MEXICAN AMERICAN LEGAL DEFENSE AND EDUCATIONAL FUND
NATIONAL HEALTH LAW PROGRAM
CIVIL RIGHTS EDUCATION AND ENFORCEMENT CENTER
FEINBERG, JACKSON, WORTHMAN & WASOW LLP

To:  Office for Civil Rights, U.S. Department of Health & Human Services

December 15, 2015

ADMINISTRATIVE COMPLAINT

Re: Inadequate Access to Health Care Violates Latino Civil Rights in California’s Medi-Cal Program

Excerpts:

I.  INTRODUCTION

This administrative complaint challenges ongoing civil rights violations in Medi-Cal, California’s Medicaid program. The Medicaid Act is intended to ensure that state programs like Medi-Cal provide access to medical services equal to the access that other Americans have, notwithstanding the low income of those who qualify for Medi-Cal.

Medi-Cal’s inadequate, extremely low reimbursement rates—in both the fee for service and managed care settings—and its failure to adequately monitor access to medical care, effectively deny the full benefits of the Medi-Cal program to the more than seven million Latino enrollees who rely on Medi-Cal for their healthcare. Over the past fifteen years, the level of Medi-Cal reimbursements has fallen in tandem with a rise in the number and proportion of Latinos covered by the Medi-Cal program. Today, no other type of health insurance in California covers a population that is so heavily Latino. The separate and unequal system of healthcare thus violates the protections of Title VI of the Civil Rights Act and the Department of Health and Human Services’ implementing regulations, as well as Section 1557 of the Affordable Care Act, as described below.

VI. DISCUSSION

B. Low Reimbursement Rates Limit Access to Care for Medi-Cal Enrollees.

1. Background on Medi-Cal Rate Setting in California.

Medi-Cal rates in California are set differently based on two payment mechanisms: (1) fee for service; and (2) managed care.

In the fee for service mechanism, the State sets per-service reimbursement rates for a particular procedure, treatment, or service. These rates are near the lowest in the country relative to Medicare rates. Medi-Cal’s 2014 reimbursement rate for primary care was just 42 percent of Medicare’s, ranking forty-ninth out of fifty Medicaid programs in the United States. For all services, including both primary and specialty care, the ratio of Medi-Cal fee for service reimbursement to Medicare reimbursement in California was 14 percent below the national average ratio. This ratio ranks forty-eighth out of fifty Medicaid programs in the United States. Notably, these numbers have likely only worsened in 2015, given reductions implemented this year.

In managed care, which now covers about 77 percent of the Medi-Cal population, plans are reimbursed on a capitated basis with a set amount per member per month regardless of the amount of services provided to that individual. Pursuant to federal regulation, the State is required to set capitation rates for MCOs sufficient to cover a minimum level of services for the populations enrolled in each MCO. Once these capitation rates are set, CMS reviews them to determine whether they are “actuarially sound.” In other words, it reviews them to determine whether they are sufficient to provide the minimum level of services predicted by a third-party actuarial contractor. Additionally, under the Medicaid law, the MCO must also make services available to the same extent as they would be available to Medi-Cal fee-for-service beneficiaries (and thus to the same extent as required by § 30(a)). See 42 U.S.C. § 1396b(m)(1)(A)(i).

Although the rates paid to MCOs are proprietary, it is widely recognized that they are set arbitrarily low due to the use of the low Medicaid fee-for-service fee schedule as a benchmark, or another set of benchmarks provided by plans that may be even lower than the Medicaid fee-for-service fee schedule. Further, the evidence will show that the State typically reverse engineers its capitation rates from budgetary decisions, first deciding how much money to allot for Medi-Cal managed care, then coming up with capitation rates within that budget by manipulating the potential prices for services such that the predicted utilization (from the actuaries) when combined with pricing information, will be within budget. Finally, the State typically selects rates that are at the lower of the range of rates recommended by the actuary.

2. Restricted Access for Medi-Cal Beneficiaries.

The data show that non-elderly adults enrolled in Medi-Cal have substantially less access to health care than Medicare beneficiaries, individuals covered by private insurance plans and/or other groups in the general population.

In 2013, on the eve of the implementation of the Affordable Care Act, the care available to non-elderly adult Medi-Cal enrollees was worse than the care available to those covered by employer-sponsored insurance plans. Medi-Cal enrollees faced disparities at levels that were statistically significant for such measures of availability of care as (a) not having a usual source of care other than an emergency room; (b) not having a personal physician as the main medical provider; (c) difficulty getting a needed doctor’s appointment; (d) difficulty finding a doctor who would see them or accept their health insurance; (e) difficulty communicating with their doctors; (f) being less likely to receive flu
vaccinations; (g) not having a doctor visit in the last year; and (h) delaying medical care because of cost.

The ACA increased enrollment in Medi-Cal, but, as implemented by California, the ACA did not resolve pre-existing access problems. As a result of the Healthy Families transition, ongoing enrollment, and the ACA, over 4 million people enrolled in Medi-Cal over the past two years. A two-year, federally-funded increase in the Medi-Cal reimbursement for primary care to 100 percent of the Medicare reimbursement rate during 2013 to 2014 was allowed to expire without Respondents maintaining the increase through use of state funds (as done by fifteen other states). The increase was applicable to both fee for service and managed care populations and designed to improve access. This short-term investment in increasing primary care provider rates did not result in a sustainable increase in primary care access for Medi-Cal beneficiaries. The State implemented it late (going into effect in 2014 and retroactively reimbursing providers by paying the difference between the Medicare and Medicaid fee schedules after the fact). And, the additional investment of funds ended on December 31, 2014. Thus, regardless of whatever minimal increase in services may have occurred in 2014, it is likely that availability of primary care services for Medi-Cal enrollees has returned to pre-2014 levels.

Indeed, the Medi-Cal provider to population ratio was already substandard, but with the increase in enrollment and withdrawal of the temporary rate increase the gap can be expected to widen even further.

3. Evidence that Low Reimbursement Rates Limit Medi-Cal Beneficiaries’ Access to Care.

Both the fee-for-service and managed care rates fail to ensure equal access to quality care for Medi-Cal enrollees, as the insufficient reimbursements make it difficult to enlist Medi-Cal primary care and specialty care providers.

C. Disparate Outcomes for Medi-Cal Patients.

As a result of the low access that Medi-Cal enrollees have to primary care, many Medi-Cal recipients are not referred to specialists for treatment of acute conditions and illnesses. Chronic conditions and illnesses thus go untreated or are not adequately treated. Substantially fewer physicians provide care to Medi-Cal enrollees than Medicare beneficiaries in every major medical specialty except two. The two exceptions are obstetrics/gynecology and pediatric care, specialties that the Medicare population is unlikely to need to the same extent as Medi-Cal beneficiaries.

E. Medi-Cal’s Inadequate, Low Rates, Combined with the Lack of Monitoring and Enforcement, Have a Disparate Impact on Latinos.

The low reimbursement rates described above—including within fee for service and managed care—along with the lack of monitoring and enforcement, have an adverse, disparate impact on Latinos because this racial group is disproportionately represented among Medi-Cal enrollees.

F. There Is No Discernible Justification for the Disparate Impact Caused by Low Medi-Cal Reimbursement Rates.

Under Title VI, the HHS Title VI regulations, and Section 1557, a showing of disparate impact shifts the burden to Respondents to justify the adverse disparate impact on Latino Medi-Cal enrollees as necessary or legitimate under the Medicaid statute.

Complainants respectfully submit that Respondents are unable to justify the adverse disparate impact of denial and delay of care and adverse health consequences because a key purpose of the Medicaid Act is to provide Medicaid enrollees with the access to health care afforded other members of the general population irrespective of poverty.

G. The Record Also Demonstrates Intentional Discrimination.

The record demonstrates as well that Respondents engaged in intentional discrimination. Where official action has a racially disparate impact, and “a clear pattern, unexplainable on grounds other than race, emerges from the effect of the state action even when the governing legislation appears neutral on its face,” that gives rise to a strong inference of intentional discrimination. Village of Arlington Heights v. Metropolitan, 429 U.S. 252, 266-67 (1977).

Here, intentional discrimination is evident in the stark differences in reimbursement rates for Medi-Cal (a program overwhelmingly enrolling low- income Latino people), as compared to the rates for Medicare and employer- sponsored insurance plans (programs largely benefitting higher-income, White people). Comparing the higher reimbursement rates when Latinos were a smaller share of Medi-Cal enrollees further demonstrates intentional discrimination. See Arlington Heights, 429 U.S. at 266-68. Additional such evidence includes, as described above, the failure to follow appropriate procedures to set rates for managed care and fee-for-service care to provide equal access to medical care; and the failure to follow legally-mandated monitoring and enforcement procedures. See id. (substantive and procedural departures relevant to intent inquiry).

VII. CONCLUSION

Under 45 C.F.R. § 80.7(c), the Office for Civil Rights must undertake a prompt investigation of this Complaint. Based on the evidence discussed in this complaint and the attachments provided, the Office for Civil Rights should find that Respondents have violated Title VI, the HHS Title VI implementing regulations, and section 1557. The Office for Civil Rights should order Respondents to raise primary care and certain specialty care reimbursement rates to assure that Medi-Cal enrollees have access to medical care to the same extent as care is available to Medicare beneficiaries and individuals covered by employer- sponsored health insurance plans.

Administrative Complaint (24 pages):

http://www.seiu-uhw.org/wp-content/blogs.dir/166/files/2015/12/CivilRightsComplaint_Text_12.15.15.pdf

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Comment:

By Don McCanne, M.D.

There are over seven million Latinos enrolled in Medi-Cal – California’s Medicaid program. Although one of the most important features of the Affordable Care Act was to expand the Medicaid program to cover many more individuals and families who have incomes near or below the federal poverty level, the chronic underfunding of this program demonstrates “intentional discrimination” against low-income Latinos in California, since it denies them “access to health care afforded other members of the general population irrespective of poverty.”

Medi-Cal has more comprehensive benefits than does Medicare. But Medi-Cal beneficiaries frequently do not have near the same access to care as do Medicare beneficiaries or privately insured patients, as this Administrative Complaint describes. This is because of a lack of willing Medi-Cal providers since Medi-Cal frequently pays less than the costs of providing care. It is appalling that this then results in de facto discrimination against seven million of California’s low-income Latinos.

Imagine improving the benefits of Medicare so that they were at least comparable to Medicaid. Then place everyone in the same program – an improved Medicare for all. That certainly would not eliminate all discrimination in our nation, but at least it would be a giant step forward in our quest for equitable health care for all.

Over seven million! That’s not right.

Waivers for State Innovation

Department of Health and Human Services
Department of the Treasury
To be published in the Federal Register 12/16/2015

Summary

This guidance relates to Section 1332 of the Patient Protection and Affordable Care Act (ACA) and its implementing regulations. Section 1332 provides the Secretary of Health and Human Services and the Secretary of the Treasury with the discretion to approve a state’s proposal to waive specific provisions of the ACA (a State Innovation Waiver), provided the proposal meets certain requirements. In particular, the Secretaries can only exercise their discretion to approve a waiver if they find that the waiver would provide coverage to a comparable number of residents of the state as would be provided coverage absent the waiver, would provide coverage that is at least as comprehensive and affordable as would be provided absent the waiver, and would not increase the Federal deficit. If the waiver is approved, the state may receive funding equal to the amount of forgone Federal financial assistance that would have been provided to its residents pursuant to specified ACA programs, known as pass-through funding. State Innovation Waivers are available for effective dates beginning on or after January 1, 2017. They may be approved for periods up to 5 years and can be renewed. The Departments promulgated implementing regulations in 2012. This document provides additional information about the requirements that must be met, the Secretaries’ application review procedures, the amount of pass-through funding, certain analytical requirements, and operational considerations.

Excerpts:

I. Statutory Requirements

A. Coverage

To meet the coverage requirement, a comparable number of state residents must be forecast to have coverage under the waiver as would have coverage absent the waiver.

The impact on all state residents is considered, regardless of the type of coverage they would have absent the waiver.

Assessment of whether the proposal covers a comparable number of individuals also takes into account the effects across different groups of state residents, and, in particular, vulnerable residents, including low-income individuals, elderly individuals, and those with serious health issues or who have a greater risk of developing serious health issues. Reducing coverage for these types of vulnerable groups would cause a waiver application to fail this requirement, even if the waiver would provide coverage to a comparable number of residents overall.

B. Affordability

To meet the affordability requirement, health care coverage under the waiver must be forecast to be as affordable overall for state residents as coverage absent the waiver.

Affordability refers to state residents’ ability to pay for health care and may generally be measured by comparing residents’ net out-of-pocket spending for health coverage and services to their incomes. Out-of-pocket expenses include both premium contributions (or equivalent costs for enrolling in coverage), and any cost sharing, such as deductibles, co-pays, and co-insurance, associated with the coverage.

Waivers are evaluated not only based on how they affect affordability on average, but also on how they affect the number of individuals with large health care spending burdens relative to their incomes. Increasing the number of state residents with large health care spending burdens would cause a waiver to fail the affordability requirement, even if the waiver would increase affordability for many other state residents. Assessment of whether the proposal meets the affordability requirement also takes into account the effects across different groups of state residents, and, in particular, vulnerable residents, including low-income individuals, elderly individuals, and those with serious health issues or who have a greater risk of developing serious health issues. Reducing affordability for these types of vulnerable groups would cause a waiver to fail this requirement, even if the waiver maintained affordability in the aggregate.

In addition, a waiver would fail the affordability requirement if it would reduce the number of individuals with coverage that provides a minimal level of protection against excessive cost sharing.

C. Comprehensiveness

To meet the comprehensiveness requirement, health care coverage under the waiver must
be forecast to be at least as comprehensive overall for residents of the state as coverage absent the waiver.

Comprehensiveness refers to the scope of benefits provided by the coverage as measured by the extent to which coverage meets the requirements for essential health benefits (EHBs) as defined in section 1302(b) of the ACA, or, as appropriate, Medicaid and/or CHIP standards. The impact on all state residents is considered, regardless of the type of coverage they would have absent the waiver.

A waiver cannot satisfy the comprehensiveness requirement if the waiver decreases: 1) the number of residents with coverage that is at least as comprehensive as the benchmark in all ten EHB categories; 2) for any of the ten EHB categories, the number of residents with coverage that is at least as comprehensive as the benchmark in that category; or 3) the number of residents whose coverage includes the full set of services that would be covered under the state’s Medicaid and/or CHIP programs, holding the state’s Medicaid and CHIP policies constant. That is, the waiver must not decrease the number of individuals with coverage that satisfies EHB requirements, the number of individuals with coverage of any particular category of EHB, or the number of individuals with coverage that includes the services covered under the state’s Medicaid and/or CHIP programs.

Assessment of whether the proposal meets the comprehensiveness requirement also takes into account the effects across different groups of state residents, and, in particular, vulnerable residents, including low-income individuals, elderly individuals, and those with serious health issues or who have a greater risk of developing serious health issues. A waiver would fail the comprehensiveness requirement if it would reduce the comprehensiveness of coverage provided to these types of vulnerable groups, even if the waiver maintained comprehensiveness in the aggregate.

D. Deficit Neutrality

Under the deficit neutrality requirement, the projected Federal spending net of Federal revenues under the State Innovation Waiver must be equal to or lower than projected Federal spending net of Federal revenues in the absence of the waiver.

The estimated effect on Federal revenue includes all changes in income, payroll, or excise tax revenue, as well as any other forms of revenue (including user fees), that would result from the proposed waiver. Estimated effects would include, for example, changes in: the premium tax credit and health coverage tax credit, individual shared responsibility payments, employer shared responsibility payments, the excise tax on high-cost employer-sponsored plans, the credit for small businesses offering health insurance, and changes in income and payroll taxes resulting from changes in tax exclusions for employer-sponsored insurance and in deductions for medical expenses.

The effect on Federal spending includes all changes in Exchange financial assistance and other direct spending, such as changes in Medicaid spending (while holding the state’s Medicaid policies constant) that result from the changes made through the State Innovation Waiver. Projected Federal spending under the waiver proposal also includes all administrative costs to the Federal government, including any changes in Internal Revenue Service administrative costs, Federal Exchange administrative costs, or other administrative costs associated with the waiver.

V. Operational Considerations

A. Federally-Facilitated Exchanges

The Centers for Medicare & Medicaid Services (CMS) operates the Federally-facilitated Exchange (FFE) platform. Certain changes that affect FFE processes may make a waiver proposal not feasible to implement at this time. Until further guidance is issued, the Federal platform cannot accommodate different rules for different states.

B. Internal Revenue Service

Certain changes that affect Internal Revenue Service (IRS) administrative processes may make a waiver proposal not feasible to implement. At this time, the IRS is not generally able to administer different sets of rules in different states.

https://www.federalregister.gov/articles/2015/12/16/2015-31563/guidance-waivers-for-state-innovation

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Comment:

By Don McCanne, M.D.

Section 1332 of the Affordable Care Act allows states to apply for waivers to exempt them from some of the requirements of the legislation so that they can introduce their own innovations that they believe would better serve their respective states. This final federal rule on the waivers provides guidance on how much flexibility will be allowed.

The good news is that those states that would use waivers to cut back on benefits provided under the program will not have much flexibility to do so under these rules. Particularly important is the fact that, not only must overall average coverage, comprehensiveness and affordability be maintained, the states are prohibited from adopting innovations that would leave more vulnerable individuals worse off. As we have seen from state responses to the Medicaid expansion, some governors are quite willing to reduce or eliminate benefits for those most in need.

The bad news is that those who have held up hopes that Section 1332 would open the doors for a state-based single payer system will find that these rules significantly limit flexibility. Also required by these rules is extensive documentation that would confirm that the state is fully compliant with the specific stipulations of the waivers. That could be very difficult with a state reform model that attempts to place everyone in one program with a single risk pool funded by multiple sources, including ACA premium credits and cost-sharing subsidies.

Regardless, these rules should not deter state activists from moving full steam ahead in supporting every measure possible that would improve health care access for the residents of their states. Until we have a political climate that would support the requisite federal legislation, we need to accomplish whatever we can on the state level.

That said, since isolated state efforts will inevitably fall short of achieving health care nirvana, at the same time we must intensify our efforts to change the political climate so that we can finally achieve our goal of enacting a single payer national health program. That still has to be our number one priority.

Correction

The Quote of the Day for December 14, 2015 was on HHS and Treasury guidance for ACA Section 1332 state waivers. It was titled, “Final rule on requirements for Section 1332 state waivers,” but it was not a rule.

Timothy Jost provides an excellent discussion of the Section 1332 guidance, which is well worth reading for single payer activists. In it he explains the difference between guidance and rule, as follows:

HHS And Treasury Release Substantive Guidance On ACA State Innovation Waivers

By Timothy Jost
Health Affairs Blog, December 11, 2015

Flexibility Limited To Waivers That Meet The Goals Of The ACA — For Now

Anyone who thought that the 1332 waiver program would allow states to design health care programs that deviated radically from the program found in the ACA will be disappointed by the guidance. But that should come as no surprise: section 1332 on its face authorizes programs that meet all of the affordability and comprehensiveness aspiration of the ACA, just through a different approach. States that have innovative ideas that will promote the goals of the ACA, however, should be able to get approval under this guidance.

It should be noted in conclusion, though, that this is only guidance, not a rule. Guidance can be changed easily; rules can only be changed through rulemaking, which takes time and requires a reasoned explanation. Section 1332 innovation waivers cannot take effect until 2017, and in 2017 we will have a different administration.

Health Affairs Blog, Timothy Jost:

http://healthaffairs.org/blog/2015/12/11/hhs-and-treasury-release-substantive-guidance-on-aca-state-innovation-waivers/

Federal Register, “Waivers for  state Innovation”:

https://www.federalregister.gov/articles/2015/12/16/2015-31563/waivers-for-state-innovation

Improving Health And Health Care: An Agenda For Reform

By Joseph Antos, James Capretta, Lanhee Chen, Scott Gottlieb, Yuval Levin, Thomas Miller, Ramesh Ponnuru, Avik Roy, Gail R. Wilensky, and David Wilson
Health Affairs Blog, December 9, 2015

We are among those who opposed the ACA because of its heavy emphasis on federal control.

The plan we present is not confined to replacing the ACA. We propose major reforms to the tax treatment of employer-sponsored health care, Medicaid, Medicare, Health Savings Accounts, and other areas of existing policy. The cumulative effect of this comprehensive plan would be to decisively reorient health care policy away from bureaucratic regulation and toward the preferences of patients and consumers.

Overall Principles:

*  Government Subsidies Should Come In The Form Of Defined Contribution Payments

*  Reform Should Move Power And Control From The Federal Government To The States And The Empowered Patient-Consumer

*  Suppliers Of Medical Services Must Have Greater Freedom To Innovate And Provide Better Services To Empowered Patient-Consumers

*  Reform Must Improve The Federal Fiscal Outlook By Reducing Long-Term Health Obligations (reduce federal spending)

Replacing The ACA:

*  Retain The Tax Preference For Employer-Paid Premiums, With An Upper Limit

*  Provide Refundable Tax Credits To Households Without Access To Employer Coverage

*  Allow States To Regulate Insurance Offerings And To Establish Mechanisms For Consumer Choice Of Plans

*  Provide ‘Continuous Coverage Protection’ For Persons With Preexisting Conditions (lose guarantee after three months without coverage)

*  Allow States To Adopt A Default Enrollment Program

*  Allow For A Gradual Transition From ACA Subsidies (no new enrollees for ACA subsidies or Medicaid)

Reforming Medicaid To Allow More State Control And Consumer Choice:

*  Pursue Separate Reform Strategies For Medicaid’s Two Distinct Parts (healthy families vs. disabled and elderly)

*  Finance Medicaid With Fixed Federal Funding (block grants)

*  Empower The Disabled And Frail Elderly (let the states do it)

A Market-Based Reform Of The Medicare Program:

*  Adopt The Premium Support Reform Model (vouchers for private plans)

*  Promote Consumer Decision-Making

*  Modernize Medicare’s Benefits

*  Reform Medigap And Other Supplemental Coverage (more cost sharing and use limited networks)

*  Reform Medicare’s Payment Policies And Eliminate Unnecessary Bureaucratic Controls (abolish IPAB and CMMI)

*  Gradually Raise The Eligibility Age To 67

Lifelong Use Of Health Savings Accounts (HSAs):

*  Provide A One-Time Federal Tax Credit Matching Enrollee Contributions To HSAs (up to $1000 once in a lifetime)

*  Eliminate The Minimum Deductible Requirement (no HDHP required)

*  Allow Nontraditional Payment Methods (allow direct-pay, etc.)

*  Include HSAs In Medicaid Reform (high-deductible plans for Medicaid)

*  Integrate HSAs Into Medicare (high-deductible Medicare Advantage)

*  Allow Withdrawals Tax-Free After Age 75 Above A Minimum Balance (reward savers)

*  Allow Tax-Free HSA Rollovers To Designated HSAs At Death

Additional Reforms:

*  Reform Federal Funding Of Graduate Medical Education (cutting the funding substantially)

*  Reform The Federal Employees Health Benefits Program (defined contribution)

*  Integrate Veterans Into Mainstream Coverage, And Refocus VA Health Care

*  Improve The Transparency Of Useful Cost And Quality Data (stimulate better decision-making by consumers)

http://healthaffairs.org/blog/2015/12/09/improving-health-and-health-care-an-agenda-for-reform/

Full report from American Enterprise Institute, AEI (70 pages):

http://www.aei.org/wp-content/uploads/2015/12/Improving-Health-and-Health-Care-online.pdf

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Comment:

By Don McCanne, M.D.

Why should we be interested in a comprehensive health reform proposal from representatives of AEI and other conservative/libertarian organizations? Simply because the authors are prominent in the health policy arena and have considerable influence in crafting reform proposals for Republican politicians.

Speaker of the House Paul Ryan has promised this next year a comprehensive Republican plan to replace the Affordable Care Act. Although President Obama would not approve legislation containing many of the features listed in this proposal, nevertheless, the Republicans do intend to gain greater control of the political arena, and would hope to move forward with a Republican administration. It is important to understand what they would do with our health care system. By having this knowledge, we can more effectively inform the process.

The Growing Difference Between Public And Private Payment Rates For Inpatient Hospital Care

By Thomas M. Selden, Zeynal Karaca, Patricia Keenan, Chapin White, and Richard Kronick
Health Affairs, December 2015

Medicare’s payment rate in 2012 for the average inpatient stay in that year was, in inflation-adjusted dollars, similar to what Medicare would have paid in 1996 for the average stay in that year.

During the period 1996–2001, differences in predicted standardized payment rates were relatively small across primary payers, and payment rate differences remained relatively constant. Since 2001, however, payment rates for stays covered by private health insurance have diverged sharply from payment rates for those covered by Medicare and Medicaid.

The predicted percentage difference between the rates of private insurers and those of Medicare has increased substantially over time. In 1996 private insurers paid 106.1 percent of Medicare payment rates, a payment rate difference of 6.1 percent. This payment difference rose to 64.1 percent in 2011 and 75.3 percent in 2012. Medicaid payment rates averaged approximately 90 percent of Medicare payment rates throughout the study period, with differences in most years that were not significantly different from zero.

Our findings can offer insights into policy prescriptions, including the recent recommendation to cap private insurance payments at 125 percent of Medicare rates. Our findings suggest that such a cap would affect far more than just the most egregious cases.

Our findings also highlight the following important questions for further research. To what extent, if at all, is the private-public differential due to cost shifting from public to private payers, given the growing body of evidence that challenges the existence of such cost shifting? Or to what extent is the differential due to hospitals’ exploiting market concentration or engaging in a technological “arms race,” in which they invest heavily in expensive diagnostic and surgical equipment? To what extent have the declines in private inpatient hospital stays between 2008 and 2012 (from 13.6 million stays to 11.2 million) contributed to the widening differential? More important, what are the impacts of the growing differential on consumers? Has the differential had any effect on access to or quality of care for public patients, or on private patients’ financial burdens?

http://content.healthaffairs.org/content/34/12/2147.full.pdf

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How Much Do Hospitals Cost Shift? A Review of the Evidence

By Austin B Frakt
The Milbank Quarterly, March 2011

From the Discussion

Cost shifting is just one of many possible responses to shortfalls in public payments to hospitals (another is cost cutting). Moreover, private payment-to-cost margins change for many reasons other than cost shifting (another is changes in the balance between hospitals’ and health plans’ market power). Indeed, the theoretical literature on the subject shows that cost shifting can take place only if hospitals both possess market power and have not fully exploited it. This limits both the conditions under which cost shifting is possible and its extent. Once market power is fully exploited, as it would be by a profit-maximizing firm, there is no more room for cost shifting. The theoretical literature also reveals the potential endogeneity of public prices in models of private ones, the role of costs and that of hospitals’ and plans’ market power.

Given these findings, what can be said about the likelihood of cost shifting in the future? Relative to the period in which cost shifting is most likely to have occurred at a relatively high rate (when indemnity plans were the norm, from 1987 to 1992), plans now are better able to resist price increases due to network-based contracting. Conversely, relative to the period in which there was likely no cost shifting (when tightly managed care dominated in the mid-1990s), price competition is now weaker because consumers are less accepting of networks with the same level of restrictions as existed then. To the extent that hospitals still have some unexploited market power, perhaps some cost shifting is possible, but given the results of papers I reviewed, it is likely to be at a rate closer to twenty cents on the dollar than the dollar-for-dollar rate suggested by industry-funded reports.

The exploitation of market power is the privilege of private industry, subject to antitrust regulation, from which our market-based health system is not immune. Plans’ and hospitals’ market power may shift again with the new health reform law. The PPACA calls for pilot programs of the accountable care organization (ACO) payment model, which will compensate integrated groups of providers on a capitated basis for all the care for a population (Gold 2010). This will encourage providers to integrate, possibly increasing their market power (Frakt 2010b; Reinhardt 2010). If plans’ market power holds constant or is weakened, it is likely that private prices will increase, even without changes in public payments.

http://www.ncbi.nlm.nih.gov/pmc/articles/PMC3160596/

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Comment:

By Don McCanne, M.D.

Medicare has long been credited with being a more efficient purchaser of health care than has the private insurance industry. Evidence of that has been lower payments made by Medicare compared to the higher payments made by private insurers.

Private insurers have claimed that lower Medicare payments have shifted costs to the private insurers. But Austin Frakt and others have shown us that it is primarily the market power of the hospitals and provider groups that have driven up private insurer payments, while Medicare payments have held steady independently of what private insurers are paying.

The report from the Agency for Healthcare Research and Quality (AHRQ), published in the current issue of Health Affairs, confirms that Medicare payments, adjusted for inflation, have held steady for the last two decades, whereas private insurance payments have continued upwards at an increasing rate, such that, as of 2012, private insurers pay 75 percent more than Medicare.

Medicaid, another public payer, has maintained payment rates at about 90 percent of Medicare’s, also at a steady rate adjusted for inflation.

Where should the balance be? Our public payers have been able to hold rate increases at the level of inflation, and that benefits the taxpayers. Our private insurers have been able to infuse more money into the health care delivery system, and that benefits the providers of health care. But private insurers pay higher rates at the cost of higher premiums, benefit reductions, and greater patient cost sharing. The private insurers have been much less effective in moderating the high rate of health care inflation, and that harms patients financially.

We should be concerned about the movement on multiple fronts to further privatize public health insurance programs. Medicaid is being shifted to private managed care programs. Enrollment in private Medicare Advantage plans continues to expand. Efforts to convert Medicare into a premium support program (vouchers to purchase private plans) are intensifying. Of course, private plans place a very costly administrative burden on our health care system. Do we really went to do this when the private insurers have already proven to us that they cannot adequately control health care prices?

Health care providers do not think that they are being paid too much by the private insurers. But when they see how much less the public insurers – Medicare and Medicaid – are paying them, they are likely to join the chorus of demanding that our public insurers be replaced with private plans.

Under further privatization of our health care financing, it will be the patients who are stuck with the public (tax) and private (premiums and cost sharing) bills. The pain would be much less with a well designed single payer national health program.