ObamaCare and the Truth about "Cost Shifting"

The centerpiece of the court battle over ObamaCare's constitutionality is the law's mandate that most U.S. residents obtain health insurance. To justify the mandate, the administration and Congress have asserted that people with private insurance pay for care for the uninsured through "cost shifting"--higher prices charged by doctors and hospitals to recover losses from uncompensated care.

The government argues that the Constitution permits Congress to require that people get insurance in order to reduce the extent of this "hidden tax." Although courts have disagreed about the constitutionality of the mandate and the new law as a whole, all courts have accepted the premise that the hidden tax is significant.

But how strong is the evidence for this proposition? Our review of the research has found that there is no credible evidence of a cost shift of any substantial consequence, either within state boundaries or across state lines. Moreover, the new law will likely generate more cost shifting--the opposite of what its supporters would have us believe.

There are, surprisingly, few peer-reviewed studies of the magnitude of alleged cost shifting at the national level. A study conducted by George Mason University Prof. Jack Hadley and John Holahan, Teresa Coughlin and Dawn Miller of the Urban Institute, and published in the journal Health Affairs in 2008, found that so-called cost shifting raises private health insurance premiums by a negligible amount. The study's authors conclude: "Private insurance premiums are at most 1.7 percent higher because of the shifting of the costs of the uninsured to private insurance." For the typical insurance plan, this amounts to approximately $80 per year.

The Health Affairs study is supported by another recent peer- reviewed study that focused exclusively on physicians. That 2007 study, authored by Massachusetts I nstitute of Technology economists Jonathan Gruber and David Rodriguez and published in the Journal of Health Economics, found no evidence that doctors charged insured patients higher fees to cover the cost of caring for the uninsured.

Where did Congress go wrong? We traced its estimates of the magnitude of the hidden tax of $43 billion per year, or an increase in family premiums by an average of $1,000 per year, to two sources--the aforementioned Health Affairs study, and a non-peer-reviewed study commissioned by FamiliesUSA, a Washington, D.C., group long known for its advocacy of greater government involvement in health care. Yet Congress simply ignored the evidence in the Health Affairs study and failed to recognize the serious flaws in the FamiliesUSA analysis.

Specifically, Congress ignored the $40 billion to $50 billion that is spent annually by charitable organizations and federal, state and local governments to reimburse doctors and hospitals for the cost of caring for the uninsured. These payments, which amount to approximately three-fourths of the cost of such care, mitigate the extent of cost shifting and reduce the magnitude of the hidden tax on private insurance.

Moreover, the economics of markets for health services suggests that any cost shifting that may occur is unlikely to affect interstate commerce. Because markets for doctor and hospital services are local--not national--the impact of cost shifting will be borne where it occurs, not across state lines.

The bad news for the new law's supporters (and for individuals with private insurance) doesn't stop there. If anything, the likely impact of the law will be to increase, not decrease, cost shifting. According to the Congressional Budget Office, around half of the people who are expected to become newly insured under the new law will be enrolled in Medicaid. But Medicaid payments to doctors and hospitals are so low that the program creates a cost shift of its own. In fact, a long line of academic research shows that low rates of Medicaid reimbursement translate into higher prices for the privately insured.

Some argue that cost shifting should be defined more broadly, to include costs of caring for the uninsured that are shifted onto taxpayers. We agree. But by this measure, the new law will increase cost shifting substantially. Again according to the Congressional Budget Office, once the law is fully operational, the volume of new health spending borne by taxpayers will be approximately $200 billion.

In an ideal world, we would expect our courts and elected representatives to rely on the best available evidence when making policy. In the case of cost shifting, the evidence is that there is neither a substantial cost shift nor any effect on interstate commerce. The absence of factual support for a key premise of the new law should give courts reason to ask for a second opinion.

John F. Cogan is a senior fellow at the Hoover Institution and professor of public policy at Stanford University. R. Glenn Hubbard is a visiting scholar at AEI. Daniel Kessler is a professor of business and law at Stanford University and a senior fellow at the Hoover Institution.

Photo credit: iStockphoto/DNY59

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