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HEALTH REFORM: 4 Reasons Why A Provider Tax Could Work For States

January 25th, 2007

Gov. Arnold Schwarzenegger has proposed a system for achieving near-universal health coverage in California. One provision that is likely to be controversial is the use of a provider tax to help fund the increased state expenditures that would be required. There are at least four reasons why a provider tax may be a desirable way for California and other states to fund programs to provide universal health insurance coverage.

1. Revenue during recessions. States are subject to large revenue losses during troughs in the state’s business cycle, a problem that poses a major barrier to states’ aspirations to move toward universal coverage. The nature of most taxes is that their revenue yield is closely tied to the level of state economic activity. As consumer and business spending decline, so do tax revenues. States often suffer recessions that are deeper and longer than those of the economy as a whole. The problem is made worse because there is often upward pressure on expenditures just as tax revenues are declining. During dips in the economic cycle, demands for public services typically rise because more people need the assistance of state-subsidized safety-net programs. Most states have constitutional prohibitions against running deficits, so when they experience an economic downturn and consequent declining tax revenues, they are forced to cut back on spending.

If, in good times, states move toward universal coverage by providing increased assistance to lower-income people, health spending would be an even bigger share of the total state budget than now. So states suffering an economic recession would often be forced to cut back on the health coverage program to bring spending in line with revenues.

However, revenues from a provider tax are largely recession proof. People’s need for medical services does not decline during recessions: They still go to doctors and hospitals for care. Thus, the revenue from the provider tax would not fall appreciably, if at all, when the economy is in recession. In short, a provider tax would be a more stable source of revenue over the business cycle than nearly all other forms of tax, helping to lessen the need to curtail spending.

2. Health care inflation. Medical care costs have consistently outpaced the growth of the economy as whole and are likely to do in the future. So even if states did not have to worry about revenue shortfalls during periods of economic recession, over time they would likely find that the revenue that supports a comprehensive coverage expansion program would not keep pace with the need to fund that program. Payroll taxes, other business taxes, sales taxes, and income taxes all tend to grow at a rate roughly equal to the growth of the state economy, but not faster. A provider tax, in contrast, is very likely to grow at approximately the same pace as overall medical care costs, since provider costs are the primary source of increased health care costs. So a provider tax helps ensure that revenue will be sufficient over time.

3. Uncompensated care. Present payments to providers include an amount to cover what would otherwise be uncompensated care–that is, the costs that providers incur because some patients without adequate financial resources or any insurance receive free care or pay an amount that is less than the cost of providing the care. In these cases, most if not all of the uncompensated care costs get shifted to others through the insurance system. If providers were not able to shift these costs to payers, they could not remain economically viable.

Under a universal coverage or near-universal coverage system, most of uncompensated care would be eliminated. If uncompensated care costs are no longer incurred because of universal coverage, providers would enjoy a windfall gain. A provider tax is a way of “capturing” this provider savings. The provider tax eliminates the windfall gain. Assuming the provider tax collects an amount equal to the previous cost of uncompensated care, on average, net provider income stays the same. Now, of course, some providers are not providing uncompensated care or at least not a proportionate share. They would experience a net fall in income, but that is because they were enjoying “underserved” windfall gains before, being reimbursed at rates that included an amount for uncompensated care even though they were not incurring their “fair share” of the costs of providing such care. (I am indebted to Rick Curtis of the Institute for Policy Solutions for having brought this point to my attention.)

4. Business concerns. Business people (including providers) often object to taxes levied on any aspect of business activity. They say the tax (such as a payroll tax) will hurt their sales because they cannot pass on all the costs to their customers in the form of higher prices. There is some economic validity to this argument. Even when all businesses have to pay a comparable tax, if businesses try to pass on all the tax in higher prices, the result will be that the higher price will deter some customers from buying the product or service and revenue will fall. (If a payroll tax on restaurants causes restaurant owners to raise meal prices, some people will eat at home.) Profits for the taxed businesses might decline somewhat and production levels might fall slightly.

But a tax on providers is unlikely to have this effect. In the previous section, I pointed out that net provider costs would stay roughly the same after the tax because uncompensated care costs would decline, so there would be no real cost increase to pass on. But even if that were not the case, providers would almost surely be able to pass on most if not all of any net cost increase. Relatively small increases in the price of medical services are not likely to deter people from getting needed care. When people truly need medical care, they are not likely to be very sensitive to small price increases (especially given the long history of large price increases). This is particularly true because insurance covers so much of the cost. Insurers would generally pay the increased costs (since the tax would apply to all providers), as they do now when costs increase for other reasons. (This is not to say that insurers would not try to persuade providers to be more efficient.) Of course, insurers would pass on these costs to those who buy insurance. There would almost surely be no significant decline in the amount of medical services consumed and no real reduction in net revenue realized by providers as a whole.

Worth considering. For almost all states, achieving near-universal coverage will require coming up with new revenue, which almost certainly means imposing some kind of new tax or a tax increase. No tax increase will be easy to get through the political process, and a provider tax is no exception. But as this analysis shows, a provider tax has some economic advantages that make it worthy of consideration.

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1 Trackback for “HEALTH REFORM: 4 Reasons Why A Provider Tax Could Work For States”

  1. Health Care BS » Blog Archive » A Provider Tax Would Be Disastrous
    March 17th, 2007 at 8:48 am

18 Responses to “HEALTH REFORM: 4 Reasons Why A Provider Tax Could Work For States”

  1. Pat Knowd Says:

    “providers would almost surely be able to pass on most if not all of any net cost increase.”

    That’s a big assumption. Poviders are stretched to the limit with insurers cutting reimbursement rates and to further assume a decline in unreimbursed expenses is another leap.

  2. Jeanne Keller Says:

    Faye: The analysis for Vermont that I’m relying on was conducted by our Department of Banking, Insurance, Securities and Health Care Administration, which conducts an annual review of hospital budgets. All hospitals in the state (14 hospitals, all non-profits) are required to post detailed financial reports, which are analyzed by the state, and public hearings are held.

    Because of the robust financial information provided, all of which is in the public domain, an analysis of cost shfit can be performed as part of the annual review. The report for 2006-2007 is posted on their website:
    The report describes the method used to estimate the cost shift. The author is an analyst for the department and you could direct any quesitons to him: Mike Davis

    Just to make this clear: I was referring to hospital cost shift only; we don’t have data on incomes and expenses of physicians, by payer, which is what is needed to estimate cost shift. My comments earlier reflect the relative ease with which some providers — in this case, hospitals, can cost shift any provider tax. In Vermont, at least, physicians aren’t in a position to negotiate their rates with insurers, and so even if they have a large panel of privately insured patients they just can’t do much cost shifting. A provider tax on hospitals would be cost shifted to private insurance, just like Medicaid and Medicare shortfalls are.

    My biggest problem with these “recapture the cost shift” schemes, as someone who works for employers who are the current payers of the cost shift, is that the underlying theory is that only those who are currently paying for health insurance would continue to be the only ones paying for health insurance. Wick says “payers would continue to pay what they are currently paying,” because the provider tax would “recapture” from providers the funds that had been cost shifted, but aren’t needed by providers any more because there won’t be any more uncompensated care. Can you see the basic unfairness of this? Those employers good enough to provide insurance all along, and who have been overpaying via the cost shift, will continue in perpetuity to overpay, in other words, to finance the care for the uninsured. IF covering the uninsured is a social good, then everyone should contribute. We shouldn’t only charge those with insurance to cover everyone, including the currently uninsured. the provider tax would take away any “windfall” from the providers, but provides no relief whatsoever for the payers who are overpaying. It institutionalizes the overpayment.

  3. Faye Hall Says:

    To Jeanne Keller: I agree with you that a provider tax would not help matters. But I am intrigued by your analysis on cost shift, especially Medicaid and Medicare cost shift. I work in a public health care system, and a large percentage of the care we provide is for patients with Medicaid and/or patients who are uninsured and have no coverage, not even governmental. I would think that IF there is a cost shift in our organization, it could not be very large since most of the care we provide is not for insured patients. I am not an economist, but I would like to understand more. I’ve gone to your website and looked at some of your articles, but they seemed to be reporting the results rather than describing the methodology used. Is there a website I can go to that would put forth a methodology for assessing cost shift? Maybe you might post it here? I would really appreciate it. Thank you.

  4. Virgil Airola Says:

    Mr. Wicks fails to fully understand the economics of the typical physician’s practice in California. He incorrectly assumes that physicians’ practices are somehow recession-proof. He also implies improperly that the safety-net health insurance programs reimburse physicians fully for the medical care physicians deliver.

    When faced with financial problems, most potential patients do NOT seek medical care until they are so sick they have no other choice. Consequently, the patients are sicker, take longer to get better, and are more work for their physician; but they often can’t meet their financial obligations to their doctor. And what doctor is going to try to wring the last dollar from the patient they’ve just saved? And the government health insurance plans don’t even cover the basic costs of most medical practice expenses, much less pay extra for the doctor’s paycheck!

    Contrary to Mr. Wicks’ opinion, during a recession physician practices are NOT recession-proof!

    In his analysis of inflation in medical costs, Mr. Wicks incorrectly assumes that physician incomes have risen as fast as the 20 to 25% per year increase in health insurance premiums over the last five years. The unfortunate reality for most California physicians has been that they have NOT seen even a cost-of-living increase in their incomes over the last five years.

    Mr. Wicks assumes that commercial health insurance programs add into the physician’s fee “an amount to cover what would otherwise be uncompensated care”. Sadly, nothing could be further from the truth! In fact, over the last fifteen or more years commercial health insurance programs have developed their physician fee schedules unilaterally and presented them (along with their non-negotiable contract) to physicians with take-it-or-leave-it ultimatums. Consequently, commercial health insurance physician fee schedules are bare bones propositions for the doctors taking care of their patients—there is nothing left over to help cover uncompensated care.

    As a result, fewer and fewer physicians can afford to provide charity care in their practice unlike the physicians of 1965 when Medicare was first developed. If uncompensated care was somehow covered by a government-sponsored health insurance program such as Medicare or Medi-Cal (California’s version of Medicaid), the physician can only anticipate greater financial difficulties in their practice because as the workload in the physician practice rises, practice expenses will become harder to pay and the physician will be unable to recruit another physician to help with the increase workload.

    If a physician must also pay a provider tax on top of their other practice expenses, many California physicians will see their small business sink into bankruptcy. In the underserved areas of California such as the San Joaquin Valley, too many physician practices are already close to closing their doors—that’s why too few physicians live and work in underserved areas! A provider tax will be sadly self-defeating as it supports health insurance reform, but drives physicians our of business in California.

    In the Q & A portion of the article Mr. Wicks and others imply that physicians are somehow overpaid or expect an income that is too high. This is untrue! The average physician expects to earn a fair wage for their care of patients. The average physician also works between 60 to 80 hours a week, is up half the night with a patient at times, is available for their patients 24 hours a day, seven days a week, or has another physician cover their patients for those emergencies. But most importantly, the average physician expects to earn enough from their practice to bring in another physician to replace themselves when they retire or to join their practice when too many patients make a physician’s day too long. In essence, every California physician practice must be able to compete effectively with every physician practice across the United States or the number of physicians in California will dwindle away. The real question should be: are Californian’s willing to pay enough to bring new physicians to California when California develops universal health care for Californians?

  5. acavale Says:

    Mr. Wicks continues to compare apples and oranges, making the same erroneous arguments. Firstly, the average American has about 2 years in college in education, works on average 35 hours per week and has seen a 2-4 % increase in mean income per year over the past 10 years. Compared to that the average Amercian physician has spent 11 – 15 years in college and graduate medical education, thus entering the work force about 12 years later than other Americans; the average physician works on average about 50 – 75 hours per week; pays about 15% higher income taxes than the average American; employs about 2 workers directly and helps support several hundred other workers (in hospital, labs, anxilary services, etc.); and has seen a net decline of 13% in income over the past 10 years.

    If we have to compare, we should compare comparable professionals (having equivalent educational qualifications) and then see if it would be acceptable to tax all such professionals similarly. For examples, say we tax lawyers 2% of their revenue so that poor people can be given adequate representation; or architects a similar amount so that we can provide affordable housing to the poor, and so on. I wonder how Mr. Wicks would rationalise that!

    Secondly, Mr. Wicks’ contention that private medical practices should go out of business if the costs of care are inadequately compensated seems very immature – something that a student of Economy would probably ask. The reasons why practices aren’t broke is because physicians have quietly accepted lower and lower take-home salaries over the years in order to maintain viablility of their practices, and some have increased their workload to compensate for lower reimbursements. If the rest of America was as hard-working as physicians, a lot of our problems would be long gone. By the way, who hasen’t heard the concept of taking a profit from your business? If the aim of a business was to provide service at cost basis, it would be called a “non-profit” institution. That’s where Mr. Wicks finally loses concept of what the whole issue is about.

  6. annecarroll Says:

    The median income data for physicians and surgeons by specialty are for individual practitioners; there is no reference to practice setting or employment status, except to state that physicians who practice in individual practice settings tend to have higher compensation than those in other settings (as a footnote). The median data only show that 50% of practitioners in that specialty made more than that figure, and 50% of practitioners in that specialty made less than that figure.

    Perhaps Harold Nelson can enlighten us with median income data per specialty per setting and employment status.

    A physician practice is a business and economic arrangement. Many businesses in all kinds of industries take losses all the time in order to lower their taxes, especially if they don’t have to answer to shareholders. In addition, businesses have many tax deductions that lower the appearance of their actual income. Anecdotal “evidence” by a practice management consultant is not proof of anything and doesn’t invalidate the argument made.

    The point is whether a provider tax would be a burden on providers (that category includes all care settings, all categories of practitioners, insurance companies, medical technology companies, etc., etc., not just physicians). The answer may depend on what state you are talking about and how the “tax” is designed. A “tax” could also be imposed by disallowing “business” deductions, or something like an Alternative Minimum Tax so that providers pay at least some taxes, etc., etc. The point is also whether a provider tax would encourage cost shifting to other patient groups such as self-pay, uninsured, Medicaid and Medicare populations, etc. Certainly, by definition, universal coverage would eliminate the need–or opportunity–to cost shift any more.

    Wicks’ argument that taxing without lowering actual provider income, and using that tax revenue to ensure universal coverage, is interesting. The next argument would be about whether the current level of reimbursement is reasonable and supportable. The latest figures (2005) show that health care costs increased by 6.9% in the past year, while general inflation in 2005 increased by 3.4%, based on a report by CMS’s National Health Statistics Group (I don’t know if these figures apply just to CMS’s costs or to all U.S. health care spending. Can someone clarify this?) Their figures also show that in 2005, health insurance premiums cost $694.4 billion, while Medicare and Medicaid together cost only $521 billion, and hospital services cost $611.6 billion. Since insurance premiums take the largest chunk of the health care expenditure pie, which is unsustainable going forward, perhaps the insurance industry, with their high administrative costs, lobbying expenses, high management compensation packages, advertising costs, etc. (all of which are deducted as “business expenses” and none of which are mission-oriented), is the first place to look at. No wonder other financial services companies like banks and credit card companies are trying to poke their fingers in the health care spending pie: that’s where all the gravy is!

  7. Harold Nelson Says:

    Elliot quoted some interesting data from BLS. “The paragraphs below give details on physician income for the same year. It shows that median physician income for those in practice for more than a year varied by specialty from $156,010 to $321,686. The material is quoted from the Bureau of Labor Statistics”

    How can we reconcile this with the frequently heard comment that physician practices are “losing money?”

    Interestingly, the high physician incomes are quite consistent with the loss of money by physician practices. If the cost of the practice includes the money paid by the practice to the physician, then the practice can be losing money even though the physician is earning personally a reasonable income. I attended a presentation by a practice management consultation about a year ago and found out that this really is how practice costs are constructed for many purposes. In laymans language, the loss of money by the practice means that on a personal level, the physician is earning less than hoped for.

  8. Elliot K. Wicks Says:

    Some of the commenters may have misunderstood my point about providers being compensated for so-called uncompensated care. I did not mean to suggest that all providers get paid an amount equal to the cost of providing the services for each patient they serve. Of course, some patients pay nothing and others pay less than the average cost (and even less than the marginal cost, which is more relevant, as noted by Harold Nelson). But the point is that providers generally do recover enough from other payers to cover their total costs, including the cost of serving patients that pay less than the cost. If that did not do so, they could not stay in business. Providers cannot continue providing services if their total revenue is consistently less than their total costs (including salary). They would go out of business. This necessarily means that the uncompensated care costs are shifted to other payers in one form or another. Providers get paid (though perhaps not what they expect or deserve), and other insured people pay more than the amount that it actually costs to provide their care. This cost shift is the way that uncompensated care is compensated.

    But if we somehow were able to give everyone an insurance card so that there was no uncompensated care, there would be no reason to have the payers who were paying for the cost shift to pay as much as they previously did, since those rates included an amount for uncompensated care. If we could impose a tax on hospitals and physicians that was exactly equal to the amount that previously was needed to cover uncompensated care, providers would be paid the same in total and payers would be paying the same in total. The tax could be one source of funding for the coverage that would be newly available to people who previously did not have it.

    On a related issue, several commenters made an issue of the adequacy of payments to physicians, I thought some data might be of interest. The median wage for all workers in the U.S. in 2004 was $23,356, and the average was $34,198, according to the Social Security Administration. The paragraphs below give details on physician income for the same year. It shows that median physician income for those in practice for more than a year varied by specialty from $156,010 to $321,686. The material is quoted from the Bureau of Labor Statistics (


    Earnings of physicians and surgeons are among the highest of any occupation. According to the Medical Group Management Association’s Physician Compensation and Production Survey, median total compensation for physicians in 2004 varied by specialty, as shown in table 2. Total compensation for physicians reflects the amount reported as direct compensation for tax purposes, plus all voluntary salary reductions. Salary, bonus and/or incentive payments, research stipends, honoraria, and distribution of profits were included in total compensation.

    Self-employed physicians—those who own or are part owners of their medical practice—generally have higher median incomes than salaried physicians. Earnings vary according to number of years in practice, geographic region, hours worked, and skill, personality, and professional reputation. Self-employed physicians and surgeons must provide for their own health insurance and retirement.

  9. Faye Hall Says:

    Could it be that some people are advocating a tax on providers because they find it easier than negotiating with tapped-out providers? Might it be that a certain class of business concerns are attempting to use the power of government to enrich themselves? A provider tax does nothing but reduce the financial strength of a provider, oh, and create another level of bureaucracy to enforce the tax. Will this provider tax be based on the income of providers? They already pay income tax. Furthermore, if the “provider tax” is applied to safety net facilities it will reduce the amount of care they are able to provide. One might think that everyone will suddenly be insured and there will be no need for a safety net, but that is simply not true. There will still be people who are uninsured and underinsured, because the poorest of the poor will still not be able to afford health insurance. You can make a law, but in the end people who have to choose between insurance and food will choose food.

  10. acavale Says:

    I am glad to see from the post by jmp308 that there are some souls who don’t tow this line of argument as espoused by Mr. Wicks and the like. For the sake of fairness, I hope jmp308 is not a physician or nurse.

    Economists like Mr. Wicks and Mr. Reinahrdt have to step down from their pedestals, climb down their ivory towers and observe what actually transpires in the trenches where health care is delivered before they pick up their pens (or laptops) and write another article like this one. We don’t want them to be waiting in line when they need an urgent heart catheterisation or a loved one needs an obstetrician, because that’s what they will get if their proposal are enacted.

  11. Joseph Purpura Says:

    Your analysis is frightening:

    Could you, Mr. Wicks, really not understand that, as health policy economists have wanted for so many years, physicians have become de facto employees of the private health plans. (Health plans that mysteriously seem to be off the health policy radar when it comes to paying for things.)

    The post by ACAVALE nicely summarizes your errors of fact and need not be repeated (although they should be for every student of health economics); moreover, how could it be that you are unaware that health plans and public purchasers set the rates of reimbursement and that providers have no say in the matter?

    It would seem that you, like Dr. Reinhardt has repeatedly shown over the years, have that disturbing tendency to view all solutions to providing healthcare to Americans through the prism of physician income and lifestyle. Maybe that’s why policy makers have of late received so little of substance from your discipline.

  12. Neil Gardner Says:

    Harold Nelson Harold Nelson asks:

    So my question to the previous posters in this thread is: Which version of cost are you talking about?

    When we try to compare a social necessity to non-social necessities from a pure, true supply and demand economic viewpoint, we lose too much prospective to make sense. It goes back to that lack of a healthcare mission statement by our society, although I guess not having such a social mission statement may well just indictate that caveat emptor principles are alive and well in this resultant non-social (under such practices) area.

    If cost shifting happens behind the scenes of the social mission being met, such as everyone gets access to timely proven care, then such discussions are irrelevant to my pay grade. However, if such cost shifting prevents the social missioin of everyone geting access to timely proven care, then it becomes part of the problem and has to be so dealt with.

    So, do we have a social mission to our healthcare system, and how can this most fairly and effectively be met??

  13. Harold Nelson Says:

    I’m always frustrated by the discussions of cost shift. There is more than one meaning to the term “cost.” The common meaning of the term is what economists refer to as the average cost. You take the entire cost of running the business and divide this figure by the number of units sold. This gives you the average cost of a unit. However in many cases, it is rational for a seller to charge a price below this cost to some consumers. The seller can increase profits by doing this.

    That seems impossible, but it’s true. In fact it’s quite common. A rational seller will consider how much is added to his total cost by providing one more unit. This amount is called the marginal cost and is typically much smaller than the average cost. Airlines make a great example. How much is added to the cost of a flight by putting one more passenger on board? Maybe the fuel cost goes up a bit. The extra passenger will use a little water, etc. There are fixed costs that don’t increase when the extra passenger boards. The pilot’s pay doesn’t go up, for example. An airline knows that it is better off to accept a low paying passenger as long as there is an empty seat and the bargain fair is greater than the marginal cost. It isn’t charity. It’s a business being very smart about pursuing profit.

    So my question to the previous posters in this thread is: Which version of cost are you talking about?

  14. Jeanne Keller Says:

    Excellent question, since in our state, Canada is touted as the ideal. First of all, I think we have to get away from fee-for-service reimbursement in health care. As Canada has found (and our Medicare program also found after cuts or freezes to fees in past decades), a cut (or freeze) in fees will be responded to with an increase in utilization. In states without strong CON laws, this might even mean rampant capital spending (such as specialty hospitals, ASCs, diagnostic equipment) that allows physciains and hospitals to make up for the lost revenues. My favorite quote on this is from Clark Kerr (III?) when he was head of the California Business Group on Health, years ago. “We gave them an unlimited budget, and they exceeded it.”

    Or, they quit seeing patients.

    Fee for service also provides no rational reimbursement for chronic care, as we are learning painfully. The old, original model of capitated HMO care, it turns out, was a better way to both compel providers to consider the costs associated with treatment, and also to incentivize prevention and better management of illness. Would a monopoly group of multi-specialty providers want to negotiate a capitation with a monosony purchaser? I’d feel a lot better about that, because the providers will be actually be sharing the risk.

    I can predict the objections: Providers are on the financial hook, but we can’t make patients comply. Government will still have more power in negotiations, etc. etc. I’m sorry, but I can’t offer a silver bullet on this one; I do think we need to put into practice what we know and are still learning about what is appropriate, evidence-based care; figure out how much that actually should cost to deliver; chose the most efficient way to reimburse it (which I’ll bet ain’t fee-for-service); and put that into place. Maybe a base capitation with add-ons based on a patient’s disease profile? (i.e. risk adjusted capitation?) (And this time around, all providers have to be capitated. We can’t make incentives for capitated PCPs to simply refer out to FFS specialists who have no financial incentives to be conservative.)

    Isn’t there anyone out there with some experience of this? I have to believe that the integrated systems and leading major group practices (Group Health, Providence, Cleveland Clinic, Henry Ford, etc — you know who you are better than I) are doing something like this internally. could you teach Medicare and Medicaid how to do it? The private payers will follow….

  15. acavale Says:

    Not very surprising to see such an article from an Economist, who appears very out of touch with reality. I would only like to point out factual inaccuracies in this article and why such a proposal would spell disaster to the average population. We are already seeing developing problems with access to care (US News&WorldReport). I have responded to the author by using quotes from his article:

    1) “However, revenues from a provider tax are largely recession proof”. This is incorrect because in severly depressed times most people avoid routine medical care and only seek care in emergencies, leading to the potential of increased use of emergency services (more expensive!).

    2) “A provider tax, in contrast, is very likely to grow at approximately the same pace as overall medical care costs, since provider costs are the primary source of increased health care costs”. This is factually incorrect since it is wide knowledge that the primary cost increases in health care costs are administrative costs incurred by Insurers. How can provider costs be blamed for “increased health care costs” when the average medical provider reimbursement is down 13% over the past 10 years compared the CPI based on MGMA data? One would hope that Health Affairs would be able to verify data accuracy before putting it in print!

    3) “Present payments to providers include an amount to cover what would otherwise be uncompensated care.” I am not sure what Mr. Wicks is talking about – it is common knowledge that uncompensated care generally means it is uncompensated.

    4) “They were enjoying “underserved” windfall gains before”. Are we living in a Communist country? Who gives Mr. Wicks the right to decide what is “undeserved”? Using the same reasoning one could say that Economists like the author also do not deserve their salary since they don’t ever participate in any form of “uncompensated occupational activity”.

    5) “Providers would almost surely be able to pass on most if not all of any net cost increase”, “insurers would generally pay the increased costs”. This is the most mind-blowing of all arguments that the author makes. If insurers would automatically pay increased costs, we would not be engaged in this discussion because there would be no crisis, since providers would falling over each other to provide services to everybody.

    Let’s move on from this discussion because, of all proposals I have heard, this makes the # 1 in a list of “proposals destined for failure”.

  16. Neil Gardner Says:

    Jeanne Keller Jeanne Keller
    View Author Bio

    January 26th, 2007 at 10:11 am
    New bulletin: States are already using a provider tax to fund care for the uninsured: it’s called the Medicaid Cost Shift.

    Question for Jeanne Keller. In the single payer Canadian system, the provinces negotiate with the medical societies for a single common fee schedule for all ocvered procedures for everyone! Do you believe this negotiation of giants, or a monopsony negotiating with a monopoly, can get real true fair pricing in medicine?

  17. Jeanne Keller Says:

    New bulletin: States are already using a provider tax to fund care for the uninsured: it’s called the Medicaid Cost Shift. A recent study here in Vermont has documented that for every dollar spent in Vermont hospitals on behalf of Medicaid-covered patients, 44 cents is provided by the private sector through the cost shifting mechanism. Yes, that’s right — almost HALF of Medicaid hospital benefits in our state are paid for by a tax on the private sector. Underpaying hospitals becomes a premium tax. It’s that simple. (See my analysis at Click on “Cost Shift Worsens.”). A provider tax would just pile on another premium tax for those just barely able to afford insurance premiums now.

    Another serious problem with using this mechanism — perhaps the most dangerous to businesses who will foot the bill, as Dr. Wicks admits — is that because of the federal match for Medicaid , our state legislature is actually only funding 22 cents of every dollar of the entitlement they grant through Medicaid. Here’s the breakdown once more:

    state share = 22 cents
    federal share = 34 cents
    private sector via cost shift = 44 cents

    Viewed this way you can see that the private sector via a cost shift on health insurance claims (that eventually is a tax on employer-sponsored health insurance) is the largest source of funding for Medicaid hospital benefits. It’s very easy for a legislator to grant entitlement to extremely generous benefits for a large number of people if they have to only raise 22 cents on the dollar thru taxes. Way too easy! I do not see how a provider tax, which is just another cost shift, would impose greater discipline on legislators, and that’s a problem.

    In a hospital market with hospital overcapacity and with powerful employers and insurers perhaps the impact can be mitigated by tough rate negotiations. But in many ctities and especially in rural areas, believe me, insurers cannot walk away from the table — they must have that hospital on network to be competitive as insurers. Thus, private payment rates end up absorbing a huge portion of government underpayments.

    We’ve also seen recently plenty of evidence that the uninsured have not been signing up in droves for offered plans: Maine comes to mind, and here in Vermont two programs we already have for families up to 200% of poverty have failed to sign up the one-half of our currently uninsured who are eligible! However, even if people don’t sign up and get the benefits, the provider tax will hum along collecting money for the state, by taxing employer-sponsored health plans (via the provider tax). It’s not, therefore “offsetting” a drop in cost shifting for the currently uninsured, becuase there aren’t fewer uninsured out there. It’s simply another tax, a windfall for the state, instead of for the providers.

    Last year, some of our state senators floated a truly hairbrained scheme to fund care for the uninsured: their bill would have mandated that hospitals provide free care to anyone under 200% of poverty, and sliding scale charged up to 300%. Their rationale? It could be funded through cost shifting onto private payers. Cost shifting was actually proposed as a funding mechanism — isn’t that ridiculous? Well, frankly, what’s the difference between that and a provider tax?

    Maybe I’ve grown cynical after 25 years of trying to solve this at the state level, but I think that legislators do not make very good decisions when they are spending someone else’s money.

  18. drogersmd Says:

    In case you’re illiterate, you know that reimbursement is set by the insurance companies and that reimbursement has been falling every year for nearly a decade. According to MGMA data, most physicians costs are at or below the level of reimbursement of government programs and not far above private payers. Many of the providers you propose to tax are barely financially viable already. Putting more of the financial burden on the backs of providers will be a disaster to healthcare of proportions not before seen. Good luck finding a doc or even anyone who will want to be one.

    Dave Rogers, MD
    McKinney, Texas

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