Healthcare cuts could shift costs to private sector

Obama's plan could result in higher costs for insurers, employers, and those with private coverage.

President Obama's plan to rein in federal spending on healthcare could end up shifting costs to the private sector, economists say.

Unless doctors and hospitals are able to respond to the government cuts by becoming more efficient, the result could be higher costs for insurers, employers, and people with private medical coverage, they say.

Historically, healthcare spending has been a bit like a balloon: If it is squeezed in one place, it tends to bulge in another.

"I think there's definitely risk that a portion of the reduction in hospital payments from Medicare will wind up as increased payments by private insurers," said Paul Ginsburg, president of the Center for Studying Health System Change.

Depending on the circumstances, hospitals may have the motive and means to "transfer those charges to somebody else," and "we'll see costs increasing on the private side and not necessarily falling everywhere," said Harold Luft, director of the Palo Alto Medical Foundation Research Institute.

The biggest healthcare proposal that Obama announced last weekend is especially likely to move costs to the private sector, because it would cut Medicare payments without giving hospitals the tools to deliver care more cost-effectively, Luft said. The administration predicts that measure - adjusting Medicare payments to reflect productivity changes in the overall economy - would save the government $110 billion over 10 years.

Squeezing from the government's end could make healthcare more efficient for everybody. "If you push on one side, you're actually pushing on the whole thing," said Kenneth Baer, a spokesman for the Office of Management and Budget.

But a report issued Tuesday by the Congressional Budget Office portrayed that outcome as speculative. There is no guarantee that the healthcare system's response to pressure would be greater quality or efficiency, according to the CBO analysis.

Throwing cold water on hopes for effective healthcare reform, the CBO described a variety of problems that could make it hard to slow federal spending on care - and to do so without putting quality at risk.

"At this point, experts do not know exactly how to structure such reforms so as to reduce federal spending on healthcare significantly in the long run without harming people's health," the CBO said.

"Examples of efficient care certainly exist today. ... Yet applying the methods of those efficient providers throughout the healthcare system cannot be accomplished through fiat or good intentions," it added.

The challenge is that the administration and Congress are trying to extend medical coverage to the uninsured without increasing the federal budget deficit over the next decade. As a result, they are bound by the budgetary scoring process - meaning they must come up with solutions that can predictably and measurably reduce federal outlays.

Some steps that might prove cost-effective over the long run do not necessarily mean savings for the federal budget.

Conversely, some steps that save the government money would not necessarily translate into overall reductions in national healthcare spending.

If Medicare cuts payments to hospitals but the costs of treating patients stay the same, "then you have the potential for cost-shifting," said Kenneth Thorpe, a professor of health policy at Emory University. But Obama is trying to implement policies "that would lead to hospitals reducing their expenditures," he said.

One of the president's signature proposals would reward hospitals for reducing readmission rates and penalize hospitals whose patients must return for another stay because they did not receive adequate treatment the first time. That proposal is unlikely to create a bulge in private medical costs, because it would lead hospitals to change the way they function, Thorpe said. The administration is counting on improved readmission rates to save the government $25 billion over 10 years.

Not all hospitals would have the ability to foist additional costs onto the private sector. Those most likely to make up elsewhere for cuts in government payments are major hospitals that are essential to local health networks and therefore able to wield more market clout, Ginsburg said.

The consolidation of hospitals in many communities limits private insurers' ability to push back.

Cutting payments by Medicare, the federal program for the elderly, is a relatively blunt instrument of reform.

"Imposing slower growth in (Medicare) payments would create ongoing pressure on providers to identify and adopt efficiencies; it would also, however, create risks for providers and patients if the efficiency gains were not achieved," the CBO said.

Part of the problem is what the CBO described as the difficulty in measuring the quality of care. If quality cannot be gauged, it is hard to reward doctors and hospitals for delivering it - and it is hard to penalize them for not doing so.

Various popular ideas about how to save money have limitations and downsides, the CBO reported.

Increasing access to preventive care, for example, is widely considered a powerful way to reduce spending, but "one study of health and economic effects of preventive services found that only 20 percent of the services that were assessed yielded net financial savings," it said. In some instances, the cost of delivering preventive care to a large population would actually exceed the savings on the relatively few people who avoided illness as a result, CBO said.

Similarly, improving public health can reduce Medicare spending on particular problems. However, helping people live longer and healthier lives can increase the burden they put on the federal government, partly because they will spend more time collecting Medicare and Social Security benefits, the CBO reported.