To assume that because one payer zigs, albeit a big one, and reduces their rates, the market uniformly zags. It is not that simple.

It then breaks down to this: if it is not costs exclusively driving prices, perhaps prices may drive costs.  Pause.  Think.

Are hospitals, our mother ships,  cost shifting, or sometimes price discriminating?

If I make a widget for $10, and Sally pays me $5 (she always paid me $10 until today), I will ask Mary to pay me $15.  Cost shift.  If I make a widget for $10, and Sally pays me $10, but I ask Mary to pay me $15—I price discriminate.

However, if my widget now costs $11, what do you call my next step if I ask or charge Mary more.  Also, what gives me the ability to ask her to pay the higher price…and get it.

Yes, this relates to what we do as hospitalists.  Yes, this is important.  Yes, the reimbursement environment and how we comprehend it will effect the resources we receive and how we allocate them.

You know the research surveys we complete every few years, asking whether we received enough systems and health economics training in residency a la Likert 1-5 (one is the right answer btw)?  Well, its here and you may need to understand it.

More to come in Part II:  why your hospital will cut costs…and NOT because Medicare pays too little.

Part II here

About the Author:

Brad Flansbaum
Bradley Flansbaum, DO, MPH, MHM works for Geisinger Health System in Danville, PA in both the divisions of hospital medicine and population health. He began working as a hospitalist in 1996, at the inception of the hospital medicine movement. He is a founding member of the Society of Hospital Medicine and served as a board member and officer. He speaks nationally in promoting hospital medicine and has presented at many statewide meetings and conferences. He is also actively involved in house staff education. Currently, he serves on the SHM Public Policy Committee and has an interest in payment policy, healthcare market competition, health disparities, cost-effectiveness analysis, and pain and palliative care. He is SHM’s delegate for the AMA House of Delegates. Dr. Flansbaum received his undergraduate degree from Union College in Schenectady, NY and attended medical school at the New York College of Osteopathic Medicine. He completed his residency and chief residency in Internal Medicine at Long Island Jewish Medical Center in New York. He received his M.P.H. in Health Policy and Management at Columbia University. He is a political junky, and loves to cook, stay fit, read non-fiction, listen to many genres of music, and is a resident of Danville, PA.


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One Comment

  1. Fernando Petry July 22, 2011 at 9:07 pm - Reply

    As much as I want to agree and commiserate with you, unfortunately the sad truth is that hospitals all around are cutting staff. The biggest financial burden for them right now are employed physicians, whether hospitalists, or employed PCP’s. It’s not just this idea of cost shifting or price discrimination, it’s that they are getting less reimbursement and they are preparing for the end, when VBP comes into play and they start getting payments withheld. The other problem is that RAC’s are auditing admissions, re-admissions and now surgeries for necessity. Hospitals are having to pay back charges sometimes ranging into the thousands for inappropriate admissions. We are a casualty of war, the war on cutting costs in Washington and ultimately on the healthcare system that drains the cofers.

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