Hospital cost shifting occurs when hospitals seek higher reimbursement from some payment sources, such as auto and workers' compensation insurers, to offset the cost of charity care and inadequate reimbursement received from other sources, like Medicare and Medicaid. Until recently, hospital cost shifting has been the proverbial elephant in the room that nobody wanted to acknowledge, let alone do anything about. New findings from the Insurance Research Council (IRC) confirm the reality of cost shifting and document the magnitude of the problem. For one segment of the auto insurance business—bodily injury liability claims in 38 tort liability states—the IRC estimates that cost shifting by hospitals added $1.2 billion to claim costs in 2007.
The federal Medicare program and, to an even greater extent, federal-state Medicaid programs are notorious for paying hospitals below costs. According to the American Hospital Association, Medicaid payments to hospitals totaled only 89% of the total costs attributable to Medicaid patients, and the total reimbursement shortfall from both programs was $32 billion in 2008.
Because Medicare and Medicaid together account for more than half of all hospital care provided, hospitals must maximize their reimbursement from other sources to help offset the shortfalls generated by public insurance programs. Other sources of payment, such as auto insurance, present an easy target for cost shifting due to the limited ability auto insurers have, vis-à-vis other payers, to negotiate or compel lower reimbursement levels.
Auto insurers, of course, do what they can to address cost shifting by closely reviewing the hospital bills associated with auto injury claims. But the nature of the system, in which medical bills may be submitted for payment long after treatment is provided and attorneys may be in the mix, undermines efforts to reimburse hospitals appropriately. Auto insurers also incur substantial expense to examine hospital bills. To the extent that hospital cost shifting may be increasing, these costs may also increase.
Interestingly, there is one state, Maryland, where cost shifting by hospitals has been significantly reduced. In the mid-1970s, soon after Medicare was created, Maryland sought and obtained from the federal government a waiver that allows the state to set reimbursement levels for care and services provided by all hospitals in the state. Reimbursement rates set by the Maryland Health Services Cost Review Commission apply to all hospitals and all reimbursement sources, including auto insurers and public insurance programs such as Medicare and Medicaid. While reimbursement rates in Maryland vary across hospitals, each hospital is required to bill all payers the same rate for the same service, and all payers are required to pay the same rate. The only remaining significant source of hospital cost shifting in Maryland is uncompensated charity care, the cost of which is built into reimbursement rates set by the commission.
Maryland's unique approach to hospital reimbursement prevents hospitals from shifting the costs generated by public health insurance programs to other payers, including auto insurers. Comparing auto injury hospital costs in Maryland with costs in states where hospitals are largely unrestrained in their ability to shift costs provides a valuable opportunity to estimate the magnitude of the hospital cost-shifting problem in the other states.
In its recent report, Hospital Cost Shifting and Auto Injury Insurance Claims, the IRC presents clear evidence of cost shifting's impact on the auto insurance system. For bodily injury liability claims with hospital treatment, average total hospital charges in 2007 were $1,158 in Maryland and $3,920 in 38 similar states with tort-based auto insurance systems. According to the IRC, the only plausible explanation for Maryland's extremely low hospital costs is the state's hospital reimbursement policy.
Even more striking evidence of cost shifting's impact on auto injury insurance costs is seen in a close examination of average unit charges for expensive diagnostic services often performed in hospitals. An increasingly popular diagnostic procedure for auto injury claimants is the MRI (magnetic resonance imaging). Between 1997 and 2007, MRI use grew from 12% of BI claims to 18% countrywide. For personal injury protection claims, MRI use grew from 15% of claims to 22% countrywide. This growth, along with the high average cost of an MRI, has made MRIs a major auto injury cost driver in recent years.
Although MRIs are most often performed in independent diagnostic facilities or physicians' offices, many are performed in hospitals, which have become increasingly aggressive in their use. MRIs done in non-hospital facilities cost about the same in Maryland as in other states. This is not surprising because Maryland's hospital reimbursement program does not apply to services outside a hospital. There is no apparent reason why MRI costs in Maryland should be much different than costs in other states.
For MRIs performed in a hospital, however, average costs in Maryland are about 45% less than those in other states. In addition, a hospital-based MRI in Maryland is much less expensive than one done in an outside facility. In other states, MRIs are more expensive when conducted in a hospital. In the absence of any other factor to explain these cost differentials, the IRC concluded that Maryland's unique approach to hospital reimbursement, resulting in the elimination of much of the cost shifting that occurs in other states, was the primary explanation.
From the findings describing hospital cost differences between Maryland and other states, the IRC was able to estimate that hospital cost shifting generated approximately $1.2 billion in excess hospital charges for auto insurers in 2007. This estimate is limited to cost shifting in 38 states and applies only to bodily injury liability claims. The total cost of hospital cost shifting to the auto insurance system, including other auto coverages where hospital costs are involved, is probably much higher.
Broader Health Care Impact on Auto
Other states seeking to replicate Maryland's approach to hospital reimbursement are likely to be met with stiff resistance from the federal government due to the cost-increasing implications such a change would have for Medicare, Medicaid and other programs that currently pay less than their fair share of hospital costs. Nevertheless, the IRC findings highlight a significant source of excess costs in the auto insurance system, and illustrate the linkage between the property/casualty system and other segments of the broader health care delivery and insurance system. The link between health insurance and property/casualty insurance is the medical providers and hospitals that treat patients and receive reimbursement from both systems. Major changes in the relationships between hospitals and health insurance programs, such as Medicare and Medicaid, will affect hospital relationships with auto insurance companies.
Of course, cost shifting isn't the only example of how developments in one system can affect the other. A more visible and immediate example might be Medicare Secondary Payer reporting requirements, where property/casualty insurance carriers face complex and potentially costly requirements designed solely to ensure that Medicare is the secondary payer in cases involving Medicare beneficiaries. Clearly, efforts to control costs in health insurance programs can and do impact auto insurance as well as other property/casualty insurance coverages.
A search of the health care bill signed into law earlier this year reveals only one direct reference to property/casualty insurance, which involves electronic data reporting standards for health transactions. Those working to ensure that the property/casualty industry wasn't swept into the health care reform net were no doubt pleased with that particular aspect of the legislation. Indeed, none of the ideas involving "24-hour care" that surfaced in the health care debate of the mid-1990s were seriously considered in this round of debate. Nevertheless, a fundamental understanding of how property/casualty insurance interacts with health care providers and health insurance programs that are directly affected by health care reform may leave some pondering the potential long-term effects of reform on the property/casualty insurance industry.
David Corum, CPCU, is vice president with the Insurance Research Council.