Cost-Shifting Blamed for Commercial Insurance Cost Growth

The average per capita cost of healthcare services covered by commercial insurance grew by 8.03% over the 12 months ending in September, while costs for Medicare healthcare services grew by only 1.97% for the same period, Standard & Poor's Healthcare Economic Indices show.

The two cost growth indices have both grown in the last several months but at significantly different speeds, with commercial plans far outstripping Medicare, even with the federal healthcare program's older, sicker population, which uses healthcare services more.

David M. Blitzer, chairman of the Index Committee at S&P Indices, attributes the variance in cost growth trends to "the fact that the rate-setting process is administrative and subject to administrative and political issues instead of economic issues."

"It's real obvious," Blitzer told HealthLeaders Media. "It's some guy who may not care that much saying, 'Here is how much you are going to charge. Period! Don't bother me!' That is going to have a different result than if it is negotiated in the market. That's not politics. It's kindergarten economics."

Robert Zirkelbach, spokesman for America's Health Insurance Plans, agrees with Blitzer that the different rates of growth for commercial plans and Medicare can be attributed to cost-shifting.

"Medicare simply dictates the prices they will pay for services, and often those prices are well below the cost of providing those services," Zirkelbach told HealthLeaders Media. "So, what happens is doctors and hospitals charge more to people with private insurance to cover the costs of those services."

September's annual growth rate for Medicare was the lowest in the six-year history of the index. The Medicare index reported its highest annual growth rate of 8.3% in August 2009, but has consistently and sharply decelerated since then, S&P says.

Zirkelbach says provider consolidations also play a role in rising costs for commercial plans. "Our members are getting rate increase requests from providers by as much as 60% and 70% in some markets across the country," he says. "There is a growing body of evidence and research showing that as hospitals consolidate, that leads to higher prices for services. In some markets there is only one 'must-have' hospital in a region that is able to charge significantly more for services, often 200%, 300%, 400% of what Medicare pays for the same services, and that is having a direct impact on the cost of care."   

Overall, the average per capita cost of all healthcare services covered by commercial plans and Medicare grew 5.75% over the 12 months ending in September, representing the fifth straight month of modest cost growth acceleration, the indices show. 

In April, the index for all healthcare services posted the lowest annual growth rate in its six-year history, 5.37%. Since then, the rate of growth has accelerated slightly each month. Another set of S&P trackers, the Hospital and Professional Services Indices, posted increases of 5.51% and 5.78%, respectively, from their September 2010 levels.

Healthcare costs easily outpaced the 3.9% growth in overall inflation as measured by the Consumer Price Index for the same 12-month period, Bureau of Labor Statistics data show.

The S&P Healthcare Economic Indices estimate the per capita change in revenues accrued each month by hospital and professional services facilities for services provided to patients covered under traditional Medicare and commercial health insurance programs.

The annual growth rates are determined by calculating a percent change of the 12-month moving averages of the monthly index levels versus the same month of the prior year.

Blitzer says it would not be wise to use the cost growth trends identified in the S&P report as an argument for a wider single-payer system. "Mandating lower rates in the short term may look wonderful, but you may wake up some day and discover you don't have enough doctors, or doctors will only do the procedures that only have high-profit margins," he says. "They're not stupid, otherwise they wouldn't be doctors."

Cost-shifting in healthcare will happen as long as providers are required to offer the same services to two groups of patients at substantially different prices, Blitzer says. "Some people suggest it is evil or they are cooking the books. I don't think that is fair. You have fixed costs from running a medical practice or a hospital, and at the end of the year you total the revenues, you subtract the fixed costs, you subtract the variable costs which can be attributed patient by patient, and you hope the number that is left is a positive number."