By Jim Schowalter

Editor’s note: This article was written in 2015 by Minnesota Council of Health Plans President Jim Schowalter. Many of the issues raised in this article, like cost shifting, are still relevant to the current health care debate.

Total costs of delivering health services do not go up or down based on who is paying the bills. That’s why people sometimes talk about the costs being like a balloon – if you squeeze in on one part of the balloon another part gets bigger. That imbalance is seen most clearly in the cost and revenue differences between public and private coverage.

In search of best value, federal and state governments get discounts for people in public programs such as Medicare, Medicaid and MinnesotaCare. That lower rate is reflected in payments to hospitals and other providers now and every year since the 1960s. It kind of makes sense – it’s way better for health systems to get some payment rather than offer charity care and besides, as long as new patients cover at their marginal cost, it makes business sense.

That’s good news for the taxpayer except for one thing: it means that hospitals charge other insurers more to pick up the slack.

For 2013, the Minnesota Hospital Association (MHA) reported payment for care for Minnesotans enrolled in Medicaid and MinnesotaCare was $741 million short of covering hospitals’ expenses and $1.3 billion under cost for Medicare. Although Minnesota hospitals lost more than $2 billion providing that care, their bottom line remains strong. Private coverage not only cleared out the $2 billion in red ink, but also allowed hospitals to finish the year in the black and post a margin.

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Source: Chart by Minnesota Council of Health Plans with data from the Minnesota Hospital Association website. Medicare products were combined, as were Medicaid and MinnesotaCare products.

In the Twin Cities in 2013, hospital profits were 7 percent of revenue on average, or $641.1 million. Hospitals in Greater Minnesota had higher margins—reaching an industry average of 9 percent. The Greater Minnesota margins were led by Mayo at 17 percent and CentraCare 16 percent. Figures vary by year, but MHA says a hospital is doing well if it produces a margin 5 percent above costs.

Everyone wants the best deal when paying for health care. That’s ok but cannot be pursued without looking at changes in the total cost of care. Because without it, someone else will have to foot the bill.

Details behind the Numbers

As the chart above shows, people with private coverage accounted for 52 percent of hospital revenues but generated just 39 percent of the expenses. In other words, people with private insurance are paying $1.33 for $1 of expense.

Revenue from people with public coverage, Medicare and Medicaid for example, was just 43 percent while the patients incurred 54 percent of hospitals’ expenses. Or, Medicaid and Medicare are paying $0.67 on the dollar.

The point isn’t to point a finger of blame at hospitals or public health programs. Rather it is to raise an issue that affects every health consumer and taxpayer and pops up throughout the health system. It matters because cost shifting blurs the issues. It changes our view of the challenges that need to be addressed – in the end we all end up paying the bill.

Jim Schowalter is president of Minnesota Council of Health Plans