John Locke Update / Research Brief

Medicaid Expansion and Health Care Costs: Lessons From Colorado

posted on in Health Care, Health Care & Human Services
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Adults who don’t receive health insurance through their employer struggle to find affordable plans when they look to buy coverage on their own from an insurance company. Some in North Carolina think the best answer to this challenge is to add these North Carolinians to the state’s Medicaid program, expanding the role of government in providing health insurance by roughly half a million people, most of whom are able-bodied adults without children.

Expanding government’s role is the wrong approach. The Affordable Care Act (Obamacare) is Exhibit A. Ironically, Obamacare was sold to the public as the low-cost solution for the very people who are now unable to afford plans offered on the Obamacare exchanges.

As I have argued before, the better course to expand access and lower costs is for the state to implement market-based reforms. Let’s scale back on costly insurance mandates, repeal the outdated Certificate-of-Need laws, expand access to Association Health Plans, and open up the scope of practice for affordable practitioners.

Doing so will bring down the cost of care for everyone.

Despite the promise of market-based reforms, proponents of Medicaid expansion – chief among them, hospitals and the North Carolina Healthcare Association — claim that uncompensated care is the problem. They say expanding Medicaid would lower the overall cost of delivering medical care to North Carolinians because the bills for uninsured patients go unpaid. The more uncompensated care the hospital provides, they say, the more health care providers raise prices to offset the cost of free or discounted services.

Gov. Roy Cooper and Medicaid expansion supporters agree that the amount of uncompensated care is what is driving skyrocketing hospital prices.

But is that accurate? Let’s consider the relationship between the cost of care and health insurance.

Many variables determine insurance rates on the Obamacare exchanges: the number of insurers, the benefit level of the chosen plan, the prices that are negotiated between insurers and facilities, and more. However, high hospital prices are a significant factor when insurers determine rates for insurance premiums, deductibles, and co-payments.

Proponents of expansion claim that if the state expanded its Medicaid program, uninsured patients would gain coverage from Medicaid and hospitals would receive some reimbursement for the cost of care that was previously unreimbursed. The thinking goes that a reduction in uncompensated care would, therefore, not require hospitals to shift uncompensated costs to the privately insured through higher prices for hospital services. Their logic continues that, by covering more uninsured individuals, hospitals would have to pass along fewer costs, which, in turn, would reduce overall premiums on the private insurance market.

However, a recent report from the Colorado Healthcare Affordability and Sustainability Enterprise found no reduction in costs after the state expanded Medicaid. The article concludes that expanding Medicaid in Colorado:

“led to increased Medicaid payments to hospitals, fewer uninsured, less bad debt and less charity-care write-off for hospitals, [but] these policies did not result in a reduction in a hospital cost shift to other payers to cover the cost of uncompensated care as expected. Instead, prices continue to rise for non-governmental payers while hospital costs and margins also rise.”

Now let’s consider factors that may influence prices that hospitals and other providers can negotiate with insurers.

There is a debate within the health care field about whether prices or utilization drives the total cost of health care. While there are issues with utilization and waste, the literature mostly agrees that prices in the United States are driving total health care spending.

Now, this may seem like an obvious point. If health care prices in the United States are higher than in other countries, and we use comparable amounts of health care services, we should spend more than other countries.

But why? Why are prices for procedures so much higher in the United States? For example, one study found “a U.S. coronary artery bypass graft surgery cost $75,345, vs. $15,742  in the Netherlands; a U.S. computed tomography scan cost $896 per scan vs. $97 in Canada.”

One explanation for the difference could be the prevalence of hospital mergers. Regional consolidations may also play a role. The research is clear on hospital consolidations – they hurt consumers and raise prices for everyone. Mergers occurred at an alarming rate over the past two decades. As of 2016, 90 percent of metropolitan areas had become highly concentrated. Further, when hospitals buy physician practices in an area, prices rise. North Carolina is no stranger to hospital systems seeking to control larger segments of the market.

In addition to the findings above, a recent study in Health Affairs compared the growth rate of hospital costs to physician costs from 2007 to 2014. Their findings square with the research on hospital consolidations and the experience in Colorado. The study found:

In 2007–14 physician prices for inpatient and outpatient hospital-based care grew by 18 percent and 6 percent, respectively. Hospital prices grew more, by 42 percent and 25 percent, respectively—more than twice as much as physician prices for inpatient care and four times as much as physician prices for hospital-based outpatient care.

As hospitals consolidate and acquire more facilities, they have more bargaining power to negotiate higher rates with insurers.

So, perhaps it is not the amount of uncompensated care that is driving the high prices of health care procedures in North Carolina. It could be that North Carolina hospitals enjoy protection from market competitors and use this shield to keep prices as high as possible.

Policymakers considering expanding Medicaid should look at the Colorado case carefully. Their experience contradicts claims that eliminating high levels of uncompensated care will bring down health care costs in the state. Rather, hospital consolidation and protectionism may be to blame.

Instead of expanding public insurance and creating more dependence on government, North Carolina lawmakers should aim to help become more self-reliant and to have more affordable options by bolstering what little of the free market remains in health care. There are multiple opportunities just waiting for action by policymakers dedicated to market-based reforms rather than expansive government.

Jordan joined the Locke Foundation in the summer of 2018 as Health Care Policy Analyst. After two years in the research division, he moved over to the government affairs team. Jordan now works with state decision-makers in the public and… ...

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