(June 7, 2007) Government underpayment to hospitals in the Medicare and Medi-Cal programs are a substantial factor in driving up private health care costs, according to a study released yesterday by the California Foundation for Commerce and Education (CFCE), a non-partisan think tank for the business community.

CFCE, a non-profit corporation affiliated with the California Chamber of Commerce, commissioned Professor Daniel P. Kessler of the Stanford University Graduate School of Business, and senior fellow at the Hoover Institution, in fall 2006 to focus on the extent to which California uncompensated care costs are actually shifted to private payers.

The first-of-its-kind study found that the cost shifting from Medicare and Medi-Cal is substantial. In fact, increasing reimbursements to cover these patients’ costs would lead to a decline in hospitals private payer markup of 10.8 percentage points.

“The message to state and federal policy makers is clear: the most efficient way to reduce private health care premiums is to increase public insurance program reimbursements,” said Loren Kaye, CFCE President. “There are many benefits from increased health care coverage for the uninsured, but a significant reduction in private payer premiums is not one of them.”

On the other hand, according to Kessler, cost shifting from the uninsured is minimal: increasing reimbursements to cover indigent patients’ costs would lead to a decline in California hospitals’ private payer markup of 1.4 percentage points.

Professor Daniel P. Kessler the Stanford University Graduate School of Business, and senior fellow at the Hoover Institution, left, and Loren Kaye, CFCE President, right.

These findings have several implications for current policy debates. According to Kessler, “state health policy reforms that seek to cover the currently uninsured are unlikely to lead to significant reductions in private insurance premiums, at least due to decreases in cost shifting. In contrast, increases in public-program reimbursement rates could have an economically important impact on premiums.”

The study also reviewed the current literature on the magnitude and effect of the cost shift, and found that it has significant limitations. Only two studies investigate the extent of cost shifting from the uninsured, and these have fundamental weaknesses. Until now, no study has yet analyzed the most recent data from California hospitals, to investigate whether cost shifting in the state has intensified or moderated in the 2000s.

Methodology
The paper used publicly available data on California hospitals from the Office of Statewide Health Planning and Development from 2000 to 2005. Kessler calculated how hospitals’ markups on Medicare, Medi-Cal and indigent patients affect their markup on private-payer patients, holding other characteristics of hospitals and their market environment constant. Then he calculated how hospitals’ markups on private-payer patients would fall if the revenues for Medicare, Medi-Cal and indigent patients were increased to cover costs.

To view the report visit: www.cfcepolicy.org/reports

Contact: Loren Kaye