Medicare and Medicaid Overpayments Are Costing Taxpayers

Washington spends enormous sums trying to lower health care costs while its own programs sometimes pay far more than the private market for the same care.

New Medicare data and California's Medicaid ambulance payments show how expensive that disconnect can become. The Centers for Medicare & Medicaid Services (CMS) found that Medicare pays about 16 percent more than private insurers for laboratory services. Bringing those rates closer to private-sector prices could save taxpayers roughly $1 billion a year.

California offers a more extreme example. Certain public ambulance providers can receive more than $2,000 from Medicaid for a transport that costs a fraction of that amount, while private ambulance providers may receive only about $339 for a Medi-Cal transport.

These are different problems, but they point to the same weakness in government health care programs. Without the discipline of a competitive market, excessive payments can remain in place for years.

Medicare Pays More While the Private Market Pays Less

Congress tried to prevent this problem with laboratory services in 2014 by requiring Medicare to use private-payer data when setting rates for most clinical lab tests. But lawmakers repeatedly delayed subsequent data reporting, leaving Medicare rates based largely on older prices while the private market continued to change.

CMS now reports that the weighted median private-payer rate for comparable laboratory tests is about 16 percent below what Medicare pays.

The agency's preliminary 2027 rates would begin closing that gap, with reductions for individual tests limited to 15 percent annually through 2029. CMS estimates the change will save about $1 billion each year.

This is not a new cost-control program or a cut to Medicare benefits. It is an effort to stop Medicare from paying above-market prices for services private insurers already purchase for less.

California Medicaid Shows How Bad the Problem Can Get

California's Medicaid ambulance payments show another way government reimbursement can become detached from the cost of care.

CFE previously detailed how certain public ambulance providers can collect multiple Medicaid payments for a single transport. In Huntington Beach, a transport costing the city approximately $676 can generate about $2,180 in Medicaid reimbursement. Pending changes could push that payment to roughly $2,609.

Meanwhile, a private ambulance provider may receive approximately $339 for a Medi-Cal transport.

Unlike Medicare's outdated laboratory prices, California's problem stems from financing arrangements that allow certain public providers to collect much larger federal reimbursements. The mechanism is different, but taxpayers face the same result: government pays more than it should.

CFE Takeaway

Finding $1 billion in annual savings from laboratory tests alone should raise questions about how much more Medicare and Medicaid could save by examining what they pay throughout the health care system.

Not every government payment should match a private insurance rate, but large disparities deserve scrutiny. Medicare should not pay 16 percent more for a service simply because its payment schedule failed to keep up with the market, and Medicaid should not pay several times more for a service based on who provides it.

Before Washington looks for more money to sustain Medicare and Medicaid, it should do a better job with the money taxpayers already provide.