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Health Care 2020: Connecting the Dots

Healthcare 2020 - Connecting the Dots: Part 1: The hidden health care tax

  

May 31, 2019

By Greg Dattilo, CEBS and Dave Racer, MLitt


No one wants to talk about the average 141% tax on hospital care paid by individuals who do not have government health insurance (Medicare, Medicaid, etc.). If you have private health insurance, you pay this tax every time you use a hospital and it shows up in inflated premiums. Since 34% of health care spending is for hospital care, these high costs have a huge effect on insurance premiums. 


In Minnesota, officials found that if you have private health insurance you pay on average 87% more for hospital care than someone else who is on Medicare.[i]This means that for every dollar a Minnesota hospital receives for a Medicare patient, you pay $1.87 if you have private insurance.[ii]This is like a tax rate of 87% on each dollar 


On a national scale the hidden tax is worse. Here are two examples released in May 2019.


  • The Congressional Budget Office (CBO) found that in 2013, individuals with private commercial insurance paid 89% more for hospital care than someone else who is on Medicare.[iii]This means that for every dollar a hospital receives for a Medicare patient, you pay $1.89 if you have private insurance.[iv] That data, however, is quite old. New data indicates that the hidden tax rate is actually increasing.
  • The Rand Corporation found far greater hidden taxes from a major study of large employers that crossed 25 state lines. The Rand data is updated to 2017. 
  • Rand found that commercial insurance companies paid 204% more for inpatient hospital care, and 293% more for outpatient hospital care than Medicare’s allowable amount. The average commercial insurance payments between inpatient and outpatient care came to 241% -- for a 141% hidden tax.[v] 
  • Rand reported that in 2012 the difference between Medicare and private insurance payments was 171%, but by 2017 had grown to 241%. This shows that privately-insured individuals and employers are paying an increasing share of the health care bill for those on government health plans.


When the government pays less for the same care as you do, and you pay more because they pay less, that is the definition of a tax.


Tax- def. (Merriam Webster)

  • a) “a charge usually of money imposed by authority on persons or property for public purposes
  • b) a sum levied on members of an organization to defray expenses”


Example: 

  • Dave is on Medicare. Dave has a procedure at the Red Hospital. The hospital charges $5,000. Medicare allows, and the hospital accepts $1,000 for this procedure. (This is an example of a common billing process where the hospital bills 300-600% more than Medicare allows.)
  • You have a private health insurance plan. You have the same procedure as Dave at the Red Hospital. The hospital charges $5,000. Your health plan discounts the bill to $2,040 and the hospital is glad to receive it. 


Compare the $1,000 Medicare allows to the $2,040 private insurance allows for the same procedure from the same hospital. Why does the hospital receive $1,040 more for you? Because the hospital shifts some of the cost to you from the reduced Medicare payment. 


The extra $1,040 paid by you or your insurance acts like a tax – “a sum levied on members of an organization to defray expenses.” Physicians, hospitals and other medical providers rely on this tax to ensure they can keep offering services to you and to others. All the members of your health plan pay more, because Medicare pays less for the same services. This is the hidden tax.


Think About It

How does the insurance company calculate the premium amount?


The premium covers the insurance company’s payment of claims and the cost of administering the health plan. By law,[vi] insurance administration cost is limited to 15-20% of the premium. Claims make up 80-85% of premiums, and at least half of the cost of claims is the hidden tax.


If there was a way to eliminate the hidden tax, insurance premiums could fall by 40-50% - or more, in some locations, but basing all health care payments on the Medicare rate would destroy the current systems of delivery medical, mental health, and hospital services.


Cost-Shifting

Medicare establishes the price it pays for just about every imaginable health care need. The amount Medicare allows is low compared to what private insurance pays. Medical professionals and hospitals claim that the Medicare-allowed amount is, at best, breakeven and often below their cost. 


Physicians, hospitals, and clinics insist that if they had to exist on Medicare payments alone, they might have to shut down. To make up for this Medicare shortfall, hospitals must charge more to privately insured patients – cost-shifting of 141% or more. The hidden tax.


You pay more because Medicare pays less.


What are we currently doing to pay for the hidden tax?


If you are lucky enough, under ObamaCare you might qualify for the government to pay some or all your premium, which includes the hidden tax. 


Government subsidies (which come from taxes) do help make premiums more affordable but do nothing about the hidden tax that makes the premium so high in the first place. 


If you are fortunate enough to have employer-paid group insurance, your employer is paying the majority of the hidden tax. You do share in the pain, however, through higher health insurance payroll deductions and less money for your pay increase. 


One possible fix, then, is to continue the government’s ObamaCare premium subsidies, and for employers and employees to continue to pay ever-increasing insurance premiums. This is nothing more than an expensive, temporary fix. It leaves the long-term problem of the hidden tax unresolved. 


Set the Price at the Medicare Level (Price-fixing)

“Whatever Medicare pays, make that the most a medical professional can charge.” This is called medical “price fixing.” This would immediately eliminate the 141% hidden tax. Today, legislators are debating just such a decision, creating government-owned health insurance plans that pay providers at the Medicare allowed amounts. If this idea becomes predominant, it will result in significant disruption of our health care and lead to government-run care for everyone.


Medical facilities and physicians rely on the hidden tax and without it, would need to dramatically change how they deliver care. This would result in reduced staff, shorter time with patients, and fewer physicians. Patients would not tolerate this over the long term. This idea is usually called “Medicare for All” or “Medicare for America.” Under this scheme, without the hidden taxes from private insurance, patients will lose access to quality care.


Or choose a moderate fix


We could keep doing what we’re doing – using premium subsidies to help finance the 141% tax. Or, we could “jump off the cliff” and eliminate the 141% tax overnight by choosing Medicare for All.


Instead, let’s do something more realistic and reasonable, something that does good, not harm. Let’s ask medical professionals and hospitals to disclose the percent they charge above Medicare. Let’s ask them to  post the percent that they accept as full payment above Medicare on their websites so we can easily evaluate it. We are asking them to disclose the hidden tax, and let’s retain our right to choose our own doctors, hospitals, and clinics. We call this the “Medicare-Plus Disclosure,” and will write about it elsewhere.

    

[i] Minnesota Measurements. 2018. Based on 1.5 million claims for $8.6 billion in medical services.


[ii] The two major government programs are Medicare, for individuals 65 and older, and Medicaid, for low-income individuals. Medicaid pays even less than Medicare for covered health care services, and medical professionals must recover these losses from you, if you have private insurance or pay cash.


[iii]CBO Staff. “Key Design Components and Considerations for Establishing a Single-Payer Health Care System,” Washington, D.C. May, 2019, P 21.


[iv] See note ii.


[v]White, C., Whaley, C. “Prices Paid to Hospitals by Private Health Plans Are High Relative to Medicare and Vary Widely.” The Rand Corporation. Santa Monica, CA. May 9, 2019. P 19.


[vi] The Affordable Care Act created the Medical Loss Ratio (MLR). The MLR limits health insurance companies from spending more than 15% (for large group insurance plans) and 20% (for small group and individual insurance plans) of each premium dollar for administration. Conversely, the insurance company must spend at least 80% or 85% of premium on claims.

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