Beware Of Free

Ask the DOC

Health care has emerged as a major campaign topic for Democratic presidential hopefuls this year. Some of them are advancing the concept of “Medicare-for-all” and other free stuff. The theme of today’s column is financial, not political. While I haven’t heard them propose how to pay for it, I would like to delve into how Medicare-for-all might affect the delivery of health care, especially as it pertains to hospitals. Hospitals consume the largest share of healthcare costs, accounting for 35 percent of expenditures in 2017 and amounting to $3.5 trillion that year.

Hospitals currently receive payments from both public and private health insurers through several different payment mechanisms. The largest publicly funded insurance plans, Medicare and Medicaid, pay hospitals via unilaterally set fee schedules. Hospital payment is based on the patient’s diagnosis and that diagnosis-related amount is set by the Centers for Medicare and Medicaid, which oversees both plans. Since the payment amount is both pre-set and fixed, it behooves hospitals to function efficiently and discharge patients as soon as possible. Current estimates place the payment amounts compared to expense amounts of the 5,262 community hospitals in this country at slightly more than 85 percent for Medicare and Medicaid, giving these hospitals about a 14 percent shortfall in operating revenue from public insurance. So, where do hospitals, that usually run on thin profit margins of less than seven percent, get the money to make up for the shortfall from public insurance funding? The answer is private health insurance.

Hospitals and hospital associations negotiate with private health insurance for reimbursement for patient care. Because they must make up for the shortfall from public insurance funding, hospitals negotiate vigorously for higher payments from the private insurers. This is called “cost shifting.” On average, private insurance payments are about 145 percent of hospital expenses. A Medicare-for-all plan that extends the current Medicare fee schedule to all patients would therefore lead to a sharp decline in revenue from formerly privately insured patients and a slight decline from formerly Medicaid covered patients (Medicaid pays hospitals slightly more than Medicare). The estimated decline in revenue for hospitals in this scenario is almost 16 percent, which amounts to $151 billion in lost revenue.

Hospitals could then face the prospect of margins as negative as nine percent, or an annual loss of $85.6 billion unless they could rapidly reduce waste and become more efficient. Some hospitals that built up financial reserves over the last few decades could see those reserves rapidly vanish. Because the most flexible hospital cost is labor, estimates are that 1.5 million hospital jobs would be lost, or about 850,000 jobs if the hospital sacrificed its seven percent operating margin. Many hospitals would undoubtedly be forced to close. And because private health insurance would cease to exist, millions more of those jobs would be lost.

Hopefully this doomsday scenario will never become a reality, but when politicians spout off about free stuff, someone needs to ask them who pays for it and what its consequences would be. The political pessimist in me says that they would not be able to logically answer either question.

The data and statistics source for this column is Journal of the American Medical Association, May 7, 2019, Vol.321, number 17, pp. 1661-2

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