HEALTH POLITICS: The Thing Speaks for Itself

Over at InsureBlog, Hank Stern takes exception to Len Nichols' thorough debunking of the recent report produced by PriceWaterhouseCoopers for AHIP.

Like the Latin title of Hank's post (Res Ipsa Loquitur...), most of his points speak for themselves.

If he wants to object to the idea that "Good policy research uses nationally and statistically representative data so that its conclusions reflect behavior of the actual population," that's his prerogative.

If he's ignorant of the IRS tax code that governs the non-partisan work of the Robert Wood Johnson Foundation and the Urban Institute, well, we guess that's fine, too.

But if he thinks there's no difference between the research produced by such independent institutions and stuff that's made to order for private interests, he should take a look at the work PriceWaterhouse did for the tobacco industry in the early 90s. An independent review of that study found "serious methodological problems and errors of omission." (h/t Media Matters) The same could be said of their latest work. AHIP got what it paid for and InsureBlog should be less credulous of the talking points it's buying.

There is one issue which warrants further discussion, and that's the question of Medicare cost-shifting. As Len points out, the PWC report assumes "all Medicare savings will be converted into private sector cost shifts." There many reasons why this assumption is unrealistic, none of which appeal to Mr. Stern.

Cost-shifting is a difficult concept, one for which there is a great deal of debate. The issue is more complex than a simple squeezing the balloon type model where cutting costs one place just leads them to pop up elsewhere. As Jason Lee, Bob Berenson, Rick Mayes, and Anne K. Gauthier argue in Health Affairs, the degree to which cost-shifting matters "varies, depending on the power and position of actors in the health care system." For how this actually works, take a look at the March 2009 MedPAC Report to Congress: Medicare Payment Policy, specifically Chapter 2A. One of the report's central conclusions is that high financial pressure leads hospitals to constrain costs. Financial pressure, in MedPAC's analysis, essentially reflects the degree of competition faced by a hospital (greater competition and less market power lead to lower margins and higher financial pressure).

As the tables below illustrate, hospitals in competitive markets (high financial pressure) actually make money on Medicare. In less competitive situations, where hospitals have the market power to raise prices, they do so. Thus, while their private margins increase, Medicare margins remain low.

In recent statement to the Ways and Means, MedPAC explains how it is that hospitals with the highest per unit costs can also have the highest profits:

When financial resources are abundant, hospitals spend more and increase their costs per unit of service. High costs by definition lead to lower Medicare margins because costs do not affect Medicare revenues (which are based on predetermined payment rates). Therefore, when costs increase, Medicare margins decrease. In other words, income affects spending and in turn costs per unit of service. Hence, if Medicare were to increase its payment rates, it is not reasonable to think that hospitals with market power will voluntarily lower the prices charged to insurers and reduce their revenue. Instead, hospitals might spend some or all of that revenue, resulting in higher costs.

Focus on cost-shifting arguments, obscures the real goal of payment reform: creating incentives for high quality efficient care. Sometimes a savings is really a savings. The thing speaks for itself. Hank Stern just doesn't like what it says.