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Cost shifting: The shell game played by American hospitals


WHITE Memorial Hospital in Los Angeles spends about $6,800 for every Medicaid patient wheeled into its emergency room with heart failure. But federal and local governments only reimburse the hospital about $5,700 per patient. How does it close the $1,100 gap?

By playing an elaborate shell game: The insured and those who pay their own way are charged more than Medicare or Medicaid patients. It's called cost-shifting, and it is helping to drive health-care costs through the roof.

In the early 1980s, hospitals typically charged private insurance companies 10 percent above costs; today it's 40 percent or more. The cost-shifting strategy is one of the major reasons that health insurance premiums to employers increase every year by as much as 25 percent.

Even worse, even as hospitals are making health insurers take it on the chin, they still are failing to contain costs: White Memorial, typical of many U.S. hospitals, is $10 million in debt.

How did we produce such a dysfunctional health-care system?

Much of the blame must go to the federal tax code, which favors employer-based insurance and third-party payment. The problem this creates is that most Americans now consider health care a "free" good. Health insurance is not something they purchase; it is bought for them by their employer and given to them as a tax-free benefit.

The result is that America's health consumers are insulated from the real costs of medical care. More than 90 percent of all hospital bills and some 70 percent of all doctor bills are paid by someone other than those receiving the services. Unlike nearly every other sector of the economy, health services do not face the normal collision between the forces of supply and demand, between consumers and providers.

The absence of free-market forces on health care has allowed health costs to rise twice as fast as the rate of inflation.

Washington has tried to contain costs through price controls. One approach involves a relative value scale for Medicare doctors, aimed at evaluating the value of a physician's service in order to keep his fees down.

Begun in January, the relative value plan is likely to discourage specialists from taking on new Medicare patients; others simply will inflate costs for the rest of us.

Another scheme is to limit how much hospitals can charge Medicare patients, based on a fixed reimbursement rate for various services. The results have been predictable: On average, every U.S. hospital now loses more than $1 million a year treating the elderly.

No business could operate under such conditions for long. Last year hospitals were shortchanged by about $11 billion by federal and state governments, according to Lewin/ICF, a leading econometric modeling firm. Add to that another $11 billion spent on the indigent, uninsured and the deadbeats, and you have cost-shifting on a massive scale.

Government-tinkering with health-care markets has only distorted them. Arbitrary price controls, even when restricted to government programs, result in shortages and cost-shifting -- injuring the very people the government has set out to help.

It's time to end the tinkering. Washington must reform the tax code so that employees receive the tax benefits from buying their own health insurance -- benefits that now go to their employers.

If every family is responsible for purchasing its own medical care and insurance, we'll start paying attention to costs.

There simply is no rational reason to think that the principles of a free market -- consumer choice and competition -- will somehow fail when applied to medicine.

Robert Moffit, a former senior official with the U.S. Department of Health and Human Services, is deputy director of domestic policy studies at the Heritage Foundation, a Washington-based think tank.

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