Cost-Shifting Hides True Cost of Government-Run Health Care

Published December 1, 2002

How do we ensure that Americans have access to the health care they need, encourage innovation and research, and still contain costs?

Nanny Mentality

The first answer from many people, including government bureaucrats and elected officials, is often to have the government “do something.” That’s unfortunate, because the government has already caused the very problems it is being asked to solve.

Over the past decade, Medicare and Medicaid have been steadily growing as a share of total health care spending. According to the Centers for Disease Control and Prevention, Medicare expenditures grew from 17.3 percent of total health care spending to 20.6 percent between 1991 and 1998. Medicaid grew from 13.2 percent to 15.7 percent over the same period. This means more than one-third of all health care costs in 1998 were paid for with tax dollars.

Why has government-funded health care grown so much? Mandated services and expanded eligibility, for a start. Health care for 10 people costs more than health care for eight people. Putting more people into government-funded health care and giving them more services means the government will spend more money.

Moreover, giving more people access to more services increases demand, which places greater upward pressure on prices. As prices rise, legislators find themselves in a quandary: how to continue offering increasingly expensive services to an increasing number of people without bringing on the wrath of the taxpayer.


Medicare and Medicaid pay according to a list of maximum prices for specific services, but these cost-control prices don’t reimburse health care providers for their full expenses. According to a Lewin Group study, Medicare reimbursed Wisconsin hospitals for only 89 percent of the cost of services provided to Medicare patients in 1999. Medicaid was worse, reimbursing Wisconsin hospitals for only 78 percent of their costs (not prices, but costs) in 1999.

Nationally, Medicare reimbursed 100 percent of hospital costs (according to the Lewin study), but 33 states were under-reimbursed–Medicare paid less than the cost of providing services. Medicaid paid 96 percent of hospital costs nationally and under-reimbursed 41 states.

Less Access

Wisconsin is experiencing a shortage of dentists, because Medicaid reimbursement rates are so low (under 70 percent of costs for dentists) and come with so many bureaucratic strings attached as to discourage participation in the program.

Last August, the largest pharmacy chains in Massachusetts declared they would stop filling Medicaid prescriptions due to under-payment for those products.

Low reimbursement rates are driving up the overall cost of health care, making it less affordable for the rest of us, and thus less available for more people. The predictable consequence is less care for more people, the exact opposite of the program’s purpose.

Other People’s Money

The owners of a neighborhood grocery store give their regular shoppers a discount, and generally lose money on those transactions. To make up for it, they put higher prices on everything, so other customers pay more. That’s cost-shifting.

Because health care providers take a loss on government programs, they make up for it by charging private payers–individuals and private insurers–more.

As insurance premiums rise some individuals are priced out of the free market, unable to pay the inflated prices and forced into some manner of government program.

The cost-shift also affects the small business owner. Since the owner can no longer afford to pay all or even part of the premium, more of the cost is shifted to the employee … or the employer simply discontinues coverage altogether.

Health Care Pork

Cost-shifting by Medicare and Medicaid is a hidden tax paid by everyone in one way or another.

The reason cost-shifting exists, and the reason it is likely to continue to exist, is purely political. Promising greater health care benefits is just another form of pork: vote for me, and you’ll get more.

Politicians know, of course, that they need to contain the costs of their programs: Health care is a major issue with voters, but so are taxes. The insidious lie in all this is that we taxpayers are still paying directly with our tax dollars, indirectly through cost-shifting, and even more indirectly by the rationing of health care services.

Paying higher reimbursement rates would cost more from a direct government standpoint. Increasing reimbursements to 80 percent of billed costs, for example, would increase the cost of Medicaid in Wisconsin by more than $311 million in state money, and $463 million in federal money.

Officials at the state and federal levels would be doing themselves and their constituents a favor by admitting what many already know: The current policies of underpayment and cost-shifting are hurting more than they are helping. Instead of trying to provide the services and hide the true costs, government officials should tell taxpayers just how much they’re really spending. Then we can make real decisions, based on real information.

State Rep. Frank Lasee represents the 2nd Assembly District in Wisconsin. He can be reached at 608/266-9870 or email [email protected].