In Health Reform, Whose Costs Are We Talking About Anyway?

Just in time for July 4^th weekend, the numbers were out. The Congressional Budget Office (CBO) estimates that if the Better Care Reconciliation Act were to become law, approximately 22 million people will lose health insurance coverage by 2026, (15 million will lose Medicaid and 7 million will lose nongroup coverage). Federal Medicaid spending would go down by $772 billion and spending to provide tax credits to help certain people buy health insurance (along with some other coverage provisions) would decrease by $408 billion (see chart below from the CBO).

Numerous articles have been written providing additional detail and commentary on what the bill’s changes would do to the costs of premiums in the Exchanges, and individual and small group market, as well as the effects on people with Medicaid, so that is not the focus of this piece.

Instead, we’d like to point out a little mentioned aspect of one change envisioned, which is the push from Medicaid to private insurance and what that would do to health care costs.

On Fox News Sunday, June 25, 2017, Dr. Tom Price, Secretary of the U.S. Department of Health and Human Services (HHS) explained to Brit Hume:

“So, what the Senate bill does is say, every single individual between zero between — up to 350 percent of the poverty level ought to be able to have some type of tax credit that will allow them to purchase the kind of coverage that they want. And it’s a tax credit, or refundable tax credit, or advanceable, so that nobody will fall through the cracks, nobody will have the rug pulled out from under them. We want a seamless transition for those that are moving from either Medicaid to the individual market or Medicaid to the employer-sponsored market, so that individuals are able to maintain the kind of coverage that they want for themselves.”

It makes sense that the Republicans are proposing such a solution. As Avik Roy wrote recently in an op-ed for The Washington Post, “For decades, free-market health-reform advocates have argued that the single best idea for improving U.S. health care is to maximize the number of Americans who can afford to buy health insurance for themselves, instead of having to depend on the government or their employer.”

He continues, “The Senate bill repeals Obamacare’s Medicaid expansion — an expansion that has trapped more than 12 million people in a program that researchers have shown has health outcomes no better than being uninsured. In its stead, the Senate bill offers low-income Americans robust tax credits to buy affordable private health insurance, just as those formerly enrolled in Obamacare’s exchanges will be able to.”

It is probably no coincidence that Dr. Tom Price, now Secretary of HHS, is helping design a system that encourages patients to move away from government insurance – especially since government programs pay physicians and other providers so much less than commercial payers.

Two recent studies from the Congressional Budget Office (CBO) highlighted the cost differential between Medicare and commercial payers for both physician services and hospitals. For physician services, CBO concluded what many of us in health policy know, but may be surprising to some:

• “Commercial prices are (sometimes substantially) higher than Medicare fee-for-service (FFS)
• Medicare Advantage prices are very close to Medicare fee-for-service (FFS)
• Commercial prices vary substantially across areas and within areas; Medicare Advantage prices co-vary with Medicare fee-for-service (FFS)”

Here is another chart from the CBO for those of you who are so inclined:

For inpatient hospitals, the CBO conclusion was similar:

• “The average commercial payment rate for a hospital admission in 2013 was about $21,400.
• The average Medicare FFS rate for the same set of stays (in the same hospitals) was about $11,400.
• On average, commercial rates were 89 percent higher than Medicare FFS rates.”

The reason this matters is because Medicaid rates are even lower than Medicare rates, often purposely so. Kaiser Family Foundation, based on data compiled by the Urban Institute, publishes The Medicaid-to-Medicare Fee Index which “measures each state’s physician fees relative to Medicare fees.” In 2014, the national average for all fee-for-service physician services was 0.66; for primary care physician services it was 0.59. In other words, on average, a physician gets paid by Medicaid 66% of what he or she gets paid by Medicare for the same service.

For some services, the Medicare and commercial rates are similar, for example, preventive and primary care visits (99213, 99214, and 99203 in the chart above). For other services, commercial rates paid to physicians are more like 200% of the Medicare rate, for example, breast biopsies (19081 in chart above).

Simply put, a service that earns a physician a reimbursement of $100 in Medicare, earns her or him only $59 in Medicaid. If that service is similarly reimbursed in a commercial plan, the physician earns about 70% more if the patient has commercial insurance instead of Medicaid.

For services that aren’t primary care, the differential is bigger. The physician who is reimbursed $66 in Medicaid, receives $100 in Medicare, but $200 in a commercial plan – so treating a patient with commercial insurance instead of Medicaid earns the physician three times as much in reimbursement.

Ensuring that “individuals are able to maintain the kind of coverage that they want for themselves” and making sure people aren’t dependent on government may be reasonable policy goals.

But let’s be more honest about whether this plan will actually mean we spend less on health care in the U.S.