Dec. 9 (Bloomberg) -- Employers and private health insurers pay a “hidden tax” of $88.8 billion each year because government programs fail to pay enough to doctors and hospitals, an industry-sponsored study found.

Inadequate reimbursements by programs such as Medicare and Medicaid increase the annual cost of covering a family of four by $1,788, according to the report, issued today by the actuarial consulting firm Milliman Inc. At hospitals, the payment gap between private and public insurance has more than doubled in 10 years, the Seattle-based firm said.

The U.S. Chamber of Commerce, the biggest U.S. business group, endorsed the study and said the incoming Obama administration needs to fix the problem as part of a health-care overhaul. UnitedHealth Group Inc., WellPoint Inc. and smaller health insurers have waged a campaign since Barack Obama was elected president last month to make sure any overhaul preserves employer-based coverage.

“Cost shifting raises premiums to all, forcing employers to cut back on coverage and ultimately contributes to the rising numbers of uninsured,” said Richard Umbdenstock, president of the American Hospital Association, one of the study’s sponsors, in a statement.

The solution “is not as simple as having the government pay more,” said Scott Serota, chief executive officer of the Blue Cross Blue Shield Association, a sponsoring group, in a telephone interview. The government should do more to link pay to performance, a policy supported by Obama, Serota said.

Industry Critics

Health Care for America Now, a coalition of labor unions and activist groups, attacked insurers for blaming the efficiency of public insurance programs for their own “bad practices and greed.”

“Everyone agrees that we need cost controls, but when Medicare does a good job, insurers and hospitals complain,” said Richard Kirsch, the group’s national campaign manager, in a statement. “They’re unwilling to compete on price and quality. They refuse to tell us what they charge and how much it actually costs to provide services.”

In 2006, hospitals earned 23.1 percent for privately insured patients, compared with a negative 10.8 percent for Medicare and Medicaid patients, according to the study.

That compares with a 14.1 percent commercial margin and a 0.2 percent margin for Medicare and Medicaid in 1996, said John Pickering, an actuary with Milliman. Medicare provides coverage for the elderly and disabled. Medicaid, run by states and the U.S. government, covers the poor.

Employer Cost Savings

Assuming no change in total revenue to health providers, Milliman said, eliminating the cost shift would reduce medical expenses for privately insured patients by 15 percent. Cost shifting adds $1,512 to amount spent to cover a family of four, including the employee’s $397 payroll contribution. Families also spend an average $276 a year in co-payments and deductibles for their care, Milliman said.

The total annual cost of health insurance through private employers was $16,632 last year, according to Milliman.

America’s Health Insurance Plans, the Washington-based trade group for the largest U.S. health-insurance companies, and Premera Blue Cross of Mountlake Terrace, Washington, also sponsored the research.

The staff of the Medicare Payment Advisory Commission, an independent congressional agency, reported last week that U.S. hospitals have lost money treating Medicare patients since 2002. The margin reached minus 5.9 percent in 2007 and will probably fall to minus 6.9 percent next year, they said. Medicaid figures vary from state to state.

To contact the reporter on this story: Avram Goldstein in Washington at agoldstein1@bloomberg.net.

Last Updated: December 9, 2008 15:11 EST