Academic journal article American Journal of Law & Medicine

Medigap: Should Private Insurers Pay Public Rates and Who Should Make the Decision?

Academic journal article American Journal of Law & Medicine

Medigap: Should Private Insurers Pay Public Rates and Who Should Make the Decision?

Article excerpt


The most complex issues in the field of healthcare policy can often be reduced to the simple question "who is going to pay?" Legislatures, whether at the state or national level, are generally the entity responsible for allocating healthcare costs. When a legislative body acts to allocate healthcare costs, it simultaneously amends a society-wide, interwoven web of regulation and incentives that is steeped in decades of tradition. Further, and perhaps more importantly, healthcare cost allocation affects each individual in our society on an intimate level.1 Medicare is one of the most controversial elements in this grand scheme of cost allocation policy.2

Medicare serves approximately 37 million senior citizens in the United States.3 Of course, Medicare benefits are limited.4 With minor exceptions, Medicare fully covers only the first ninety days of hospitalization for an eligible citizen.5 After such period, a Medicare-eligible citizen may draw upon a non-renewable lifetime reserve, which provides Medicare hospitalization coverage for an additional sixty days.6 Medicare recipients who wish to expand their hospitalization coverage beyond these basic limits can purchase private supplemental insurance plans, commonly referred to as "Medigap policies."7 Only private insurers provide Medigap policies, although Congress regulates their format.8

Medicare and private Medigap insurers organize their payment systems in similar ways. Specifically, because the cost of hospital care varies greatly depending on a given patient's diagnosis, both Medicare and Medigap insurers base their per-day hospitalization payment rates on a given patient's ailment.9 When a Medicare eligible patient enters the hospital, her physician examines her and provides her with a diagnosis. Her diagnosis will fall, in turn, into a category that Medicare has established beforehand, a category called a Diagnostic Related Group ("DRG").10 Stated simply, a DRG lumps together, for the purposes of payment, several diagnoses that have similar costs of treatment. A DRG classification determines the rate a hospital may bill, on a daily basis, for a patient's care.11

Most insurance providers, whether Medicare or a private company such as Blue Cross/Blue Shield, establish DRG rates by negotiating with hospitals or larger healthcare organizations. Medicare, however, is in a unique position during such negotiations. Medicare runs at an annual cost of approximately $150 billion; in other words, healthcare providers receive approximately $150 billion dollars in Medicare payouts every year.12 Thus, Medicare accounts for a very large percentage of healthcare providers' income and, accordingly, Medicare has great leverage in negotiating DRG rates.13

Since 1999,14 healthcare providers have advanced several lawsuits against Medigap insurance providers.15 The issue in such cases is always the same: whether private Medigap insurers should pay the very low per diem hospitalization rates that Medicare has "negotiated," or negotiate their own DRG rates.16

The Ninth Circuit Court of Appeals has determined that Medigap insurers are entitled to Medicare-negotiated rates.17 This Note contends that the Ninth Circuit's decision is legally unfounded, politically unwise and, further, that it creates a shortsighted public policy. From a legal perspective, the bulk of analysis offered by the Ninth Circuit is either arbitrary or irrelevant.18 Politically, the Ninth Circuit's holding is both undemocratic and relatively uninformed. From a policy perspective, the court's position is unsound because: (1) it creates ambiguity in the healthcare markets; and (2) the position has broad implications that are dangerously unclear.

Part II of this Note creates a context for the Medigap line of cases by examining the current economic environment and by offering a limited description of both Medigap policies and Medicare. Part III considers the approach of the Ninth Circuit Court of Appeals to the Medigap rate question. …

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