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The Dose - JK Wall

Welcome to The Dose, which tackles the finances behind local health care and life sciences and points to the most interesting national analysis. Your host is J.K. Wall.

Health Care & Life Sciences / Life Science & Biotech

Covering the uninsured brings only a small benefit for the insured

November 6, 2015

During the vigorous debates leading up to Affordable Care Act and then the debates over whether to expand the Healthy Indiana Plan, one frequently aired argument went like this:
 
The cost of all the unpaid medical bills racked up by the uninsured are shifted by hospitals over to insured patients. So, really, we’re already paying for the uninsured via higher health insurance premiums.
 
This cost-shift theory was so widely held among political leaders that President Obama cited it in his speeches urging passage of the ACA, that the argument is in the text of the bill itself and it was even cited by Chief Justice John Roberts in his 2012 decision to uphold the constitutionality of the law.
 
Turns out, they’re wrong—at least, two-thirds wrong.
 
A new study by economists at Northwestern University shows that uninsured patients do rack up medical bills that, if passed on fully and equally to all other Americans, would represent a tax of $900 per person.
 
The thing is, those costs aren’t passed on fully. Hospitals are only able to shift 33 percent to 40 percent of those costs to insured patients, according to research by Northwestern economists Craig Garthwaite and Matthew Notowidigo, along with Columbia University economist Tal Gross, in a working paper published by the National Bureau of Economic Research.
 
So, according to their calculations, the uninsured were costing everyone else about $300 per person each year. Hospitals apparently didn’t have the pricing power, across the board, to pass all $900 of those costs on to privately insured customers.
 
So what happened to the other $600?
 
Some of the money hospitals lose due to uninsured patients is absorbed by not-for-profit hospitals as part of the community benefit they are required to provide in exchange for not paying income taxes.
 
Some studies have shown that not-for-profits may get more than they give in that arrangement. But the Northwestern researchers conclude that not-for-profit hospitals are, in effect, “the insurers of last resort.” Hospital leaders always have said as much.
 
“We’ve essentially outsourced the problem of the uninsured to the hospital CEO,” Doug Leonard, president of the Indiana Hospital Association, told a group of large employers back in 2013.
 
The rest of the losses are absorbed by taxpayers through special payments to hospitals known as Disproportionate Share, or DSH, payments. These come from the Medicare and Medicaid programs to hospitals that serve higher numbers of low-income patients.
 
And the Affordable Care Act took that into account. One of the first deals the Obama administration struck to win support for its health reform law was to get the hospital industry to agree to $155 billion in cuts to Medicare and Disproportionate Share payments in exchange for the expansion of health insurance coverage that Obamacare is now creating.
 
The share of Hoosiers without health insurance fell from 14 percent to 12 percent in 2014, according to the Census Bureau, and has certainly fallen further this year due to the expansion of the Healthy Indiana Plan.

Using a different methodology, a Gallup-Healthways survey found that the uninsured rate in Indiana fell from 15.3 percent in 2013 to 11.1 percent in the summer of 2015.
 
But the cuts to Disproportionate Share payments have been pushed back until 2018. So for the moment, hospitals’ financial reports look quite good.
 
This dynamic came through in the financials of the Indiana University Health hospital system. It has set aside $92 million less for uncollectible accounts during the first nine months of this year than during the first nine months of 2014. That amount is more than three times larger than the growth in profit produced by IU Health's operations during the first nine months of the year.
 
“This decrease is due to a shift from self-pay to government payors, mainly HIP 2.0,” IU Health stated in an Oct. 30 financial report.
 
That program, expanded in February, now covers 337,000 low-income Hoosiers.
 
IU Health said the percentage of its patient revenue that it categorized as uncollectible went from 2.6 percent last year to 1.5 percent this year. Or, in other words, IU Health’s profit margin went up by 1.1 percentage points.
 
Whether those good times last remains to be seen. Cuts to Medicare and DSH payments to hospitals could wipe out most of the gains they see from reducing the numbers of uninsured patients.
 
What seems clear, however, is that folks with private insurance weren’t covering the full cost of the uninsured in the past, and the reduction of the uninsured won’t bring a ton of price relief in the future.

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