Medicaid and Medicare Cuts: (Almost) Everyone Pays

Sam Uretsky

This article is from the July/August 2006 issue of Dollars & Sense: The Magazine of Economic Justice available at

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This article is from the July/August 2006 issue of Dollars & Sense magazine.

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Unless you belong to the select and dwindling group of those with fully employer-paid health coverage—or to the 40-million-and-counting with no health insurance at all—you've probably noticed your health insurance premiums rising at a frightening pace. In 2005, premiums for family coverage rose by an average of 9.2%, six percentage points more than the rate of inflation, according to the Kaiser Family Foundation's Annual Survey Of Employer Health Benefits. The cost of health insurance has increased by 73% since 2000, with an average family plan costing $10,880 in 2005; the average monthly premium contribution paid by employees with family plans rose from $135 in 2000 to $226 in 2005.

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There is plenty of blame to go around for rising health insurance costs. But an under-recognized part of the story lies in the shifting of costs from public to private insurers. This May, Premera Blue Cross, a Washington state insurer, released a study of public versus private reimbursements to hospitals and doctors. The study found that "employers and consumers are paying billions of dollars more a year for medical care to compensate for imbalances in the nation's health care system resulting from tight Medicare and Medicaid budgets" and pointed to "a rapid acceleration in higher costs to private payers in Washington state, for example, as hospitals and doctors grapple with constraints in the federal health insurance programs," as the New York Times summed it up.

The Premera study found that in 2004, Washington state hospitals had losses of 15.4% for services to Medicare beneficiaries, compared to profits of 2.9% for these services in 1997. Over the same period, hospitals' profit margins for patients with employer-sponsored health plans rose, from 5% to 16.4%. As the report put it, "This phenomenon can be thought of as a cost shift from the public programs to commercial payers. That is, if Medicare and Medicaid had paid higher hospital rates, commercial payer rates could have been lower with hospitals still achieving the same ... operating margins." The study found a similar trend for doctors' offices. Medicare pays physicians 25% to 31% less than private insurers do in Washington, and Medicaid pays about 30% less than private insurers for children's office visits and up to 54% less for adults' office visits.

In sum, the study found that hospitals in Washington state charged private insurers an additional $738 million in 2004 to compensate for losses incurred by treating patients under Medicare and Medicaid. Through the 1990s, by contrast, treatment of Medicare and Medicaid patients was profitable for both hospitals and physicians. The percentage profit was small—about 2% in Washington state—but it meant that Medicare and Medicaid were covering all direct expenses for their patients.

What accounts for this sharp reversal? The simple answer: the Bush tax cuts. In 2001, Bush inherited a 10-year budget surplus of around $5.6 trillion, according to Congressional Budget Office projections. "We can proceed with tax relief without fear of budget deficits, even if the economy softens. ... The projections for the surplus in my budget are cautious and conservative," the president claimed. But 2000 was the last year the United States ran a budget surplus. Between 2001 and 2003, the federal government saw that projected $5.6 trillion 10-year surplus turn into a projected 10-year deficit of $378 billion. And the 2001 and 2003 tax cuts, primarily benefiting the wealthiest families, were the single most important cause of the new deficits, according to analyses by the Congressional Budget Office and the Center on Budget and Policy Priorities, among others.

Between 2001 and 2005, Medicare and Medicaid spending per beneficiary did grow, but only very slightly—far less than the rise in health care costs. So the gap between how much hospitals and doctors were spending to provide care and how much they were being reimbursed under the two programs grew. And the situation is about to get even worse. To deal with the growing deficits, last year Congress passed the Deficit Reduction Act of 2005. The new law did nothing to restore earlier tax levels, but did make major cuts in Medicare and Medicaid funding. For instance, the law cuts Medicaid spending by $4.8 billion over the next five years and by $26.1 billion over the next 10 years. The direct effects of these cuts will be to reduce reimbursements to hospitals and physicians—more of the income shortfalls described in the Premera report. No doubt these shortfalls will result in more cost shifting onto those with private coverage, who will continue to face steep increases in their premiums.

Of course, Medicare and Medicaid recipients are hurt by the cuts too. Under the 2005 law, states will be allowed to tighten restrictions on Medicaid eligibility and impose higher co-payments for some drugs and services. The law cuts spending on acute care health services for children by 15% and on acute care for the elderly poor by 8%. Elderly people who require nursing home care will be less able to protect their assets, although 84% of nursing home residents have assets of less than a single year's nursing home costs.

So, tax cuts for the wealthy are paid for in part by cuts in services to the elderly and poor, and by making private health insurance costs even more burdensome for employees who have coverage and employers who provide it.

But there's one group not burdened at all by these difficulties: top health insurance executives. In 2003, the nonprofit watchdog group FamiliesUSA issued a report on executive pay in the 11 for-profit, publicly-traded health insurance companies that offer so-called Medicare+Choice plans, under which Medicare beneficiaries receive their coverage through a private insurer rather than directly from Medicare. Annual CEO compensation ranged from $1.6 million at Humana to $76 million at Oxford, with an average of $15.1 million. And these figures do not include the average of $57.6 million in unexercised stock options these top dogs held. Since executive pay is part of the overhead cost of running an insurance company, it's no wonder that traditional Medicare, which paid its chief executive $130,000 in 2002—and with no stock options—is able to operate with overhead costs of around 1%, while the private sector has overhead costs of 10% to 15%.

To the credit of Premera Blue Cross, which paid for the Washington state study on cost-shifting, in 1999 its CEO was paid a relatively modest $736,650. On the other hand, Premera has applied to change from a nonprofit to a for-profit corporation, in spite of opposition from consumer groups who believe a for-profit company will increase rates and reduce services.

Top insurance executives are among the super-high-income elite, and as such, prime beneficiaries of the Bush tax cuts. (Not to mention that their role in the design of Medicare's new prescription drug benefit, which cuts private insurers in on the program, is also contributing to the budget deficit.) When the federal government tried to make up the revenue lost to tax cuts by cutting benefits and reimbursements under Medicare and Medicaid, these same insurance companies cried foul. It is good to see CEOs advocating for increased funding of social programs. Now maybe they could offer to give back part of their tax-cut bonus to help pay the bill.

Sam Uretsky is a retired hospital pharmacist who frequently writes about health care policy and finanacing.

SOURCES: Milt Freudenheim, "Low Payments by U.S. Raise Medical Bills Billions a Year," New York Times, 6/1/06; Premera Blue Cross, "Payment Level Comparison between Public Programs and Commercial Health Plans for Washington State Hospitals and Physicians," (Milliman Consultants & Actuaries, May 2006); Families USA, "Top Dollar: CEO Compensation in Medicare's Private Insurance Plans," June 2003; John Holahan and Mindy Cohen, "Understanding the Recent Changes in Medicaid Spending and Enrollment Growth," (Kaiser Commission on Medicaid and the Uninsured, May 2006).