Low Medicare and Medicaid reimbursements to hospitals and physicians lead to significantly higher health insurance costs for consumers and employers, according to a study released by Milliman Inc. The report found that annual health care spending for an average family of four is $1,788 higher than it would be if Medicare, Medicaid and private employers paid hospitals and physicians similar rates, with total provider reimbursement unchanged.

The continued underpayment of providers by public programs has devastating consequences for families and employers that are struggling to afford health care coverage. These underpayments create a payment gap to hospitals and physicians that privately insured employers and consumers must close through a "cost shift" or "hidden tax."

The Milliman study measures the cost shift as the difference between actual payment rates and average payment rates for Medicare, Medicaid and private payers; total payment to hospitals and physicians is held constant. The study does not assess appropriate levels of payment, but rather the disparities among current payment rates.
The study found that cost shifting:

* Adds an estimated $1,512, or 10.6 percent, to the average premium for a family of four
* Of this amount, employers pay approximately $1,115 and the employee share is $397
* Families pay an additional $276 more in coinsurance and deductibles due to the cost-shift

"As businesses struggle to cut costs to match sagging revenues, employee health benefits are increasingly at risk," said Rich Umbdenstock, president and CEO of the American Hospital Association. "The faltering economy makes fair payment by Medicare and Medicaid more important than ever."

In 2006, the hospital cost shift from Medicare was $34.8 billion and $16.2 billion for Medicaid. In 2007, the physician cost shift was $14.1 billion for Medicare and $23.7 billion for Medicaid. Taken together, the estimated annual cost shift is $88.8 billion.

Overall, the cost shift represents 15 percent of the current amount spent by commercial payers on hospitals and physicians. Stated differently, if there were no cost shift, hospital and physician costs for privately insured patients would be 15 percent lower.

Health plans have taken many actions to keep coverage affordable, but are challenged by the growing cost of the subsidy that their customers provide to public programs. In 2006, Premera Blue Cross, which provides coverage for 1.7 million consumers in Washington, Alaska, Oregon and Arizona, commissioned a local cost-shift study, the first of its kind, to examine how deficient payments by Medicare and Medicaid are affecting employers and hospitals in their area. Their work laid the foundation for the national cost shift study which examines the additional cost burden passed on to all employers and consumers nationwide.

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