What Cuts to Medicaid and Obamacare Could Mean for Hospitals, Insurers and You

DAN GORENSTEIN (DG): Congress could soon overhaul health insurance in two big ways.

The first: A proposal snaking its way through the House that would, in part, shrink Medicaid, the public insurance program that covers poor and disabled Americans. The other, a decision looming later this year, would slash subsidies for millions of people buying coverage on the Obamacare exchanges.

Together, these moves over the next decade would suck about one-trillion-dollars out of the health care system and leave about 14 million people uninsured.

Those 14 million people, understandably, have been the focus of fierce debates.

Congress Montage: I just want to reject the idea that somehow Republicans want to keep people from getting Medicaid // We are cutting money and health care from people and families who are suffering to pay for tax cuts for the rich // If they’re not eligible they shouldn’t be on it in the first place // But they are eligible // No! // I am Medicaid! Don’t cut me!

DG: The stakes are huge — even a matter of life of death for some who stand to lose coverage. And, many of the rest of us — directly or indirectly — will also feel the impact of this seismic shift. 

Today, we zoom out and trace the ripple effects that coverage losses this big and spending cuts this deep could have on our health care system. 

From the studio at the Leonard Davis Institute at the University of Pennsylvania, I’m Dan Gorenstein. This is Tradeoffs.

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DG: Our guest today is economist Jon Gruber. Jon worked with Republican governor Mitt Romney on health reform in Massachusetts. And, he advised the Obama administration on the creation of the Affordable Care Act. Most importantly for today’s interview, though, Jon’s a professor at MIT, where studies health insurance.

We taped our interview last Friday and it’s worth noting that we discuss some policies that are the source of intense, ongoing debate in Washington so the details — and the estimates of their impact — have already changed and will likely change again.

Here’s our conversation.

Hey Jon, how are you?

JON GRUBER (JG):  Good, Dan. How are you? 

DG: Good. Thanks so much for joining us. So I really wanted you and I to have a conversation about this because when we’re talking about 13 million people losing health insurance over the next decade and removing some $1 trillion out of the U.S. healthcare system that’s going to reverberate in lots of ways, some ways that we can predict, some ways that invariably will be unpredictable. And I think one of the things that’s exciting about talking about this with you is that given the decades worth of research that is accumulated inside of you as a health economist, you understand and see what may be coming down the road in a way that few of us actually do. So I’m really excited that you’re here. Thanks so much for joining us.

JG:  Look, Dan, it’s always great to be here. I love what you’re doing and I’m happy to help out. 

DG: OK, so just to lay a road map out for us, Jon, we’ve picked four big areas where we expect to see some major ripple effects if these insurance reforms become reality: hospitals, health insurance companies, states and the U.S. economy. We’d like you talk us through each one. 

So first up, Jon: hospitals. We know that hospitals have to serve whoever walks into their emergency rooms, including people who can’t afford their bills — a term known by health policy wonks as uncompensated care. So I’m wondering here, Jon, what happens when millions more uninsured folks start showing up at hospitals?

JG:  Well, I mean, the only thing we know for sure is that we don’t know for sure. That said, we have the wonderful natural experiment that was run by putting in place the ACA, which was a massive expansion of insurance, and we can learn from what that did. And the best estimates are that the introduction of the ACA lowered the amount of uncompensated care that hospitals deliver by about a third. So hospitals spent about a third less on caring for the uninsured. And that will be reversed to some extent when you massively increase the number of uninsured. Hospitals will have to spend more on patients who don’t pay their bills. In particular, remember that the uninsured don’t go equally to all the hospitals. They focus particularly on safety-net hospitals.

DG:  Safety-net hospitals being the hospitals that to serve the people who tend to be low-income and marginalized folks. 

JG: Well, it’s really that they’re serving a disproportionate share of low-income patients who don’t have good insurance, and the burden’s going to fall on them. And that puts more financial stress in those institutions. That could lead to things like closing a trauma center, which affects all of us.

DG:  Jon, I want to go back to uncompensated care because I think that there’s a suspicion among many people who think about the U.S. health care system that if all of a sudden you have more people who are uninsured going to hospitals and getting care, and the hospitals have to eat those costs, those costs will then be passed on to people who do have insurance. How likely is that based on the evidence that we do have?

JG: I think we can definitively say uncompensated care will go up. I don’t think we can definitively say how much of it gets passed on to the privately insured here. Here, Dan, we have a classic example of research just not catching up to intuition. I think everyone assumes there’s a lot of what we call cost shifting. There’s not a great body of research clearly showing when uncompensated care rises how much that gets shifted to private payers. If you polled health economists, I think the vast majority would say it will lead to higher private insurance bills, but I think there’d be a broad variety of views on to what extent it will.

DG: OK, Jon, before we move on, I want you to tell us how confident you are in your predictions. We’re basically asking you to predict the effects that these unprecedented cuts could have. Of course you’re basing those predictions in the evidence we have and some studies point in a clearer direction than others. So, as you gaze into your crystal ball, would you say this prediction on uncompensated care is very clear, pretty clear or muddy waters?

JG:  I would rate “very clear” that uncompensated care will go up, “very clear” that this will either lead to higher prices of the insured or worse quality care at safety-net hospitals, “muddy water” on the extent to which those two outcomes will happen. 

DG:  Great, thank you. So let’s turn to health insurance. 

Both types of coverage that Republicans have in their crosshairs, Medicaid and Obamacare, are largely run by private health insurance companies — companies who of course stand to lose millions of customers. How should we expect these insurance companies to respond?

JG:  I mean, let’s start with the important point you’re making, Dan, which is public insurance in America has largely been privatized. Most people in America who have public insurance get it through a private company. 

DG: By that, Jon, you mean that the vast majority of people on Medicaid have their coverage run by private insurance companies that the states hire to administer their plans. And with the ACA exchanges, people are buying private coverage, just with public subsidies.

JG: Exactly. Obviously then it’s big business for the insurers and if people are no longer on Medicaid, if people are no longer in the exchanges, insurers will lose money. 

So on the exchanges, there’s really three effects. First is .we’re making the subsidies much less generous. That’s going to make fewer people sign up. It’s, in particular, going to be the most healthy people who are going to not sign up. That is going to raise premiums. On top of that, when fewer people sign up, there may be fewer insurers willing to offer insurance, both because the market is thinner and because people are sicker. If fewer insurers offer insurance, that’s a further boost to premiums. 

DG:  So, Jon, just to recap here: You’re saying that if Obamacare gets more expensive and harder to buy, that will scare off both healthy people who don’t feel the coverage is worth it and insurance companies who rely on those healthy people to keep their costs down. And that will make coverage even costlier for people left in these marketplaces.

How strong is the evidence behind that prediction? “Very clear,” “pretty clear” or “muddy waters”? 

JG:  It’s very clear that insurers will suffer. It’s not clear what the implications are for insurers losing all their Medicaid business. In your category, that’s muddy water. It is very clear that this will lead to much higher costs for those on the exchanges. They’re not going to collapse, but they’re going to function less well because insurers will be raising prices rapidly and exiting the exchange market.

DG: Just to put some concrete numbers to Jon’s last prediction there, estimates by the Robert Wood Johnson Foundation show that if Congress cans these extra Obamacare subsidies, premium costs for someone buying a middle-of-the-road plan on the exchanges could spike anywhere from 7 to 7,000%. 

When we come back, Jon uses yachts, fly paper and an ax to help us understand how this health policy shakeup could hit state budgets and our larger economy.

MIDROLL

DG: Welcome back. We’re talking with MIT economist Jon Gruber about the major changes that Congress is considering to Medicaid and Obamacare and the cascade of consequences that those moves could have for a whole range of folks, from hospitals and health insurers to consumers and caregivers.

OK, Jon, let’s turn to the states. 

In particular I want to talk about the state Medicaid programs. Even if, say, 7 million people end up losing their Medicaid, there’s still another 60 to 70 million people who are relying on the program. Republicans have proposed capping one important way that states have raised money in the past to pay for their Medicaid programs — these so-called provider taxes.

If that cap holds that the Republicans want to put in place, what will it mean for states, Jon, who have to fund a big chunk of this coverage?

JG:  Look, this is a difficult topic, Dan, because it speaks to the heart of what’s so screwed up of American health care, which is, it’s a system which lives on cross subsidies. It’s a system where we don’t just pay for things. We pay one on the one hand and hope, on the other hand, things will get corrected. So for Medicaid, we massively under-reimburse states for their costs 

DG:  ”We” meaning the federal government.

JG: We, the federal government. So to deal with that, we have set up various loopholes that allow them to find other ways to raise the money they need. The provider tax loophole is a classic one that’s been around for a long time and states have used it to raise a lot of money to help them be able to afford to run the Medicaid program they should run .

DG: And just quickly here, Jon, let’s describe this. 

At the highest level, states use this provider tax to basically capture free money from the feds. At the simplest level, here’s how they do it. 

A state collects, for example, a $100 tax on hospitals. At the same time, they also give hospitals who serve Medicaid patients a $100 pay bump.

But the states only cover half that bump. The feds pick up the rest. So states now have 50 extra bucks from Washington to put back into their Medicaid programs.

JG: Yeah, I mean, this is not kosher. This is not what was intended, but states do it because that’s the only way they can deal with the shortfalls in what the federal government’s actually sending to fund their Medicaid programs. 

DG: This is literally the price for the federal government underfunding Medicaid costs. 

JG:  Exactly. And so basically, this is one of a number of ways states deal with that. Now they’re talking about capping it or cutting it out. It’s not clear which way that goes. But if you cap it that means states are suddenly going to have a massive shortfall in their Medicaid programs and they are going to have to deal with that. 

 So there’s three ways states can react. One is they can make fewer people eligible. Two is they can make the program itself less appealing for those folks by charging them more money to be on it or paying doctors less to see them — basically make Medicaid less useful insurance for those folks. And the third is they can start to cut the long-term care services that are the bulk of what Medicaid spends by paying nursing homes less or by not letting people get home care. 

It’s very important to understand, Dan, if you are someone who’s very disabled or very elderly and has limitations in your ability to function, Medicaid guarantees you a nursing home spot. It doesn’t guarantee you a good nursing home spot. So one way to cut costs is to reimburse nursing homes less and just let those nursing home spots just be worse and worse. Medicaid does not guarantee you home care in most states. So this could lead to millions of elders who were getting necessary care to be able to stay in their homes, losing those services because states no longer have the money. 

DG:  Oka, so to summarize what this could mean for states is states either could shrink their program, shrink their services, reduce payments. Getting back into the prediction business, Jon: Based on the evidence we do have, how confident are you in how states will respond here? “Very clear,” “pretty clear” or “muddy waters”? 

JG:  I mean basically, look, the bottom line is in a class economic model this is just a hit to a state revenue source and they should react in lots of ways. It turns out the way states behave is often according to what we call a fly paper effect, which is money seems to stick where it lands. And the fly paper effect would seem to say that, well, if you cut things related to Medicaid, they will focus the cuts on Medicaid, but they don’t have to. They could cut other social services as well. We don’t quite know how they’ll respond. I would say that’s muddy water.

DG: Jon,  you know, it’s people like you who taught me this concept of tradeoffs. I am not minimizing the downsides to what the Republicans are proposing through these Medicaid cuts. Is there any upside? Even if it’s just more process or procedural, like it helps us have a more honest conversation — what is the upside here, Jon?

JG:  Yeah, I mean, look, I think there’s a clear upside. The clear upside is these provider taxes are not the way we should run our health care system. And if it led to more honest conversation about what states need to run their programs and provider taxes were replaced with a more sensible funding stream that was more above board, that’d be good.

The problem is you’re taking it away, not replacing it with anything which is, on net, bad. But it’s absolutely true that these provider taxes, you know, no one would design a system that had this as a way of financing it. And if it can lead to more honest conversation and we can figure out a way to replace those funds for states, that would be a good development.

DG:  OK, we’re at our final category here. We’re going macro on you, Jon, so get ready. The U.S. economy…

If you suck something like a trillion bucks out of spending on the U.S. healthcare system, I’ve got to think that’s going to leave some sort of mark on the country. What might this look like? 

JG:  Yeah, that’s a great question. This goes to the realm of macroeconomics, which is neither of our specialties, but I can dabble and my dabbling is that the key issue here is what we call the multiplier effect, which is that basically when the government subtracts a dollar from the economy, what is the multiplier effect in terms of how does that affect private economic behavior? And the best estimates are that, in good economic times, the multiplier is like 0.6 to 1. So in other words, for every dollar the government subtracts, the economy shrinks by 60 cents to a dollar.

The reason the multiplier effect happens is that when the government doesn’t spend money, people then don’t have the resources to go spend at the supermarket. That means that the multiplier effect is bigger the more the government is hitting people who spend a lot of their income.

Let me put it this way: When the government gives a tax break to the rich, that doesn’t have much of a multiplier effect because they just save it. They’ll spend some of it to buy a new yacht or whatever, but they’re not going to spend most of it.

But a poor person — say, someone on Medicaid — when you take a dollar away from them, that cuts their spending a dollar because they have no savings. So the multiplier effect will also be bigger when it’s on programs targeted to the poorest people. So I think most macroeconomists would agree that for every dollar that’s pulled out of our low-income health care programs, the U.S. economy is going to shrink by more than a dollar.

DG: OK, so just to go over this: You’re saying that when the government pulls back on helping pay for people’s health care, they will in turn pull back on other kinds of spending at the grocery store, the movies, wherever, and that will be a drag on our economy. 

That all makes intuitive sense. But to be clear, we have never seen this kind of rollback in federal health care spending before. So how confident are you in the evidence that this will happen, Jon? “Very clear,” “pretty clear” or “muddy waters”? 

JG: We are very clear, based on past evidence, that when governments cut spending, economic activity is reduced. The question is just how much. Based on past experiences with general types of spending not specific to health care they suggest fairly clearly that a cut of this magnitude will more than dollar-for-dollar reduce economic activity.

DG: Now we hear often about how health care is eating up close to like a fifth of our GDP – the gross domestic product. It’s this huge weight around our country’s neck. Now here comes this plan that promises to lift the weight a little by cutting health care spending by a trillion bucks. 

I’m sure some people are going to hear this and say, “Isn’t this what economists just like you, Jon, have wanted for a long time?” I guess what I’m really asking is, is there any part of this that’s good?

JG:  Look, if someone is overweight, you can lower their weight by cutting off their arm. That doesn’t really address the problem you’re trying to solve, which is a misaligned and broken health care system that relies on private healthcare markets to set prices and the prices are misaligned. And as a result, we spend too much on health care. Kicking people off health insurance is not going to solve that problem.

DG: You see the $1 trillion cut as more of an ax.

JG: It’s an ax at the wrong body part. It’s not just an ax. That’s why I didn’t say chopping off your belly. That would be bad, but at least would get to kind of the direction you want to go of a smaller belly. It’s chopping off your arm. It doesn’t even go to the right place. 

DG:  Alright, Jon, I want to pause and recap here what sounds like the ripple effects are going to be for the rest of us. About 300 million people in the U.S. will continue to have insurance. It sounds like you’re saying our coverage could get more expensive if it’s an Obamacare plan, or less generous if you’re on Medicaid. And depending on where we get our health care, even if it’s covered by private insurance, that care could be harder to find if local hospitals or other providers close. Anything else you would add to that?

JG: Look, Dan, we’ve got to add two things that are very important. First of all, for the rest of us, we have to add the fact that when more people are uninsured, that does raise the risk of communicable disease. And, in an era where people are backing off getting vaccinated, backing off taking the preventive measures that they need, with more uninsured people, that’s going to mean faster spread of communicable disease. It’s not going to be a hundred years until the next pandemic. So I think that’s important. 

And let me just say lastly, look, I understand the show’s about the effect on the rest of us, but let’s just talk for a minute about the 13 million people. We don’t know if that’s the right number. We don’t know what the right number is, but we have clear evidence from the expansion of Medicaid under the Affordable Care Act that health insurance keeps people alive. If you take estimates from Sarah Miller’s work on what the Medicaid expansions did, which is that for every 529 people covered, a life was saved, that says that kicking 13.7 million people off health insurance will lead to 23,000 more deaths a year in America. That is a big number. And I think while it’s important to focus on the rest of us, let’s not lose sight of the effect on the people themselves who are going to suffer financially and die because of the loss of health insurance.

DG: Jon, thanks so much for taking the time to talk to us on Tradeoffs. 

JG: Thanks so much for having me, Dan. It’s great, as always, to talk to you.

DG: The Republicans’ plan targeting Medicaid continues to wind its way through the House. If it passes there, onto the Senate.

I’m Dan Gorenstein. This is Tradeoffs.