If not for all the marble columns and black robes, you could have easily mistaken the Supreme Court arguments over the constitutionality of the Patient Protection and Affordable Care Act—a.k.a. ObamaCare—for yet another D.C. panel discussion of American health policy. While Solicitor General Donald Verrilli was defending the law’s mandate to purchase health insurance, Justice Ruth Bader Ginsburg volunteered the factoid that hospital costs in Maryland had jumped 7 percent as a result of “uncompensated care” for uninsured patients who fail to pay their medical bills. Justice Stephen Breyer reeled off a string of semi-coherent statistics about the uninsured: “We have a group of 40 million, and 57 percent of those people visit emergency care or other care, which we are paying for,” Breyer said. “And 22 percent of those pay more than $100,000 for that.” Justice Sonia Sotomayor, in a brief flight of technocratic fancy, wondered aloud whether the same type of tax credits already available for buying solar panels and fuel-efficient cars couldn’t also be used to encourage the purchase of health insurance.
In treating the legal question as a policy issue, the justices were following the government’s lead. Verrilli, who defended both the individual mandate and ObamaCare’s expansion of Medicaid, did not open his argument with an appeal to constitutional principle or legal precedent. Instead he explained the problem that the law’s many interlocking provisions were intended to fix, declaring that “for more than 40 million Americans who do not have access to health insurance either through their employer or through government programs such as Medicare or Medicaid, the system does not work.” Government briefs in support of the law were similarly heavy on policy detail and legislative history, offering multi-decade overviews of previous efforts to overhaul federal health policy and describing the existing patchwork of programs, subsidies, and state and federal regulation.
ObamaCare’s legal defense relies as much on policy arguments—about the nature of uncompensated medical care, the role of Medicaid, and the interaction of the law’s various provisions—as it does on constitutional reasoning. But the policy case is just as dubious as the constitutional one.
The Myth of the $1,000 Premium Hike
Justice Ginsburg’s reference to uncompensated care came from a White House talking point. To justify ObamaCare’s health insurance mandate under the Constitution’s Commerce Clause, which allows Congress to regulate commerce among the states, the administration argued that the existence of tens of millions of uninsured individuals poses a national problem: The uninsured don’t pay for their care, shifting the costs to the rest of us.
According to the government’s brief, the uninsured fail to pay for 63 percent of the care they receive. About 26 percent of that cost is picked up by other parties, such as charity or Medicaid. The remaining 37 percent is not. In 2008 this gap amounted to $43 billion in uncompensated medical costs, according to an estimate by the liberal health advocacy group Families USA that was cited in the administration’s brief. Ultimately, the argument goes, providers pass those costs on to everyone else, increasing the average family health insurance premium by roughly $1,000 per year. ObamaCare’s defenders say this national problem justifies a national solution; hence the Patient Protection and Affordable Care Act, which requires nearly everyone to enter the insurance market, thus eliminating the problem of uncompensated care (in theory, at least).
Even if these numbers were accurate, ObamaCare—with its combination of insurance industry rules, mandatory insurance, and hefty subsidies—would be a strange solution to the problem. That’s because the cost of expanding health insurance under the law is far higher than the cost of uncompensated care. Projections by the Congressional Budget Office (CBO) indicate that by 2017, after just three years of operation, the total cost of the Medicaid expansion and insurance subsidies will be nearly $200 billion—almost four times the administration’s estimated annual cost of uncompensated care. If eliminating cost shifting were the primary goal, Congress could have done it for far less money.
Perhaps quite a bit less. The Families USA estimate of $43 billion, it turns out, may have been grossly exaggerated, as David Hogberg of Investor’s Business Daily pointed out in March. In 2009 a team of researchers led by Jack Hadley at the Urban Institute, a nonpartisan research organization, used various methods to estimate that the effect of cost shifting on private insurance premiums was just $8 billion a year.
Why the difference? Families USA failed to count several frequently overlooked but significant sources of government funding, such as community and maternal health grants, that already help cover the cost of care for the uninsured. It also assumed that uncompensated care costs generally translate into higher insurance premiums, which may not be the case. As the Urban Institute’s report notes, the $43 billion estimate “omits the possibility that providers who treat substantial numbers of uninsured people have lower profits.”
Hadley and his co-authors pronounce themselves “highly skeptical” that the growing cost of private insurance has much to do with uncompensated care, even wondering if the two phenomena are related at all. “The evidence,” they write, “shows that attributing increased private health insurance premiums to expanded coverage to the uninsured is a misperception.” So the average $1,000 insurance premium hike used to justify the individual mandate could well be a myth.
At a Loss
If anything, the mandate, within the context of the broader law, may actually increase overall financial losses associated with medical care. Although ObamaCare is expected to increase the number of people with health coverage by about 34 million, most of them would not gain coverage as a direct result of the insurance mandate. According to a Congressional Budget Office report cited by the administration, the mandate would account for just 16 million of the newly covered individuals.
Of those 16 million, the CBO estimates, about 6.5 million will satisfy the coverage requirement by enrolling in Medicaid, the joint federal-state program for the poor and disabled. The law requires that anyone who earns less than 138 percent of the federal poverty line be immediately enrolled in the program.
There are two major problems with shuffling so many individuals into Medicaid. First, Medicaid recipients, on average, consume about twice as much health care as the uninsured. Second, provider reimbursement rates for Medicaid beneficiaries tend to be significantly lower than private insurer payment rates—averaging about 58 percent of what private insurers pay (rates vary by state). In fact, Medicaid reimbursements are so low that providers take a loss on Medicaid patients—a fact that President Obama himself implicitly acknowledged in a March 2010 letter to Congress, noting that “Medicaid reimbursements to doctors are inadequate in many states.”
Millions more Medicaid patients means many more visits to health providers—and, as a result, increased losses by providers accepting Medicaid beneficiaries. As the old joke goes, they’re losing money on each patient but making it up in volume.