Commercial health insurers might be able to cut rates 18% if other payers would pick up their fair share of the tab for hospital care.

John Pickering, a consulting actuary a Milliman Inc., Seattle, presented that estimate today at a hearing of the House Ways and Means Committee on health reform.

In 2006, U.S. hospitals reported about $24 billion in gains on $616 billion in revenue, giving them an operating margin of 3.8%, Pickering estimated in an analysis prepared for the committee.

The operating margin for uninsured patients and patients enrolled in a variety of relatively small government health insurance programs was negative 25%.

The operating margins was negative 9.4% for Medicare and about negative 15% for Medicaid.

Hospitals made up for the negative operating margins on government programs and the uninsured by generating a gain of about $66 billion on patients with commercial health coverage — enough for a positive operating margin of about 23%, Pickering reported.

If Medicare and Medicaid patients paid as much for physician care as commercially insured patients pay, the commercial plans could reduce their rates 12% without increasing rates or reducing their own profit margins, Pickering estimated.

“In total, we estimate the cost shift burden on commercial payers is approximately $89 billion,” Pickering writes in the analysis of cost-shifting.

During the Ways and Means hearing, Pickering acknowledged that some of the cost-shifting may be justified.

In some cases, Medicare and Medicaid patients pay less than commercially insured patients because the Medicare and Medicaid programs are bigger and in a better position to negotiate lower rates, Pickering said.

“Many providers have it as part of their mission to serve the whole community,” Pickering said.

In other cases, Pickering said, providers decide that getting low reimbursement rates from government programs is better than getting nothing from the uninsured.

But commercial insurers are concerned, because “these gaps have been widening, putting pressure on commercial rates,” Pickering testified.

Members of the Ways and Means panel noted that commercial payers had paid Milliman to develop the analysis.

Karen Davis, president of the Commonwealth Fund, New York, which would like to see the government let individuals and small groups buy coverage from a new public health insurance program based on the Medicare provider network and claims administration system, said the Pickering analysis fails to reflect how much providing coverage for the uninsured would reduce the cost-shifting burden on all other patients.

Some Republican members of the panel said the Commonwealth Fund’s proposed “Medicare Inc.” plan would drive commercial insurers out of the market.

But Davis said projections show that group plan enrollment already is on track to fall rapidly.

“We need a uniquely American solution” that combines the strengths of public and private health insurers, Davis said.

To prevent commercial insurers from dumping patients into the new public plan, all plans “must take everyone and charge everyone the same rate regardless of health status,” Davis said.

The plans also should make adjustments for variations in patient risk profiles that occur despite guaranteed issue, community rating rules, Davis said.

Pickering said expecting doctors and hospitals to accept low public health program payment rates from a large influx of newly insured patients, and a large influx of patients shifting from commercial plans into the new public plan, might not be tenable, “simply because it’s too many people.”

Hospital operating margins are higher than they have been in the past, and new price pressure could help promote efficiency, Davis said.

Links to written versions of the committee testimony are available here.