Health Reform and Cost Shifting

Brief

Health Reform and Cost Shifting

March 31, 2011

Abstract

An editorial published by the Wall Street Journal on March 11, 2011, argues that the government's case for an individual mandate is faulty. The authors argue the "hidden tax" on people with health insurance is greatly overstated. Their support is a study by John Holahan and Jack Hadley, "Covering the Uninsured How Much Would It Cost?" Holahan and Hadley, disagree with the authors' interpretation of their research, however. They contend the individual mandate will reduce government payments for uncompensated care, which will translate into lower taxes paid by people with private insurance, even if their insurance premiums don't decrease.

Full Publication

The editorial by John F. Cogan, R. Glenn Hubbard and Daniel Kessler “Obamacare and the Truth about Cost Shifting” in the Wall Street Journal on March 11, 2011, argues that the case the government has made for the individual mandate is that the cost of the uninsured is shifted to those with private insurance. The authors argue that in fact there is little evidence that cost shifting exists, thus the “hidden tax” on people with health insurance is greatly overstated. They cite correctly a study we published in Health Affairs as evidence that the amount of cost shifting that occurs is relatively small, increasing premiums by less than 2 percent.

While they cite our paper correctly, their interpretation of its implications for the mandate is incorrect. The argument for the mandate, in addition to bringing about greater risk pooling in insurance markets, is that the uninsured use care that is paid by others. This care is financed by a combination of federal, state, and local payments as well as higher private insurance payments. The share of private insurance payments has almost certainly increased since our paper, based on data from the 2002–2004 Annual Medical Expenditure Panel Surveys, was published, because of the growing market power of provider systems. But nonetheless, the key point is that the cost of care provided to the uninsured, estimated to be $57.4 billion in 2008, is paid by someone. As Governor Mitt Romney said, the uninsured are essentially “free riders” and should pay for their own care to the extent it is affordable. This was the fundamental principle behind the Massachusetts reform and applies to the federal reform as well.

The authors also seem to have changed their mind on the cost shifting argument halfway through their writing. Citing unnamed research, they argue that low Medicaid payments would shift costs to private insurers. But it is difficult to understand how the authors could believe that “low rates of Medicaid reimbursement translate into higher prices for the privately insured” when they argue that free care provided to the uninsured does not. In fact, a recent thorough review of the cost-shifting evidence by Austin Frakt (“How Much Do Hospitals Cost Shift? A Review of the Evidence,” Milbank Quarterly, March 2011) indicates that hospitals’ ability to cost shift is limited.

The reality is that the uncompensated care burden currently borne by one level of government or another is substantial. The reductions in these costs were not taken into consideration in the Congressional Budget Office estimates. In truth, the spending on the Medicaid expansion and the subsidies in the Affordable Care Act would be partially offset by reductions in the need to support uncompensated care. This could have a small effect on private insurance premiums and a larger effect on spending by federal, state, and local governments. The Act recognizes the latter by scheduling reductions in Medicare and Medicaid Disproportionate Share Payments to hospitals beginning in 2014. Lower government payments to support uncompensated care will translate into lower taxes paid by people with private insurance, even if there’s little effect on their insurance premiums.

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