No, Really — Employer Health Insurance Is Better Than Government Care

Who knew the cost disparities between employer and government health insurance could be so exciting?

Last week, Princeton economics professor Uwe Reinhardt took issue with my July 28 column — “Employer Health Insurance: A Bargain Compared to Government-Sponsored Coverage.” In my piece, I unpacked the numbers from a new American Health Policy Institute study that compared the cost of health coverage in government- and employer-sponsored insurance.

Duke University economist Christopher Conover chimed in a day later to rebut Professor Reinhardt — who followed up two days later with another post of his own. Conover continued the discussion this week.

All caught up? Good. Now allow me to continue the debate.

Professor Reinhardt spends much of his original post characterizing the various components of the Medicaid population in order to claim that it’s unfair to compare folks with employer-sponsored insurance to those with government coverage.

He does quote my acknowledgment that “some of the spending difference [between government and employers] is due to the fact that Medicare, Medicaid, and the Veterans Health Administration tend to serve older, sicker, or special-needs populations.”

He then spends six paragraphs ignoring that acknowledgment.

The employer-sponsored insurance pool is different from the Medicare, Medicaid, and VA pools. But that doesn’t mean we can’t compare groups at all.

Professor Reinhardt posits that Medicaid is a superior alternative to employer-sponsored insurance because its average annual payments for children and adults — $2,359 and $3,024, respectively — are lower than the $3,430 that employers spend per enrollee.

To further substantiate this claim, Professor Reinhardt cites an Urban Institute study that finds that private coverage for Medicaid patients would cost one-quarter more than the government status quo, even with no significant increase in healthcare utilization.

But Medicaid can only deliver those lower costs because it has imposed price controls on healthcare providers. And such controls come with significant trade-offs.

Consider prescription drugs. The federal government requires drug makers to rebate Medicaid up to 23.1 percent of a drug’s average price. If average prices increase faster than inflation, then Medicaid claims an additional rebate. Experts estimate that the average rebate for a brand-name drug in 2011 reached 40 percent.

It’s rather easy for the feds to keep spending down when they can simply pass laws dictating that they must pay less than anyone else.

Ninety percent of states maintain a “preferred drug list” in their Medicaid programs. If a drug isn’t on that list, a patient who needs it has to petition Medicaid officials to get it. Sixteen states limit the number of prescriptions that Medicaid patients can fill each month.

The federal government also caps payments to doctors who treat Medicaid patients. Nationwide, the average Medicaid payment was 61 percent of the average Medicare payment in 2011. The average Medicare payment, meanwhile, was 80 percent of the average private-insurance payment.

Those low payments yield a predictable consequence — Medicaid patients can’t get appointments. A Health Affairs study last summer found that one-third of doctors refused new Medicaid patients in 2012. Only 70 percent of doctors nationwide participated in the program.

A separate Health Affairs study of doctors in Washington State reported even lower figures. Just 50 percent of physicians in the Evergreen State accepted new Medicaid patients.

Professor Reinhardt also disputes my assertion that employer plans’ costs are growing more slowly than the government’s. He offers Medicaid data for 2007-2011 from the Kaiser Family Foundation in response.

The American Health Policy Institute’s report calculates the average annual change in employer health costs per covered life at 1.5 percent between 2003 and 2012, after accounting for inflation. For government payers over the same period, the average annual change was 1.6 percent.

The study draws its data from the Centers for Medicare and Medicaid Services. AHPI’s calculations are straightforward; I encourage Professor Reinhardt to take a look at them.

True, there is wide divergence within government healthcare programs. The AHPI report reveals that Medicaid spending decreased 2.8 percent between 2003 and 2012, while Medicare spending jumped 28.2 percent during the same period.

But those Medicaid “savings” aren’t the result of skillful administration by government officials. Rather, they come at the expense of other payers.

Professor Reinhardt pooh-poohs any notion of a cost-shift from public to private payers, but there’s ample evidence to the contrary.

The AHPI report cites a study from the Kaiser Family Foundation — one of Professor Reinhardt’s preferred suppliers of healthcare data: “Data suggest that both Medicare and Medicaid payments are significantly less than actual hospital costs, while private insurance payments exceed hospital costs by over 30 percent.”

Kaiser estimated that private payers take on an additional $21.1 billion, or $111 per covered life, to make up for Medicare and Medicaid’s underpayments, as well as uncompensated care for the uninsured.

The Medicare Payment Advisory Commission (MedPAC) reports that 64 percent of hospitals lose money on Medicare patients. They have to make up those losses from somewhere — and it certainly isn’t Medicaid, with its even lower reimbursement rates.

Or consider data from the American Hospital Association. It defines “underpayment” as the “amount by which payment is less than costs.” In 2012, Medicare payments amounted to 86 percent of the costs hospitals incurred treating patients in the program. For Medicaid patients, the corresponding figure was 89 percent.

Again, that shortfall has to come from somewhere — or else hospitals would’ve collectively lost $56 billion in 2012. That somewhere? Private payers, including employer health plans.

Hospitals aren’t the only ones claiming that Medicare and Medicaid shift costs. A 2008 report from Milliman, a consultancy, reported that Medicare paid $48.9 billion less to both doctors and hospitals than it would have if all payers paid equivalent rates. For Medicaid, the corresponding figure was $39.9 billion.

Private payers effectively subsidize those discounts for Medicare and Medicaid. Milliman calculates that the typical family of four pays an additional $1,788 annually to offset underpayments by the two programs.

Even government officials admit that cost-shifting is real. Vermont’s state-chartered Green Mountain Care health plan says that the cost-shift is “real — private payers pay more because public payers underpay.” The plan’s officials calculated the cost shift in 2012 to be nearly $287 million.

Still not convinced? Here’s one more expert on government cost-shifting: “Medicaid’s payments to hospitals fall well short of fully allocated costs . . . that shortfall must be covered by other payers — mainly private insurers.”

That expert? Professor Reinhardt.

Charging the privately insured more to offset losses caused by government-mandated price ceilings on the publicly insured isn’t price discrimination, as Professor Reinhardt suggests in his piece — it’s cost-shifting.

Finally, Professor Reinhardt makes no mention of the government’s inability to control fraud in Medicare and Medicaid. This is not an insignificant omission. Nearly 7 percent of all spending in the two programs is “improper,” according to the Government Accountability Office. That’s nearly $65 billion — a figure larger than the entire budget of the Department of Homeland Security.

Meanwhile, the VA — which Professor Reinhardt once told me represented an excellent example of the virtues of single-payer health care — made $2.2 billion in improper payments in 2013, or 4.4 percent of total payments.

And as we learned this year, this excellent example of government health care unnecessarily killed 1,000 veterans over the past decade by rationing care. Malpractice payouts have nearly hit $845 million — and will no doubt head higher as the scandal is resolved.

Reining in health costs will remain a challenge for both employers and government. Evidence shows that the market-friendly approach of the former can control costs without resorting to price controls, restrictions on care, and outright rationing, as the latter must.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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