It may be that public reimbursement is not actually below marginal cost,
making it rational for providers to sell their services at the legislated
price, but is below average cost, forcing providers to make up the
difference (fixed costs) from private payers.
I would strongly suspect that there are reputation effects at play when
providers (and especially hospitals) agree to accept lower reimbursement
from public payers. Refusal of Medicare and Medicaid patients, who are by
definition vulnerable population sub-groups, is hardly a way to be seen as a
caring provider. It may be much more palatable to a provider to refuse
coverage to underpaying private insurers whose subscribers may be viewed as
having more control over their insurer (whether or not this is true in
reality).
One thought on the relevance of this issue to the public option proposed by
Obama: If the public plan is seen by providers as a competitor to private
plans, that is, an option that patients are free to choose or not choose,
providers seem less likely to accept below-cost payment from the public
payer out of goodwill than they are in the case of Medicare and Medicaid
where patients are not voluntarily enrolled but rather are enrolled because
they are elderly, poor, or disabled. If the reputation explanation is to be
believed, perhaps cost-shifting isn't as big of a concern in the
"competitive marketplace" that Obama proposes.
---
Sean Arenson
MSc International Health Policy (Health Economics)
Department of Social Policy
London School of Economics and Political Science
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