The Real Hidden Tax on Increased Insurance Coverage


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Friends and foes of the Affordable Care Act (ACA) alike tend to target the relative effectiveness of the (soon-to-be-repealed) individual mandate as the key factor behind relatively higher levels of insurance coverage since the law was enacted in 2010.
ACA supporters might wish that the mandate was much stronger, but they still claim that its repeal will trigger rising premiums and leave millions more Americans uninsured in the years ahead.
Many ACA foes often can’t decide whether repealing the mandate remains the key to unraveling Obamacare or if it simply should be eliminated as a matter of principle, regardless of the cost and coverage consequences.
Spoiler alert: They were both wrong about the past. They are likely to remain mistaken about the future.
In reality, overall coverage gains under the ACA hit a modest, but relatively stable, plateau well before last month’s tax-cutting budget reconciliation law decided to eliminate further penalties under the individual mandate as of 2019. Those initial reductions in the number of uninsured Americans were due primarily to expanded eligibility for Medicaid and, secondarily, to generous subsidies for lower-income enrollees in state-based health insurance exchanges.
The less-explored question involves why Obamacare’s overall combination of taxpayer subsidies, expanded insurance programs, health benefits requirements, AND coverage mandates had so much less of an effect than the law’s architects envisioned.
It turns out that many of the nominally uninsured still have other alternatives to health care than just through heavily-subsidized Medicaid and exchange-based insurance. You might call such uncompensated care either an option for “implicit insurance” or a hidden tax on acquiring more formal coverage.
Health policy researchers Amy Finkelstein, Neale Mahonem and Matthew Nolowidigdo unravel the puzzle in a recent National Bureau of Economic Research paper. They explain why there is less “demand” than expected for the increased “supply” of subsidized coverage for lower income individuals and more limited take up of subsidized coverage than once predicted.
The bottom line is that the nominally uninsured (before and after Obamacare’s implementation) pay only a small share (one-fifth to one-third) of their medical expenses. Hence, they value formal health insurance at substantially less than its full cost to insurers providing such coverage.
Among the sources of other financing for care provided to the uninsured are federal and state subsidies for uncompensated care, such as Disproportionate Share Hospital (DSH) payments (reduced more gradually and later than originally envisioned under the ACA), as well as part-year insurance coverage, direct care programs, and private donations.
The federal Emergency Medical Treatment and Active Labor Act (EMTALA) also requires hospitals to provide “emergency care” to screen and stabilize uninsured patients on credit. Nonprofit hospitals claim provision of charity care as one of the primary ways to fulfill their community benefit requirements for tax-exempt status. Retroactive look-back coverage under Medicaid also has provided a further modest financial cushion for some providers treating the nominally low-income uninsured.
Keep in mind, too, that the accounting lines between charity care and bad debt are far from clear cut, and they can be adjusted somewhat to match the financial reporting needs of nonprofit versus for-profit providers. Recovery rates for uncompensated care provided to low-income uninsured individuals with few assets are limited (roughly 10-20 percent at best) and further shielded by personal bankruptcy protections.
So, while financial and medical life for lower-income uninsured individuals is far from comfortable or stable, Finkelstein, Mahonem, and Nolowidigdo find that these various backup “options” do reduce the willingness of low-income individuals to pay for the full --and in many cases even the generously subsidized, out-of-pocket – premium costs of insurance coverage. For example, other research by Finkelstein estimates that adults living below the Federal Poverty Level would be willing to pay only 20 to 50 cents per each dollar of Medicare insurance coverage spent on their “behalf,” and they would rather give up Medicaid than pay the insurance costs of providing it.
Cui bono? Other recent research estimates that about 60 cents of every dollar of adult Medicaid spending in the Oregon Health Insurance Experiment lottery represented a transfer to previous providers of implicit insurance payments for the uninsured. Now you know why the hospital sector is such an aggressive supporter of the ACA’s expansion of subsidies for Medicaid and exchange-based insurance.
Remember all those pro-ACA arguments about how providing care to so many uninsured Americans, particularly in high-cost and overcrowded emergency rooms, just creates a “cost shift” in the form of higher premiums for everyone else who is insured? It turns out that the ability of hospitals to actually pass on uncompensated care costs, instead of taking a short-term hit in their operating margins, remains limited. However, all of that hot air launched by hospital lobbyists and their allies did facilitate some recycling of corporate welfare relief by way of pass-through patients with dependent providers. Yet not even those subsidy injections could keep Obamacare from bumping up against a relatively low coverage ceiling.
At the same time, promised budget savings in reducing uncompensated care for millions of uninsured Americans by moving them into better-reimbursed care through Medicaid and ACA-exchange coverage appear to have hit their own ceilings as well, and they came up short of earlier expectations. Estimates of uncompensated care costs for hospitals eventually were reduced, from just after the ACA was passed in 2010 ($39.3 billion that year) to when it began to be fully implemented in 2014. (After first reaching $46.4 billion in 2013, costs fell to $35.7 billion in 2015). In particular, the more-telling measure of the percentage of hospital costs due to uncompensated care declined from 6.0 percent in 2009 to 4.2 percent in 2015.
However, just about all of the reductions in uncompensated care costs from 2013 to 2014 occurred in states that expanded Medicaid eligibility, while they remained flat in non-expansion states. According to an August 2016 study by Northwestern University researchers David Dranove, Craig Garthwaite, and Christopher Ody, the ACA’s individual mandate and expansion of coverage through the ACA’s health insurance exchanges had “very little effect on the uncompensated care burden faced by hospitals.” When their later work in early 2017 extended the study period an extra year through 2015, they found only small declines in nonexpansion states between 2013 and 2015. Meanwhile, other researchers estimated that although uncompensated care costs in states that expanded Medicaid under the ACA fell by about 25 percent from 2009 to 2015, Medicaid funding shortfalls in reimbursing hospitals below their costs also increased by more than 15 percent.
And earlier this month, a Modern Healthcare review of financial records for the 20 largest U.S. health systems found that they had dedicated just 1.4 percent of their collective operating revenue to charity care in fiscal year 2016, the same as the previous year.
The ACA also initially promised to offset some of the costs of subsidizing increased coverage by reducing other federal payments to hospitals previously providing greater amounts of uncompensated care to a (larger) uninsured population. The original law proposed to reduce federal Medicaid DSH allotments by $18 billion from 2014 to 2020. But the initial year of those reductions has been delayed several times by subsequent legislation, and the first year of such cuts, starting at $2 billion, was rescheduled to begin in 2018.
Meanwhile, the early evidence on the effects of expanded Medicaid coverage under Obamacare on the level of use of hospitals’ emergency departments (EDs) for health care is not promising. In 2015, the percentage of Medicaid enrollees at ages 18-64 making one or more emergency department visits within the past 12 months still was nearly twice as high as the percentage of the uninsured at ages 18-64: 34. 9 percent vs. 18.0 percent. In 2010, the difference was 40.2 percent (Medicaid) vs. 21.3 percent (uninsured). The privately insured at those ages didn’t visit the ED much less often than the uninsured (14.1 percent in 2015, 17. 4 percent in 2010). Recent research by Zhou, Baicker, Taubman, and Finkelstein in Health Affairs also confirms that insured and uninsured adults use the ED at very similar rates and in very similar circumstances, but the uninsured use ED services substantially less than the Medicaid population.
These findings echo those within the early years of the Oregon Health Insurance Experiment, where Finkelstein, Taubman, Allen, Wright, and Baicker found that people who won the random lottery selection and gained Medicaid coverage increased their ED visits by 40 percent in the first 15 months. They also found that this Medicaid coverage effect on increased ED use appears to persist over at least the first two years of coverage. There was no evidence it was driven by pent-up demand that dissipates over time, and such expanded coverage is unlikely to drive substitution of physician office visits for ED use.
Of course, hospital sector interests will insist that, despite some reductions in uncompensated care costs since full implementation of ACA coverage expansions, their institutions still need continued subsidies from taxpayers and that recent coverage gains are at risk. Nevertheless, skeptical taxpayers might wonder whether they are double paying, in maintaining tax-exempt status for nonprofit hospitals purportedly burdened by caring for uninsured patients AND providing them uncompensated care subsidies via supplemental Medicaid and Medicare payments, yet at the same time subsidizing increased insurance coverage via expanded Medicaid and premium tax credits for ACA exchange enrollees.
It appears that one hand of federal and state governments doesn’t always know what their other hand is doing, but they usually can agree on both reaching deeper into taxpayers’ pockets.
Meanwhile, these various subsidy streams might be working at cross purposes regarding incentives to gain and maintain insurance coverage.
Finkelstein, Mahonem, and Nolowidigdo conclude their recent work by asking whether subsidies for formal insurance, or for informal insurance through uncompensated care, offer more efficient forms of providing a given amount of coverage. They also question which version provides a more or less costly form of income redistribution – as compared to simple cash transfers cash transfers to low-income individuals.
Or as Yogi Berra once suggested (in a commercial for supplemental accident insurance): “They [could] give you cash, which is just as good as money.”