Uncompensated Care’ Problem Greatly Overstated

April 4, 2013

President Obama’s health care legislation, referred to as Obamacare, achieves its goal of reducing the number of uninsured in large part by dumping an estimated 16 million low-income Americans into Medicaid, the federal-state health insurance program for the poor.

Medicaid is arguably the worst health insurance coverage in the country, and Obamacare does nothing to fix the program’s many problems, especially its exploding costs.

Many states, including Oklahoma, have said no to the Medicaid expansion. And though those states are doing the right thing, they are being pilloried by liberals and the media.

Obamacare proponents claim the expansion would be a financial windfall for the states. The federal government will cover virtually all of the costs of the newly eligible Medicaid recipients for the first three years, gradually declining to 90 percent of the costs—unless Congress changes its mind, of course, which future budget pressures might force it to do.

And supporters argue that if the state doesn’t expand Medicaid, hospitals will be stuck with billions of dollars in uncompensated care, imposing a huge financial strain.

It’s a compelling argument, but it has been greatly overstated.

The American Hospital Association (AHA) estimates that hospitals, which receive the largest share of health care spending, provided $41.1 billion in uncompensated care in 2011, which includes both bad debts the hospital thought it would receive and charity care.

To put that in perspective, that’s about 1.5 percent of the estimated $2.6 trillion the United States will spend on health care this year. Plus, hospitals, often working in conjunction with the state, have found numerous ways to game federal reimbursements, even to the point that the feds have issued cease-and-desist orders.

To be sure, $41.1 billion is a lot of money, but it’s still pretty small given the size of the U.S. health care system. And we aren’t even sure if that number is reliable. The estimate comes from the AHA, which has a vested interest in ensuring the largest uncompensated care number possible.

That’s because the federal government subsidizes many hospitals for at least part of their uncompensated care costs—the bigger the uncompensated care number, the greater leverage to demand subsidies. However, those subsidies gradually decline under Obamacare.

The bigger problem is that both Medicare and Medicaid pay significantly less for hospital services than private health insurance. And those underpayments impose larger uncompensated care costs on hospitals than the uninsured.

The actuarial firm Milliman, Inc. published a study in 2008 that concluded that “the total annual cost shift in the United States from Medicare and Medicaid to commercial payers is approximately $88.8 billion.”

In other words, hospitals have made up for those underpayments by charging patients with private insurance more. And health insurers eventually pass those higher costs on to consumers in the form of higher premiums. Expanding Medicaid to an additional 16 million people only exacerbates that underpayment problem.

Oklahoma is looking for innovative ways to provide some coverage for its low-income population, without the top-down federal micromanaging and access-to-care problems that would come with Medicaid expansion.

Health policy expert Merrill Matthews (Ph.D., University of Texas at Dallas) is a resident scholar with the Institute for Policy Innovation and a weekly contributor at Forbes.com. He is a past president of the Health Economics Roundtable for the National Association for Business Economics, and is co-author of the OCPA policy paper “Has SoonerCare Achieved Its Objectives? A Five-Year Checkup.”