Contractual log-rolling between Medicare and Employer Sponsored Insurance

In this month’s Journal of the American Medical Association, Dr. James C. Robinson, makes an interesting twist on the cost-shifting argument that I need to grapple with.

Ultimately, the insurers are required to make a take-it-or-leave-it offer to physicians, limiting MA payment rates to the TM level regardless of the clinicians’ consolidation and potential bargaining leverage. Some physicians accept those rates and some do not. The facts on the ground say that enough clinicians accept TM rates for MA patients to ensure the growth of the MA program….

How long can this go on? How long will the employers who purchase commercial insurance be willing to pay the high premiums that derive, in part, from high physician payment rates that subsidize MA? The natives already are restless. Employers are shifting an ever-increasing fraction of insurance costs to their employees through deductibles and other forms of cost sharing. Some are dropping coverage for dependents and retirees. A few are dropping health insurance altogether.

Medicare Advantage is growing, implicitly subsidized by commercial insurance.

As I understand the argument being made, physicians are log-rolling their fee schedules with insurers. They take low rates on government programs (Medicare, Medicare Advantage, Medicaid and CHIP) while charging high rates for the private programs. In this story, they are effectively managing the average blended rate instead of the individual program rates. And the average blended rate means private premium payers pay a lot more to bump up the average rates so that doctors participate in anything and everything.

I have a lot of problems with the cost shifting story. Austin Frakt has gone over the theoretical and pragmatic issues with it frequently. Fundamentally, if we believe that doctors and hospitals are usually behave as if they profit seeking entities, they are seeking the best set of prices that they can.

They will prioritize higher paying patients than lower paying patients which is why Medicaid tends to have narrower networks than Medicare or commercial plans. They will make extra hours available to higher paying patients than lower paying patients as they have the choice between an extra hour of clinic time versus working on their short game or playing catch with their kids.

But even more fundamentally, this analysis assumes that all insurers are multi-line carriers.

That is false. And this provides us with a testing opportunity. There are a number of insurers that are in government programs only and don’t have a commercial arm. There are a number of insurers that only offer policies in the commercial space and have no government programs.

If we are to assume that the story being told in JAMA by Dr. Robinson is right, we would expect the insurers that only have government programs would be paying higher rates for their government programs than the insurers who offer both government and commercial products. Conversely we would see carriers that offer only private, commercial products would get better rates from hospitals and doctors than carriers who offer both government and commercial products. The commercial only carriers would then have a significant premium advantage, all else being equal, which would drive the mixed-product carriers out of business or to the margins.

In this story, we should be seeing large national carriers that only offer commercial plans and large national carriers that only offer government programs. We should not be seeing Aetna, United Healthcare, Cigna, all of the Blues, and most of the larger regional carriers offering products with significant market share in both the commercial and government program spaces. Yet that is what we see.

Multi-line carriers, like the ones that we see in today’s health insurance market, make sense if we assume that the evidence of minimal cost shifting is strong and persuasive. In this scenario, insurers gain good pricing due to market power and providers gain good pricing because of their market power. There is minimal cost-shifting and thus minimal subsidization even though there is significant market segmentation and pricing discrimination.

18 replies
  1. 1
    NJSO'B says:

    Related to this, what do you make of the research showing that Medicare and Medicaid rates are below hospital costs, in contrast to private plan rates that are substantially greater than hospital costs? Are hospitals really taking a loss on Medicare and Medicaid patients and then covering that loss through the higher private rates? Is there evidence of cost shifting there?

  2. 2
    Barbara says:

    Would love to chime in here but can’t. I will say that I am highly skeptical that most hospitals and doctors have a highly refined or accurate understanding of their true costs per patient.

  3. 3

    @Barbara: I agree on the true cost part.

    I think that they have enough of a business sense to know that one number is bigger than the other being offered and that enough docs and hospitals have the ability to say yes to one offer and no to another offer.

  4. 4
    Barbara says:

    @David Anderson: A lot of the misalignment in the system could be ameliorated by paying specialists less and primary care physicians more. Medicare drives not only reimbursement for Medicare services but commercial services as well. What is broken in the reimbursement for doctors is an actual effort to understand the value they provide as opposed to the costs that they incur in providing services. There is a built in assumption that everything a doctor does is valuable, which is to say the least, highly questionable. Other categories like drugs and equipment also have problems, but doctors and hospitals are the heavy lifters of medical costs.

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  6. 6
    itstrue says:

    All of this would go away if we moved to some kind of global budgeting system. There’s no reason to shuffle costs between payers or to discriminate on patients if you’ll max out your payments at the end of the year anyway. On the details, I don’t think there should be a set fee schedule; in fact I can see why having one is bad economics by not allowing the share of the budget be determined by supply and demand within the bounds of a capped budget, as well as limiting the range of policy options for improving the quality of care.

    I don’t care what’s public or private, so long as it’s all operating under the same fiscal discipline and ends up being universal. The problem with Medicaid block grants isn’t the absolute limits to funding it imposes– it’s the limits to funding relative to all other payers. All sources of health financing are under the same strains, and should be dealt with under one framework.

    I do care that we have no natural (i.e., market) mechanism for holding down costs for such an inelastic (i.e., needed) good as health care. No amount of accountable-managed-consumer-driven-care-mumbo-jumbo is going to get powerful interests to stop wringing as much money as possible out of the arrangement, especially when providers can simply contract with payers that don’t operate under those constraints, or otherwise play divide and conquer with their monopsony on life and death.

    After doing this for a while, I’ve come to think that too many people in health policy are too smart for their own good, and place too much stock on theoretical models that have never borne out past the anecdotal. Until we have some kind of an arrangement across all payers, public and private, that puts a ceiling on what we spend in a given year, we’re forever dancing around the edges of the health care cost conundrum.

  7. 7
    Barbara says:

    @itstrue: “All of this would go away . . .” No, it won’t. Even those countries with very successful single payer or universal access systems (it’s really universal access we are after, single payer is but one means), struggle with payment and policy issues — with the important caveat that individual citizens are not caught in the middle nearly to the same degree they are here. For instance, people in England protest the non-coverage of cancer drugs the NHS deems not worth the cost in terms of additional survival. What do you do when the budget is exceeded? Where do you cut? Who or what doesn’t get funded?

    After doing this for a while, I’ve come to think that paying and arranging health care will always be a Sisyphean undertaking, with no policy being perfect, and the goal being to find one with drawbacks most people can tolerate. I have also come to appreciate how ridiculously medicalized our view of the world is. The number among us who equate medicine with health.

  8. 8
    Fake Irishman says:


    *snaps fingers in agreement*

  9. 9
    itstrue says:

    @Barbara: Dealing with expensive stuff like $450k cancer drugs will always be an issue under any system, and I agree with your assessment about the NHS or other systems that centralize decisionmaking on what’s covered in this regard. That’s why I think that we shouldn’t ration care by fiat the way they do. But we do need a mechanism to push back on providers, Pharma, etc., to get the best price we can. Having some ceiling on overall spending would bring everyone to the table to parse out the pieces of the pie in a more equitable way. Canada does this under a single payer rubric, where there’s a set provinicial budget and then they figure out how to stretch resources to care for all through negotiations with the unions, hospitals, and provider associations. If there’s a need for more money in the system, then they raise taxes. Germany, the Netherlands, and Switzerland have systems to set fee schedules or global caps and mandate covered services that then give payers real leverage to bargain and compete without generating a race to the bottom in terms of coverage. Premiums are set according to income, with the remainder taken from the treasury.

    All these examples ultimately need to place mandates on what’s deemed “medically necessary,” and they always have complex appeals processes, etc. The cruel choice remains that some people are denied many services, or all people are denied a few services, and who, how, and when really matters. Most places, even the UK, allow for wealthier people to buy supplemental coverage and solve these problems for themselves, but when they take a serious look at what the vast majority of people need before allowing people to buy something that can humanely be called extra. Of that needed part, they set a budget.

    We treat all care as if it’s always needed at whatever price is offered, and that’s what has to change. All health systems face real long-term problems with bringing necessarily expensive but nonetheless life-changing medicine to people who need it. It’s one of the great policy challenges of our time. The thing is, we’re facing it with one hand tied behind out backs by not mandating some level of fiscal discipline from the top. Primary care, social determinants of health, and people ‘living cleanly’ can certainly lower demand for services, (and overall costs) but they don’t do much to prices dictated by the supply if/when the need arises.

  10. 10
    Barbara says:

    @itstrue: Clearly, I agree with what you have written. Although it’s controversial for me to say this, the entities that live with top-down limits on funding in the U.S. are insurers (or HMOs, etc.) and virtually no one else. That’s how Medicare Advantage works within the Medicare system. I have nearly zero faith in the ability of Congress to implement a budgetary driven system that doesn’t put a political thumb on the scale of picking winners and losers in the drive for pieces of a fixed pie.

  11. 11
    Jim Bales says:


    You write:
    In this story, we should be seeing large national carriers that only offer commercial plans and large national carriers that only offer government programs. We should not be seeing Aetna, United Healthcare, Cigna, all of the Blues, and most of the larger regional carriers offering products with significant market share in both the commercial and government program spaces. Yet that is what we see.

    Let me pick a nit here — we only expect to see that if the situation is static and has progressed to equilibrium. The passage you quote describes a dynamic process, not yet fully played out:

    “How long can this go on? … Employers are shifting an ever-increasing fraction of insurance costs to their employees through deductibles and other forms of cost sharing. Some are dropping coverage for dependents and retirees. A few are dropping health insurance altogether.”

    So, in this story we should see: 1) Large, national carriers in both commercial and government markets beginning to shed one side or the other, and 2) More and more of the rate disparities you cite between carriers who are all-in on one market vs. those operating in both.

    It sounds like we are not seeing either of these, which suggests that, at worse, the story being told is in its infancy, and at best that it isn’t happening at all.

  12. 12
    StringOnAStick says:

    I suspect that the R push to block granting Medicaid has as one of its goals a very public spectacle of each states version of that million dollar patient we’ve heard about. Think of many videos of sympathetic patients not getting the care they need because of an expensive outlier patient, with the underlying goal of convincing people to demand rationing for high cost individuals. That should provide enough tabloid TV filler to distract the masses while they grift the hell out of the system.

    I’ve always been more cynical than I’d like to be but the current R behavior and that if their wealthy backers like the Mercers makes me wonder if I’m not cynical enough.

  13. 13
    Another Scott says:

    @Barbara: Yup.

    I saw some story a year or two ago that made the point that costs as a share of GDP (or GDP/person) for heath care are actually very slowly converging if one controls for technological development, etc. (not for the EU or OECD countries as a whole). Europe’s is rising, ours is slowly falling. A lot of the arguments for “single payer/cut-out-the-middleman/etc” don’t seem to be holding up all that well. And that makes sense – the world is getting smaller and there isn’t some secret sauce that will give us what we want for vastly lower prices – goods and services and people and information can move fairly freely between countries.

    To be clear: Systems can always be more efficient, and we know how to drive down costs in the USA for health care. But unless it’s done slowly, it won’t happen at all (or at least not without huge disruptions). Physicians aren’t going to accept draconian cuts in their incomes; hospitals aren’t going to accept draconian cuts in their incomes; drug companies and medial equipment suppliers aren’t going to accept draconian cuts in their incomes; etc. Incremental progress is the way forward, and those who argue there’s a free lunch are, as usual, wrong.

    Of course, there is always going to be pressure to direct healthcare policy so that connected people get a bigger piece of the pie. There’s so much money involved, how could it be otherwise? Medicare for all (which I support, subject to examination of the details) / Single Payer / etc., aren’t going to end the battles over health policy (even among people of good faith).


  14. 14
    Arclite says:

    @ David,
    Perhaps this is a blog post all of its own, but what to do about the exorbitant rates doctors charge compared to other countries? In the USA they make 4-6x per capita GDP, compared to 3-4 for most other countries. How can we get these costs into a more reasonable place?

  15. 15
    Amir Khalid says:

    This sounds like it would require some sort of mandatory price control. I’m not sure if that would be workable or even politically acceptable in the Hew Hess Hay.

  16. 16
    Pete Mack says:

    Doctors have a huge–massive–up-front cost in both direct expense of university + medical school, and the indirect expense of years of work hours lost (~10 years!). I saw a credible analysis showing that a GP over the course of his career makes roughly the same (assuming amortized 5% earnings on savings) lifetime salary as a UPS driver right out of high school. The problem is significantly worse in this country than in Europe. That said, this does not remotely hold for specialists.

  17. 17

    @Jim Bales: Jim — I basically had this discussion offline and I have a hard time seeing it.

    For this to work, we would expect private rates and medicare payment rate changes to be inversely correlated (they are not)
    We would expect the high price and very snazzily dressed revenue maximization consultants on the provider side of the table to have a collective and universe decade long fit of the dumbs when they talk contracts with insurers.
    We would expect very long contracts with few opt-outs (contracts are 3-5 years typically with easy opt-outs) to prevent rapid learning
    We would expect providers to not know that they can say no to Medicare Advantage and get into Commercial networks (they do that all the time)
    We would expect that regions with low Medicare eligible populations and comparatively high ESI populations to have lower ESI per unit rates than regions with large Medicare eligible populations and low ESI populations, all else being equal.

    For this to work in my mind, a lot of epicylces need to be drawn with very strong assumptions. Congress has been trying to squeeze Medicare provider reimbursement to one degree or another since 1983 and Medicare Advantage as a business model under the current rule regime has been in place since either 2003 (MMA) or 2010 (ACA). If some providers have figured out how to utilize third party charity reimbursement strategies to shift patients into higher reimbursing insurance policies in order to maximize revenue, someone would have figured out by now what the hell is going on.

    The easier story to tell with far fewer assumptions is a combination of a market power and a permeable price ceiling for Medicare and Medicare Advantage story. That explains the business structure that we see on the payer side without heroic assumptions.

  18. 18
    Hoodie says:

    @Arclite: A factor to take into account is how training is financed. I imagine most US doctors self-finance their training, and have heavy debt loads when they begin practice. The cost of legal education is one reason why lower and middle income folks can’t afford legal representation. The system is set up to advantage lenders. Big surprise.

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