April 30, 2011

Opponents of the Affordable Care Act (ACA), derisively referred to as Obamacare, often cite the individual mandate to buy insurance as the chief objection to the act.  Most Americans do not like to be told what to do, whether it is paying taxes or buying insurance.  Proponents of the Act defend the individual mandate by likening it to the requirement to buy auto insurance.  Opponents say that a person can choose not to drive a car, thus making auto insurance an inherently optional choice.   ACA leaves no option.  If you breathe, ACA says you need to have insurance.  So, how did we get to a point where the government tells us we have to buy health insurance?

In 1986, the COBRA act mandated that any emergency room that took Federal money must take care of anyone coming into the emergency room.  The bill originated in a Democratic House, but was passed in the Republican Senate and signed by a Republican president.  Since almost all emergency rooms received either Medicare or Medicaid dollars, it meant that the Federal government would now start telling private hospitals which patients they should treat.

New York City is at the forefront of most reforms.  One of the world capitals of trade and finance, NYC has a large and diverse population crammed into a relatively small space.  Problems in this urban pressure cooker surface earlier than in other areas of the country.  In the 60s, NYC passed a law mandating that any hospital emergency room that received any kind of city money had to treat people whether or not they could pay.  In the late sixties and early seventies I worked in a large privately owned hospital in NYC.  Working part of that time in the emergency room, I saw that not only did hospitals not have a choice in who they could treat but that the patients no longer had a choice either.  Whether in response to possible litigation or by law, an injured person who refused to be taken by ambulance to a hospital was assumed to be under stress and not in their right mind from the injury.  The ambulance drivers were instructed to bring in the patients whether they wanted treatment or not. The emergency room would routinely get injured homeless and drunk patients who had to be coerced into receiving treatment.  Gunshot victims, sometimes anesthetized by alcohol, heroin or other drugs, fought against care, complaining that it was only a flesh wound.  As you can imagine, some of these protesting patients were not a lot of fun to treat.  Patients used the emergency room for runny noses, gassy stomachs and acne flare-ups.  Parents brought their young daughters in upon their first menstruation.  It was particularly challenging to keep the more gruesome gunshot wound, knife stabbing and car accident victims separated from those with less violent complaints and illnesses. 

Today, that emergency room scene plays out daily in hospitals around this country.  The COBRA act provided no federal funding for this mandate of mercy, forcing hospitals to invent creative accounting and pricing policies to offset the cost of charity care.  In a recent publication, an  American Hospital Association survey reported that charity care has increased 20% since 1980.

The real charity care though is not the relatively small 6.1% of total hospital costs that uncompensated care accounts for.  Rather it is the increasing share of patient visits that are covered by Medicare and Medicaid.  As the chart above shows, M & M care accounted for 44% of hospital costs in 1980.  In 2009, it had grown to 55%, with much of that increase coming from Medicaid, the low income insurance program.  Neither Medicare or Medicaid pay the full cost of care.  The chart below shows the growing shortfall in just the last 12 years.

From almost zero in 1997, underpaid hospital costs have grown to over $35B in 2009.  Where do the hospitals get the difference that they lose in treating Medicare and Medicaid patients?  By jacking up reimbursements from those with private insurance.  The chart below shows a 20 year history of the extra that hospitals charge private insurance companies to make up the shortfall in Medicare and Medicaid payments.

This past week, I received the renewal rates for my company’s health insurance program – a 17% increase.  Double digit rate increases have been normal for the past eight years but this year’s increase is the highest yet, surpassing the 13.4% increase a few years ago.  In the face of rapidly rising health insurance premiums, small companies who want to get and keep quality employees face a formidable challenge in providing health insurance to their employees.  Whether one agrees with all the elements of the ACA, small business owners have known for the past decade that something had to be done.

As the chart above shows private insurance companies pay an additional 34% to hospitals to make up for payment shortfalls from Medicare and Medicaid insured patients.  The insurance company passes on that increase to its customers and the resulting cost shifting means ever rising insurance rates.  As the number of Medicare and Medicaid patients continues to grow, the cost shifting will increase in proportion.  Each states sets the Medicaid reimbursement rate for that state.  With many of them experiencing severe budget shortfalls, reimbursement rates will fall, accelerating the cost shift to private insurance patients.

During the upcoming 2012 election campaigns, we are unlikely to hear about the complexities of cost shifting. Politicians have to convey their summary of the problem in two sentences or less.  Is that the fault of politicians or the voters? Republicans will say rising insurance rates are because of Obamacare.  Was it Obamacare that caused the double digit increases during the Bush years?  Democrats will say that the ACA is the cure for the double digit increases of the Bush years.  That’s what I like about election campaign rhetoric – everything is so simple and easy to understand.