Medicare and Cost

I usually try to blog about subjects where I have some value to add based on expertise. But most pundits today seem happy to mouth off about subjects they know nothing about, so why not me?

Mr. Rick Pollack, executive vice president of the American Hospital Association, expressed concern yesterday about the Senate proposal to allow persons age 55 or older to buy into the Medicare system. He explained: "Medicare pays less than the cost of delivering services. And as more patients are reimbursed at levels that are below the cost of providing the service, it obviously makes it difficult to maintain essential public services that patients and communities depend upon."

Now, can this possibly be true? If Medicare really pays less than the cost of delivering a service, then why would hospitals serve Medicare patients? They're losing money on each one.

Apparently, as summarized by Pollack's interviewer, part of the answer is that "Hospitals typically make up that shortfall by passing the cost to privately insured patients who pay more." But if other patients are willing and able to pay some higher cost that is necessary to make up for the loss hospitals incur on Medicare patients, then hospitals could make even more money by charging other patients that higher rate and still not serving the Medicare patients.

Do hospitals serve Medicare patients out of a sense of civic responsibility? Is it a public service? Or do they actually make money on Medicare patients but hide it with complicated accounting?

Are they just confusing marginal cost with average cost? If you imagine that each patient has to bear part of the cost of keeping the heat and lights on and paying the hospital's debt service -- all of which the hospital would do whether or not that patient showed up -- you can easily show a loss on patients when actually you're making a profit on them. The correct calculation would consider only the marginal (i.e. additional) costs that the hospital incurs because of treating that patient.

Here's a skeptical take on this costs question. But I don't really know the answer. Perhaps someone can elighten me.