09/07/2011 05:10 pm ET | Updated Nov 07, 2011

Who's Cost-Shifting Now?

Everyone agrees that healthcare spending is out of control and the cost spiral is unsustainable. The cure for this sickness seems, however, elusive.

Recently online, the ten reasons for U.S. healthcare spending were delineated. Some may seem too vague or theoretical -- like "action without evidence" -- to produce a workable cure.

Here are four problems in healthcare spending that can readily (maybe not easily) be fixed.
1. Practice differences with similar outcomes
2. Insurance company profits
3. Moral hazard
4. Cost-shifting

Differences in practice were highlighted back in the 1980s and again in the run-up to passage of PPAHCA (Patient Protection and Affordable Health Care Act of 2010). There is good evidence that similar patient outcomes have been documented using very different practice approaches.

Some medical professionals expend a lot more resources than others to get the same patient outcomes. In other words, you can get the same high quality medical outcome for less money. There are three reasons for such behaviors by providers.

1) Self-interest: doctors benefit directly when they do more. This incentive structure is called "pay for performance," which rewards provider activity, rather than patient result.

2) Practicing medicine by style and that's-how-I-was-trained, rather than Best Practice, proven with good, hard scientific data.

3) More and more doctors practice defensively. The legal and regulatory environment is so punitive that providers order expensive tests in order to "document" -- tests that are not necessary for patient care. They do consults to CYA (cover your a--), not because the patient needs it. And they follow time-consuming, money-devouring rules and regulations because if they do not, they are guilty of the worst of all medical crimes since Nuremberg: being out of compliance.

As their financial statements and therefore insurance company profits are closely guarded proprietary secrets, hard data is difficult to acquire. There is evidence for the following three assertions.

1) In 2010, Stephen Helmsley, CEO of UnitedHealth Group, was paid $102 million in compensation and over $100 million in stock options, making him the highest paid CEO in the U.S.
2) Under the current system, insurance companies make money (profit) by delaying, deferring and denying care, not by providing it.
3) Most Americans have insurance company stock in their pension portfolios. So as patients, we want care for us to be provided immediately and without limit, but as stockholders, we want care for everyone else to be denied or withheld as long as possible.

The U.S. insurance system as currently structured is the epitome of perverse incentives: it rewards the very behaviors that patients do not want, and offers no incentive to produce the outcomes that patients do desire.

The "moral hazard" has not yet reached national consciousness. It would be remiss to discuss healthcare spending without at least some mention of the most important reason why it is out of control.

Moral hazard is the term used to describe how people spend money when it is not their own, when it is OPM (other people's money). Moral hazard applies equally to private citizens as it does to public officials.

For people in the real world (not the Beltway), there is no reason to economize or even spend wisely. After all, "It ain't my money!" For public officials in Washington, they keep promising care without limit for every American, and then raise taxes as well as print more dollars. After all, "It ain't their money!"

"Cost-shifting" has sometimes been called "revenue-shifting." To avoid semantic confusion, let's call such shifting "inappropriate-money-transfer" or IMT. A "cost" to one person, say an insurance company, is revenue to another, such as a doctor or hospital. When the government cuts Medicare "costs," they cut "revenue" (reimbursements) to providers. Just like, "one man's meat is another man's poison," in healthcare, one group's cost is another group's revenue.

Since it is too confusing to preface every comment by stating who is paying and who is receiving, let's use the term IMT (inappropriate-money-transfer) when someone takes money intended for one person or group, and gives that money surreptitiously to a different group or person. IMT assumes there is no personal gain for the individual or group ordering the money transfer. If that person does directly benefit, it is not IMT. The proper term is then stealing.

Every U.S. hospital charges insured patients more than the hospital's cost, in order to generate profit. Not-for-profit institutions then take that profit and pay for unreimbursed care -- care that is federally mandated but not paid. If hospitals did not do this, they would quickly go broke. That is what used to be called cost-shifting.

In 2007, my own institution paid $127,000,000 for care that it provided to uninsured patients. The hospital was not reimbursed those millions. Either the medical center "found" that money elsewhere pretty darned quick, or it closed its doors. No enterprise anywhere can sustain repeated a 15% loss per year and stay in business for very long.

Now comes the PPAHCA (Patient Protection and Affordable Health Care Act of 2010), arguably the acme of disingenuous titles-in-reverse. Rather than protecting patients, it increases errors. It is the anti-thesis of "affordable" (see *) for both individuals and our nation. It reduces care. The PPAHCA is also a superb example of cost-shifting, or more accurately, IMT.

*Even before PPAHCA has been fully implemented, health insurance premiums for families have begun to rise, anywhere from 16% to 34%. As a nation, the GAO reports that most (probably all) of the spending for the PPAHCA will be added to the deficit. That is not what any sane person would call affordable.

Estimates for the cost of PPAHC range from one to 2.7 trillion dollars. Ostensibly, the trillion plus dollars will be spent on health care goods and services for the American people. Ostensible means, "appearing to be true."

Rather than appearances, let's look at reality. Billions are being spent to expand the bureaucracy. PPAHCA creates six whole new federal agencies along with thousands of new regulations and thus new regulators and compliance officers. At the same time, money paid to providers is being cut: a 21% reduction in the Medicare reimbursement schedule.

As they say in the game of bridge, let's review the bidding. Money intended to provide health care for We the Patients is being spent to expand even further a massively bloated federal bureaucracy. Part of that money is being diverted from care providers to bureaucrats. In other words, the federal government has now become the nation's #1 cost-shifter, or should I write the biggest IMT-er?

Deane Waldman MD MBA is the author of "Uproot U.S. Healthcare" and "Not Right!" (January 2012).