Pelosi's cost-shfiting will wreck health care

The House Democrats are all excited about their so-called "robust public option." Nancy Pelosi thinks that they have found a magic bullet to produce a health care bill that will peg government payouts to doctors and hospitals based on the Medicare price-control schedule of payments. The problem is (see below for the differences between price and costs) that the government set prices Medicare below the market costs of that health care. The WSJ explains why this is so very problematic.

Yet as the government pays less, the private sector pays more. Like Medicare today, hospitals will shift some of their losses into higher private insurance premiums. Meanwhile, the public option's premiums will be artificially lower, even before the heavy subsidies that Democrats plan to offer. As private insurance costs increase, private payers will lose market share, intensifying the cost-shift and precipitating an exodus to government from commercial carriers.

Democrats dismiss cost-shifting as a tall tale of the health industry. After all, if providers can increase their revenue by charging private payers more, why haven't they already exhausted this opportunity? Perhaps because, contrary to Washington's fantasy of robber baron doctors, very few hospitals behave like classical profit-maximizing firms. Most are nonprofit institutions with social missions.

The real problem is that government pays so much below costs. A 2006 study in the journal Health Affairs found that for each dollar of cost hospitals incurred, they received $1.22 from private payers and only 95 cents from Medicare. Analysts Allen Dobson and Joan DaVanzo argue that this puts hospitals "in the unenviable position of playing the role of private-sector tax collectors, to maintain their financial solvency."

It's true that cost-shifting isn't dollar for dollar. Providers can absorb some underfunding by cutting services, such as by reducing hospital stays, or investing less in research, teaching and state-of-the-art care. Yet as the Medicare Payment Advisory Commission recently noted, given decades of such Medicare-related losses, "a concern is whether hospitals can constrain costs and still deliver high-quality care." For that reason the Mayo Clinic announced this month that some of its campuses will no longer accept Medicare patients.

The Pelosi Democrats aren't going to give up on trying to leverage in some sort of public option. Their logic is that once they get a program in place, they can start piling on additional mandates and increase the size of the program just as has been done with other government health programs over the years. That is why they're so adamant to get a public option approved. They figure they can hammer out the expansion later. And the result will be to drive private insurers out of the market and throw more and more people into a government-provided insurance plan. That's why they're so excited about describing their plan as "Medicare for Everyone." They just are ignoring the fact that the reimbursement schedule for Medicare won't cover all a doctor or hospital's costs. Someone has to pay the difference. And if we start forcing people out of the private market into the government program, there won't be anyone left to pay the difference. And so the only solution will be to provide less health care. The trajectory of improvements in health care that we've seen in our lifetimes will start flattening out and maybe even trending down. That's the real curve that the Democrats are bending - not the cost curve.