Would The Medicare Buy-In Hurt Providers?

The ink hasn’t dried on the public option compromise but a coalition of hospitals, doctors, insurers and certain lawmakers are already opposing a provision that would allow Americans between 55 and 64 to buy coverage in the Medicare program. Opponents argue that Medicare’s lower reimbursement rates would shift costs to private payers and disadvantage hospitals in rural districts. Some even claim that expanding Medicare would add more individuals onto the rolls of a program that’s going broke:

Federation of American Hospitals: “Any Medicare Buy-In would invariably lead to crowd out of the private health insurance market, placing more people into Medicare….A Medicare Buy-In would involve Medicare rates; would be controlled by CMS; and would crowd out older workers with private coverage who may choose early retirement as a result.”

American Medical Association: “The American Medical Association said it opposes expanding Medicare because doctors face steep pay cuts under the program and many Medicare patients are struggling to find a doctor.”

Sen. Byron Dorgan (D-ND): “We have the lowest Medicare reimbursement rates in the country in North Dakota, we’re at the bottom or second to the bottom. We’d have to straighten out the reimbursement rates before I’d want more buy-in to Medicare at current rates.”

While the Senate legislation recognizes that Medicare does underpay certain providers — and addresses the issue by providing primary care practitioners and general surgeons practicing in health professional shortage areas with a 10 percent Medicare payment bonus for five years beginning in 2011 — the industry’s arguments are largely overstated.

As Ezra Klein explains, according to the latest MedPAC report, “Relative to urban hospitals, Medicare’s payments actually covered a slightly higher percentage of rural hospital costs.” Medicare pays all hospitals the same base amount of money to treat a certain condition, but “adjusts” these payments for overhead and other factors. “Medicare uses the hospital’s own data to make adjustments to the base rate to account for these differences,” suggesting that rural hospitals aren’t under paid for the services they provide. Rather, they receive less than urban hospitals because they provide less services, rely on failing business models — “the areas they serve are shrinking, but the services demanded by customers are increasing” — or “have monopolies over their local areas.”

The last point is crucial to the ‘cost-shift’ argument. MedPAC has concluded that “hospitals that are forced to run efficiently are adequately funded by Medicare payments. That is, Medicare payments are sufficient to cover costs but some hospitals run inefficiently and make it appear otherwise.” The research suggests that hospitals “are raising prices when they have the market power to do so,” not because they are reimbursed at Medicare rates. As the Congressional Budget Office points out, periods of increased competition between providers have “led to a limited amount of cost shifting and also encouraged hospitals to adopt cost-containment measures.”

In other words, critics confuse cost shifts with price differentials. Economists point out that “price differentials are not necessarily the recouping of losses from one payer by overcharging another”; providers often “charge different prices to different market segments” to maximize profits, not to shift costs.

Significantly, the buy-in could also extend the solvency of the Medicare trust fund and undermine critics who argue that the policy is adding more Americans to a “sinking ship.” By bringing in premium dollars from younger beneficiaries and reducing Medicare’s spending for those individuals after they turned 65, the program could stay solvent for longer.