Missouri Hospital Cost-Shift Report

Key Findings
  • Cost shifting imposes a significant ?hidden health care tax? on privately insured Missourians. Medical care provided with reduced or no compensation is a significant driver of cost shifting.
  • Cost shifting occurs when health care providers are reimbursed at a higher rate for privately insured patients in order to cover the losses incurred by treating Medicare and Medicaid patients and uninsured or underinsured patients who default on payments for services previously rendered in good faith.
  • Missouri hospitals provided $10.5 billion in uncompensated care throughout the past decade. growth in uncompensated care exceeded 90 percent between 2002 and 2011. Per capita growth in uncompensated care exceeded 80 percent.
  • During the same period in Missouri, net earnings per capita increased nearly $400 per month. Adjusting for inflation brought the real gain in net earnings for Missourians to just $23 per month. After accounting for cost shifting attributable to uncompensated care, annual net earnings for the average privately insured Missourian was $370 lower in 2011 compared to 2002.
  • Hospital uncompensated care in Missouri was $1.3 billion in 2011. it is projected to grow to more than $3.5 billion per year by 2019. Medicaid reform would offset $11.1 billion in uncompensated care in Missouri between 2014 and 2019. The decision to expand Medicaid carries the potential to substantially reduce the ?hidden health care tax? burden for privately insured Missourians and their employers.

Data and analytic support provided by the Hospital Industry Data Institute, the data company of the Missouri Hospital Association.

On Feb. 10, 2013, The Wall Street Journal chronicled the tough choices facing states in the Medicaid reform debate. A headline on one graphic in the article called out, ?If states spurn Medicaid, employers could foot the bill.? 
As the Journal noted, there are ?? tough choices for states. If states don?t expand the Medicaid programs, the cost of covering millions of uninsured full-time workers will fall to employers.? As described in the article, the director of New Mexico?s Human Services Department called it a ?de facto tax increase.? Missourians call this the ?hidden health care tax.? Amanda Austin, director of federal public policy for the National Federation of Independent Business, told the Journal ?Business owners may be exposed [to higher costs] if the expansion does not go through.? 
So, why are Missourians facing a ?hidden health care tax? in excess of $1 billion if the state fails to reform Medicaid? The logic is simple, but the calculations are complicated. In a nutshell, hospitals are reimbursed below their cost of delivering care when they treat Medicare and Medicaid patients, and they are frequently uncompensated altogether 
for treating uninsured and underinsured patients. Some of the burden of uncompensated care is typically passed on to privately insured individuals, a practice known as 
cost shifting, or the ?hidden health care tax.? This report reviews the concept of cost shifting and takes a closer look at one of its major drivers ? hospital uncompensated 
care. Because of shifts in the health insurance market, state Medicaid policy and the more recent economic downturn, the trend line for uncompensated care in Missouri 

has grown at a staggering pace during the past decade. The continuation of this trend and resulting cost shift is a major factor in lawmakers? consideration to expand Medicaid coverage to individuals earning less than 138 percent of the federal poverty level ($26,951 for a family of three) beginning in 2014. 
Cost shifting could increase in the near future. Missouri hospital payment cuts from Medicare and Medicaid totaling $4.2 billion between 2013 and 2020 were intended to create savings that would be used to cover more of the uninsured through Medicaid expansion and health insurance exchanges. However, in June 2012, the U.S. Supreme Court ruled that the mandate to expand Medicaid was optional for states. Although these cuts will increase pressures to pass uncompensated health care costs on to the privately insured, expanded Medicaid coverage will actually mitigate much of the effect by reducing hospitals? burden of caring for uninsured and underinsured Missourians. Although the uninsured account for a relatively small share of hospital utilization, they account for a disproportionate share of the uncompensated costs that hospitals must make up through a variety of means. Hospitals treating Medicaid patients in Missouri are reimbursed at approximately 65 percent of costs. For uninsured patients and patients with high deductible health insurance plans who can?t afford to pay them, hospitals often receive little or no compensation.

How does cost shifting work?

Assume that one out of every five customers who bring their cars to an automobile dealership for repair are unable to pay. By law, the auto dealer must repair their cars and because the dealership cannot collect from the customers, their services are written off as either ?uncompensated? or ?bad debt.? Also assume that two out of the five receive 

significant discounts for their care, and again, the auto dealer is required to repair their cars for this discounted rate. now, nearly half of the repair business is either heavily 
discounted, or those services are provided for free. How does the dealership stay in business? The costs are shifted to those who pay for their car repairs. 

Cost shifting occurs when health care providers are reimbursed at a higher rate for privately insured patients in order to cover the losses incurred by treating uninsured or 
underinsured patients who default on payments for services previously rendered in good faith. The concept of cost shifting is presented graphically in Figure 1. Some arguments that dispute the existence of cost shifting are based on the premise that health care providers are motivated primarily by profits, so they will set prices as high as possible regardless of reimbursement rates from public payers and the number of patients unable to pay for services. To the contrary, many health care providers, particularly hospitals, have missions to improve the health of their patients and communities by providing patients access to medical care, regardless of their ability to pay. 
As such, hospitals shift costs when doing so allows them to provide care to the maximum number of patients, regardless of their insurance status. Hospitals? mission statements are significant drivers of their business practices, which affects the payments they receive from different insurers. 1 Further, such arguments disregard the Emergency Medical Treatment and Active Labor Act federal law that hospitals provide care to anyone in need of emergency health care treatment regardless of their citizenship, legal status or ability to pay.
Although cost shifting is not a new phenomenon, the current reimbursement of hospitals by the Centers for Medicare & Medicaid Services below the cost of care is different from the program?s original design. When Medicare and Medicaid began, reimbursements were designed to cover costs plus a 2 percent profit margin on care provided by forprofit hospitals and a 1.5 percent margin for nonprofit hospitals. The positive returns were eliminated in 1969, when hospitals were reimbursed at their reported cost.2 This approach was criticized because it did not place pressure on hospitals to reduce health care costs, which were already increasing much faster than wages and inflation during the 1970s. Beginning in 1983, Medicare transitioned to a prospective payment system in which hospitals were paid based on costs incurred in prior years. Justification for the lower reimbursement was based on the notion that it more closely aligned incentives to control costs and encourage efforts within the health care sector to slow the pace of rising costs. As intended, lower reimbursement rates forced health care providers to cut costs and increase efficiency. The drawback is that efficiency gains are subject to the law of diminishing marginal returns ? each dollar saved becomes increasingly difficult to capture. Experts hypothesize one adverse outcome of underreimbursement in the face of diminishing marginal efficiency gains may be reductions in the quality and intensity of care that health care providers are able to extend to 

patients, particularly under a fee-forservice payment structure.3,4,5
Estimates on the scope of cost shifting vary. In 2005, Families USA estimated that private insurance premiums were about 10 percent higher to cover the uncompensated cost of services provided to the uninsured alone. Others have estimated that the effect is less than 2 percent of annual health insurance premiums.6,7 A thorough review of the literature from 1996 to 2011 found that empirically-valid estimates of cost shifting resulted in a 10 to 20 percent increase in premiums for holders of private health insurance policies.2 In 2010, the Congressional Budget Office reported that cost shifting from the uninsured to the privately insured costs the average family an additional $1,000 per year in health insurance premiums.8
THe driVers OF COsT sHiFTing
Cost shifting is mainly driven by underreimbursement for services covered by Medicare and Medicaid and uncompensated care provided to uninsured and underinsured 
patients. The term underinsured refers to individuals with health care coverage but with high exposure to the risk of exorbitant out-ofpocket medical spending. The risk exposure may occur as a result of the deductible structure of the individual?s health insurance policy, the individual or a family member experiencing a catastrophic medical 
event or a combination of the two. A growing number of Missourians are exposed to this risk because of the significant growth in the number of employers shifting their coverage to high deductible health plans. 
In an attempt to rein in costs, many employers and insurance providers are moving toward consumer directed, high deductible health plans. High deductible plans are a major factor driving the growth of uncompensated care. Many of these plans leave individuals liable for out-ofpocket expenses in excess of $10,000 per year.9 High deductible plans have been touted as a mechanism to reduce health care spending because they force patients to assume a large share of the costs upfront, requiring 
them to weigh the benefits of care against the out-of-pocket expense of obtaining it. Unfortunately, these plans also provide strong disincentives for individuals to obtain 
primary and preventive health care services. The unintended consequences of high deductible plans can lead to increased disparities in health and income between the working poor and wealthy families because low-income families are more sensitive to co-payments and deductibles.10,11 Patients often fail to see the value of preventive care and management of chronic diseases because they lack adequate information, or they overestimate the cost of such services. The result is that growth in short-term health care expenditures slows slightly, but population health worsens over time, especially for lowincome and working poor families. The indirect effects and incentive 
structure underlying high deductible plans suggest they could actually increase health care spending in the long run. 
A recent study found that in 2012, about 13 percent of individuals covered by employer-sponsored health plans were in a high deductible version. For 2013, 70 percent of firms surveyed said they would offer a high deductible plan, and nearly one-fifth will offer only high deductible plans. The study found that by 2022, half of all privately insured individuals will be covered by a high deductible plan.12 A major concern with these plans is that individuals who are likely to select them based on their low premiums are unlikely to have sufficient resources to pay their deductible should they become ill.13 The popularity of high deductible plans also places an indirect burden on consumers of traditional health insurance plans because they draw younger and healthier individuals from the larger risk pool, leaving the remaining beneficiaries with higher premiums as a result of being in a higher-risk pool. 
The financial burden of health care costs facing families is increasing dramatically. In 2003, 35 percent of the population age 19 to 65 had health care costs at or above 10 
percent of their annual income or deductibles larger than 5 percent of their annual income. In 2007, the number had risen to 42 percent of adults.14 From 1999 to 2009, the 
median income for U.S. families with health insurance through their employer increased from $76,000 to $99,000. This was a nominal increase of more than $1,900 a month for the average family. A recent study found that after adjusting for growth in health insurance premiums, out-ofpocket costs, taxes for public health insurance and inflation, the average family had a 10-year gain of only $95 per month.10,11 If health care costs had increased at the same rate as inflation, the median family would have had an additional $545 of disposable income per month. Health expenditures for Missourians increased an average of 5.8 percent per year between 1991 and 2009. The 
national average was 5.3 percent. In the United States, the average cost of a family?s health insurance premium in 2010 was $13,871. By 2020, this cost is projected to increase by 72 percent to nearly $24,000 per family in the United States. At an average cost of $12,754 per family in
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