Cost shifting: What employers can do when hospitals overbill and insurers tack on costs
Hospitals overcharge employer-sponsored plans via their health insurance carriers to “cross-subsidize” the Medicare underpayments, and employer-sponsored health plans are stuck in the middle of this back-and-forth .
Many hospitals in America claim to be underpaid by Medicare. That is, hospital executives say that the reimbursement from Medicare does not cover the cost to care for a Medicare patient.
For example, the reimbursement by Medicare for a 5-day hospital stay for pneumonia is not enough to pay for the nurses, the technicians, the administrative overhead, and the electricity for that patient.
Instead of cutting costs, hospitals then over-charge employer-sponsored plans via their health insurance carriers to “cross-subsidize” the Medicare underpayments.
This process of “cross-subsidization” involves the health insurance carrier “tacking on” an additional 15% in administrative fees, commissions to insurance brokers and consultantsb and profit margin.
Therefore, insurance carriers are incentivized for Medicare to underpay hospitals even more in order to maximize the carriers’ 15% additional fees/commission/profit.
Hospitals could create their own health insurance companies (and indeed some have) and work to decrease their costs and lower administration fees; however, most hospitals lack the will and the skill to execute such a strategy.
As a result, hospitals “cry poor” to the government via lobbying efforts to increase Medicare reimbursement and “cry poor” to insurance carriers to negotiate higher payments.
Stuck in the middle of all this back-and-forth are employer-sponsored health plans and the plan members (i.e., employees and their families). These two groups end up footing the bill and are ultimately the losers in this game.
What can employers do?
Step #1: Understand why their health care costs are high and rising. Oftentimes, people need to understand the why beyond just the what of their high and rising health care costs.
Step #2: Build a case with your organization’s executive team. The CEO and CFO are busy and health care costs are not their area of expertise, yet their buy-in is obviously required. The “drip method” or the “boiling frog” method have been successful at other organizations for achieving this buy-in.
Step #3: Create an action plan to address the hospital over-charging with the two groups that are largely charged with this responsibility: 1) your broker/benefit consultant and 2) your insurance carrier/TPA.
Step #4: You may need to find new partners. Part of your case with your organization”s executive team needs to involve this possibility and the ensuing search process/RFP that it involves.
Step #5: Manage time expectations. Health care is notoriously slow to change. Every successful organization that has tackled its hospital-over-charging problem has done so over 2-4 years. There are excellent case studies in the book, The Company That Solved Health Care, and the employee health plans for Quest Diagnostics (see video here) and Purdue University (see video here).
Related: Employer health care advocacy group urges action on ‘indefensible’ hospital prices
Step #6: Get started. Literally the most difficult part of this entire process is getting started. Just start with one, small incremental step today: do an internet search, ask ChatGPT a question, read a blog post.
Eric Bricker is Medical Director at Simplepay Health.