Report Employers Subsidize Public Health System by $88 Billion

By Staff Report

Dec. 9, 2008

Employers have long known they pay more for the same medical services than the federal government.

This difference is often described as a subsidy that helps hospitals and doctors make up for the low—and sometimes money-losing—reimbursement rates paid by Medicare and Medicaid.

Now, actuarial firm Milliman has quantified the impact of the subsidy on employers and employees, revealing that the difference tops $88 billion annually.

According to a study funded by the insurance industry and released Tuesday, December 9, employers pay an additional $1,115, or 10.6 percent more, for a family of four’s health insurance premium to help doctors and hospitals make up for lower payments they receive from Medicare and Medicaid. Employees pay an average of $397 more annually in premiums and $276 more in coinsurance and deductibles.

Milliman said its report was the first to quantify the employer cost of low reimbursement rates to both hospitals and doctors.

The industry said the report did not attempt to assess whether the levels of reimbursement were appropriate. The report only attempted to quantify the difference between what Medicare and Medicaid pay and how much it costs private employers for identical health services.

In a statement, the health insurance industry called this difference a “cost shift,” or a “hidden tax,” on employers and employees.

Using data from 2006 and 2007, the report estimates that annual cost shift to employers is $88.8 billion.

“Medicare and Medicaid are not paying providers enough to cover their costs, and so employers and employees end up footing the bill,” said Robert Zirkelbach, a spokesman for the Washington-based insurance lobby America’s Health Insurance Plans.

With skyrocketing health care costs, Congress has attempted to reduce Medicare reimbursement rates to physicians and hospitals. But a bill to reduce payments by 10 percent failed. Congress eventually increased payments for 2009 by 1.1 percent.

The insurance group says health care reform efforts to increase the number of people with health insurance should focus on reducing costs, but not simply by slashing reimbursement rates to doctors and hospitals. The report was endorsed by the American Hospital Association and the U.S. Chamber of Commerce.

Doctors say low reimbursement rates mean they must see more patients per day to make up the lost revenue. The result is that patients often do not get the time they need with their doctor, says Khurrum Pirzada, a doctor at a primary care practice in suburban Detroit.

More than half of his patients have either Medicare or Medicaid. His office has focused on improving its operational efficiency to keep up with an increase in the number of patients and improve the quality of care its doctors provide.

“Every year, we’re just treading water financially,” he said.

—Jeremy Smerd

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