Cost Plus Plans Draw Fire

history“The cost-plus system virtually guarantees that health insurance premiums will go right on rising, because the people who are directly responsible for controlling hospital costs find the only way they can increase their revenues is by increasing their costs. . . . ”

Editor’s Note: As Cost Plus Insurance gains market share, will it have the unintended effect of increasing cost pressure? The article below was written 29 years ago and may provide a clue.

October 7, 1985

DALLAS — The cost-plus basis under which most public and private health insurance plans are set up is forcing business to discard conventional health insurance plans and adopt self-insured programs at a considerable saving, recent research indicates.

A study by the National Center for Policy Analysis, a privately funded research group in Dallas, concluded: “An insurance system designed to make sure that hospitals cover their costs is inherently adverse to the interests of those who are insured.

“The cost-plus system virtually guarantees that health insurance premiums will go right on rising, because the people who are directly responsible for controlling hospital costs find the only way they can increase their revenues is by increasing their costs. . . .“

Using the example of Blue Cross-Blue Shield, the study says that if Blue Cross patientsaccount for 30 percent of a hospital`s patient days, Blue Cross agrees to pay the hospital 30 percent of its total costs.

“This means Blue Cross pays hospitals for more than the services used by Blue Cross patients,“ the study said. “It also pays for part of the cost of charity care, for the bad debts of non-Blue Cross patients and for the cost of empty beds and unused equipment.“

Similar cost-plus payy other insurance companies and by the government under the Medicare and Medicaid programs, the study said.

Gerald Musgrave, co-author of thment schemes have been used be study, said the government currently was spending about $40 billion annually on Medicare and $38 billion on Medicaid.

“With all the money we are paying as taxpayers, the elderly are out of their pockets exactly the same percentage (15 percent) as when the programs started in 1966,“ he said. “They have not helped the elderly at all. The extra money has gone into something that has been very, very expensive.“

Musgrave, a former professor of economics at the University of Michigan and now president of an economic forecasting firm in Ann Arbor, said recent government regulations called for a flat fee to hospitals for treating a patient. The flaw in that regulation, he said, is that a hospital will lose money if a patient`s stay is prolonged.

“Although the government`s response to the cost-plus situation is in the right direction, the flat fee is inadequate, because it will encourage hospitals to discharge a patient earlier in order to make a profit,“ Musgrave said.