Writing in a New York Times blog, Uwe Reinhardt, a well respected economics professor at Princeton makes the case that Medicare spending is not out of control on the basis that in most past years the rate of increase in Medicare spending on a per capita basis was less than the private sector.
For example, between 1969 and 2010 Medicare costs increase at an annual rate of 8.1% compared with 9.4% for comparable coverage in the private sector. Two thoughts come to mind, 8.1% is nothing to brag about and if one reads the Trustees report it is clear that the per capita cost is not the issue in terms of Medicare affordability, but rather the growing number of beneficiaries. Since Medicare can’t do much about the eligible beneficiaries, to remain viable it must raise premiums or lower it’s per capita cost.
Reinhardt then takes on the argument that Medicare holds down its costs by making lower payments to providers and providers make up the difference via cost shifting. Here is what he says:
The cost-shift hypothesis appears to have widespread, intuitive appeal, especially among employers and their agents, private insurers. Economists, this one included, do not find it persuasive, as can be seen in this review of the economics literature on the cost-shift hypothesis and this summary. Economists believe that what is denounced as “cost shifting” in health care is mainly just good old-fashioned, profit-maximizing price discrimination based on differential market power, which is not to be confused with cost shifting.
The economists’ skepticism aside, I would caution the proponents of the cost-shift hypothesis to think twice before injecting it into the health policy debate.
If private insurers cannot resist price increases for health care in response to lower Medicare fees, then presumably they cannot resist price increases in response to other factors — e.g., the medical arms race, for which hospitals are known, or the “edifice complex” to which many hospitals (and, it should be noted, universities) have succumbed.
In a nutshell, reliance on the cost-shift hypothesis to explain the data in the exhibit above strikes me as an open admission by private insurers that they cannot offer effective countervailing market power vis-à-vis the providers of health care.
It would imply that health-spending growth in the private sector can be constrained only through substantial reductions in the use of health care — either through higher cost-sharing by patients or other managed-care techniques — reductions that would be all the deeper because they would be partly offset by price increases.
In the above highlighted paragraph the case is made that insurers lack market power to control the cost of health care services. I find that curious because market power would mean less choice for consumers. The only way to get market power is to have a very large base of potential patients and yet government policy is trying to encourage more competition among insurers. Does it matter if we call it cost-shifting or profit maximization or even profit maintenance?
Further, if Medicare holds down costs by cutting fees and private insurers do the same, what are the consequences? Is it as simple as less income for providers or does it also translate into less innovation, less necessary services provided or fewer services available from fewer providers? Which is good and which is not?
If one of your customers reduces what it will pay for services, chances are you will seek to make up the loss. If that customer has the power to dictate its price whereby it cuts your profit will you not seek other resources? What do suppliers to Wal-Mart do to make up for that squeeze? How do drug makers limited by European price controls make up the lost revenue … I suspect you know the answer. Are these actions price discrimination or simply a logical reaction to disproportionate market power by one consumer; in health care that being government.
An insurer could exercise market power by severely limiting its provider network while at the same time controlling the market. That is, one insurer in a state and the minimum needed participating hospitals and doctors. Pure economics will not consider patient reaction or satisfaction to such an arrangement. In fact, experience indicates that is the opposite of what patients expect… right or wrong.
The academics can call it whatever they like, for consumers dictatorial market power exercised by the federal government is shifting costs to them.
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