calculatorA new study in Health Affairs appears to disprove the commonly cited myth that public insurance programs “shifts cost” onto private insurance. The idea behind the myth is that public insurance programs pay providers less than what procedures cost which forces them to make up the difference by charging private insurance companies more.

In reality, the study found lower Medicare payment rates actually reduce what private insurance companies pay. From the study’s abstract:

Contrary to the theory, I found that hospital markets with relatively slow growth in Medicare inpatient hospital payment rates also had relatively slow growth in private hospital payment rates during 1995–2009. Using regression analyses, I found that a 10 percent reduction in Medicare payment rates led to an estimated reduction in private payment rates of 3 percent or 8 percent, depending on the statistical model used.

The fact that cost shifting is a myth shouldn’t surprise anyone who has looked at international health care prices. Medicare still pays more than most other countries’ health care systems and in all those countries hospitals remain financially viable.

This study reinforces that the real issue at play is market power, not cost shifting. Compared to other countries with single-payer or all-payer systems, providers in the United States have more power to demand higher prices.

Medicare is the most powerful purchaser in the United States and can get some of the best deals, while much smaller private insurance companies are forced to pay more simply because providers have market power to make them. This is not cost shifting. This is like many other industries where a provider tries to maximize profits by charging each payer as much as possible.

Photo by 401(k) 2013 released under Creative Commons License