Virginia’s Hidden Health Care Tax

The hidden tax erodes private insurance coverage.
Percentage of health insurance provided by employers, 2103-2015. Source: Kaiser Family Foundation.

by James A. Bacon

The Medicaid program reimburses health care providers approximately 74% of the cost of delivering medical services, while Medicare covers about 89%. With about half of all health care patients in the Old Dominion covered by Medicaid and Medicare, and with thousands more receiving charity care, where does the money come from to operate Virginia’s hospitals, physician practices and other health care services?

Here’s what James B. Cole, recent president of the Virginia Hospital and Health Care Association, says:

Government payers do not pay cost, and therefore commercial insurance companies who insure all of us pay a higher rate to help to subsidize that. In effect, it is a hidden tax. That is not always clear to the public.

Speaking at a Virginia Business magazine roundtable of health care executives, Cole elaborated upon the implications:

I hope, as the policymakers look at these issues, they don’t labor under the false assumption that somehow hospitals are a free-market enterprise.  We’re fundamentally different. You’re not going to get a highway construction firm to build the state’s highways for [less than] what it costs them … The government is our largest payer, and we’re open 24/7.  We care for anyone whether they can pay a nickel or not, and that’s not standard in the business world.

Cole’s words are absolutely true. The U.S. health care system is a bastardized system that is only nominally capitalist. While hospitals, physicians and other providers work in the “private” sector, not for the government, the system is so permeated with subsidies, cross subsidies, mandates and regulations that it functions as a government-run system. Virginia’s health care system is no exception.

One of the most dysfunctional aspects of the system is the ability of Medicaid and Medicare, functioning as a monopsony (a dominant buyer) backed by the legal and moral imperative to provide health care to all, to pass on their costs to others. The more Medicaid and Medicare squeeze health care providers, the more the providers stick it to players with the least market power, the private insurers. Thus, much of the cost increase we see in private insurance premiums reflects not the underlying cost of providing health care but a hidden tax.

Here’s the irony: As premiums rise, the cost of private insurance becomes unaffordable to more and more businesses and their employees. As businesses drop their health care coverage, they turn employees over to the tender mercies of Medicaid or charity care (if they’re poor enough to qualify) or Obamacare, where premiums are expected to increase 25% nationally next year (but “only” 10% in Virginia), according to the Department of Health and Human Services.

Private insurance coverage, which peaked near 80% nationally in the early 1970s, according to National Health Statistics Reports, has eroded steadily to only half the population today. In Virginia, where private coverage is somewhat higher than the national average, the percentage has declined to 53% in 2015 from 57% two years previously, according to the Kaiser Family Foundation.

One could argue that private insurance is in a slow-motion death spiral. As larger percentages of the population depend upon Medicaid and Medicare, more costs get shifted to private insurers. As private insurance premiums increase, more employers drop out, leaving fewer of the privately insured to shoulder the cost. The logical end result of this trend, desired by some, will leave the federal government as the sole remaining payer of health insurance.

But once the private insurers are gone, who then will pay the subsidies?

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15 responses to “Virginia’s Hidden Health Care Tax”

  1. LarrytheG Avatar

    employer-provided insurance is subsidized also.

    Part of our problem if that we don’t know and we don’t want to know – ALL of the facts about “govt” health care..

    we want our little entitlements but we don’t want others to get them.

    one small example… people with homes and assets – go to MedicAid to pay for their nursing home care so they can keep their homes and give them to their kids. Taxpayers are paying for that.

  2. TooManyTaxes Avatar

    I wouldn’t put too much stake in what Cole, a hired gun, says. We had a serious medical situation in our family that involved surgery and a several-day hospital stay. I saw all the bills. While both the out-of-pocket and insurance payments were substantial, the amounts accepted by the hospital and the doctors were substantially below what was billed. Assuming some consistency in billing, I’d wager to say the discounts negotiated by BC/BS for federal employees matched or beat the discounts negotiated by government programs. Whether this occurs across the board with other insurance companies, I cannot say.

    1. For sure, the insurance companies negotiate massive discounts off the list price. But that’s not the relevant comparison. How do Anthem’s discounts compare to what Medicaid and Medicare pay for the same procedure? I’m guessing that Anthem pays more…. and smaller insurers pay even more.

      1. And what, pray tell, does the man pay who goes to the hospital without insurance, or insurance that hasn’t met a high deductible or otherwise doesn’t apply? Are his alternatives merely to pay the “list” price or take bankruptcy, or can he negotiate to somewhere within the range of decency established by the insurers for all their customers?

        1. LarrytheG Avatar

          Indeed, what do people who don’t have money nor insurance do when they get sick or injured and go to the Hospital?

          this is the problem with the folks who think like Jim Bacon does.

          they don’t have any real answers other than it’s wrong for them to have to “subsidize” others who need health care.

          this totally explains what we have had 8 years of Repeal and Replace without one piece of real legislation signed and presented to the POTUS as a legitimate alternative he would have been forced to sign or veto.

          The Conservatives have no answers other than to repeat silly and inane mantras about the free market and competition – like selling across state lines is going to fix the problem for those who cannot get or afford even basic insurance.

          People in Europe, Japan, Australia, Singapore don’t have to “worry” about who subsidizes who nor about outrageously-priced services and products like Epipen… they pay 1/2 what we do – and live longer..

          When it comes to health care in the US – Conservatism has no answers. There is no place – no country – on Earth that works the way they say it should work…

  3. Steve Haner Avatar
    Steve Haner

    Oh, the daily bankruptcies. The scores of medical professionals and insurance staff standing in line for unemployment. No. Wait. Looks like they are all getting three squares a day from where I stand…

    If a highway construction firm actually tried to apply its business skills to providing health care, the protectionist powers that be would apply COPN with a vengeance and prevent their entry into the field. You are right, this is not capitalism. But it is often highly profitable. The unmitigated greed of some in the industry (the epi-pen situation being the tiniest tip of the iceberg) has tainted just about everybody else. I have had some great experiences with providers in recent years, but some experiences on the business side have been atrocious. I do not trust anything they say about money. People who bill me $1000 and then accept $29.95 from Anthem as full payment are just not going to ever get my trust back. The damage is self-inflicted.

  4. LarrytheG Avatar

    re: ” The unmitigated greed of some in the industry (the epi-pen situation being the tiniest tip of the iceberg) has tainted just about everybody else.”

    I guess I saw the epi-pen situation as an example of the free-market in action – if it was left to it’s own inclinations and not regulated.

    With some caveats – is Anthem negotiating with providers for prices much different than WalMart “negotiating” with it’s supplies to get the lowest price it can for motor oil or soup – with smaller companies and mom & pops no hope at all of getting the same low price… in fact can’t even buy it for WalMart ends up selling it for?

    How about your cable company or your cell phone provider? Do you like the way they price your services?

    In the medical world, it’s my understanding that’s it’s Medicare that sets the standard for reimbursements and the insurance companies use the Medicare reimbursements as industry benchmarks.

    Further – no doctor is required to accept Medicare nor MedicAid … or for that matter – any insurance – and some don’t…

    the name of the game with Medicare and MedicAid is knowing the diagnostic codes that can be applied to any given treatment – that Medicare _will_ reimburse… you just gotta know the codes to get all the reimbursement that is possible to successfully claim. Weeks-long seminars are taught to doctors office staffs on this subject.

    the big picture bottom line is that – in a true free market – you are not entitled to be insured. The insurer would be free to not provide you coverage or only do so for a huge premium based on your age and health status.

    we think we are “entitled” to be covered by health insurance. we take it for granted that we are guaranteed to be covered but the reality is – that guarantee – that requirement that you be offered insurance by employer-provided is – a government rule – a regulation. Without that regulation – employer provided insurance would refuse to offer insurance to some people and charge others 5-10 times for being older or sick than the younger ones who are healthy.

    we all get on our high horses about the various things each of us thinks is “unfair” or “outrageous” but in the end – many of us only have insurance – because of the government.

    that’s a reality that we often choose to ignore.

    1. Steve Haner Avatar
      Steve Haner

      Not a free market if I cannot create a competing product. Epi-pen is indeed exploiting a monopoly, which any capitalist would be tempted to do, but a market that protects their monopoly is not a free market.

      1. LarrytheG Avatar

        Steve – can you point to another country that has such a “free market” that “works”?

        how would you “fix” this?

        do you want the govt to take away their intellectual property like Canada, Europe and other OECD countries do?

        Here’s the deal.

        we KNOW what people don’t like.. their complaints.

        my problem is that those folks never seem to come out and say what they’d do instead… and especially so if the answer is to have the govt get involved and “regulate”.

        so what should we do? use the govt to fix this – or not?

        Are we doomed to a system where people know what they don’t like but we cannot agree on what we want to do about it?

        that’s essentially where we are right now – on a variety of medical and health care conundrums…

        so do we want govt to fix this ..or not?

  5. LarrytheG Avatar

    In terms of a “hidden tax” – I would posit that employer-provided in also a hidden tax on all taxpayers and especially those who don’t have access to employer-provided insurance.

    Folks who receive their insurance via employer-provided are subsidized heavily by taxpayers -it’s the biggest tax expenditure in the tax code – (bigger than mortgage or charity deductions by far) – more than 330 billion a year – 1/2 of the current deficit.

    Further, employer-provided insurance companies are not only forced to cover the sick, old and expensive- they cannot charge them any more than they do others in the same employee pool who are young, healthy and cost them far less in claims, something ObamaCare is faulted for doing – their own insurance does the same exact thing and has for years.

    there are usually two options: self-only and family. everyone in the pool pays the same for one or the other… usually . There is no such thing as “self-only” but someone with cancer… or a heart defect.. it’s still just self-only – regardless of age or health status – same cost as for healthy self-only.

    Ditto for family coverage. there is no extra cost for a kid in a family who has asthma or a Mom or Dad with an expensive chronic condition like diabetes.

    The irony is that many who get this govt-subsidized, guaranteed health insurance from their employer – BELIEVE that they are not subsidized … and many are opposed to others getting government subsidies for health insurance … ergo – they are opposed to ObamaCare “subsidies” as well as Medicaid paying lower (subsidized) reimbursements.

    Worse – the folks who do work – full time at 7-11, tradesmen, uber, etc – but don’t have employer-provided , THEIR taxes actually do go to subsidize tax-free employer-provided!!! even as they have to pay for THEIR insurance with fully taxed money and their insurance CAN and DID charge them more if they were older or sicker, etc…until ObamaCare came along.

    Similarly, many seniors who get Medicare, think they paid into it (and did not for Medicare Part B) and are entitled to it – guaranteed health insurance for $122.00 a month and they too are opposed to “subsidies” for others who “don’t deserve” subsidies.

    Tell me who, in this country, can be sick and old and get guaranteed health insurance for $122 a month and can never be “cancelled”?

    so we have a nation of people who get their own subsidies but don’t think they do – who then oppose equivalent subsidies for others.

    this is the state of the health insurance “debate” – now – for the last 8 years .

    Don’t misunderstand – I’m NOT advocating generous subsidies for all…. I’m advocating fair and equal treatment – for all – whatever it is.

    we simply cannot have a system where some folks get generous subsidies and others are denied any at all … and those who get the subsidies – essentially oppose – fair and equal treatment for others.

    How can we get to a place where we all admit the reality – and we want a fair system that applies to everyone?

    Are we at the point where wanting a fair system – is a “liberal” idea and defending an arbitrary and unfair status quo is “Conservative”?

    1. TooManyTaxes Avatar

      I think it’s an overstretch to argue full time at 7-11, tradesmen, uber drivers and the like are subsidizing employer-paid health insurance. Taking Larry’s examples to represent relatively lower paid workers, I suggest they likely don’t pay much in federal taxes and that, if employer-paid health benefits were taxable, these individuals’ tax federal tax bills would be largely unchanged.

      Further, if ones makes the argument that employment-related health benefits be taxed, why stop there? An equally valid argument can be made for taxing the value of public school education, the difference between the cost of public higher education and tuition paid, the value of ACA premium subsidies and even welfare benefits. From economic and tax fairness principles, singling out employee health care benefits fails.

      1. LarrytheG Avatar

        @TMT – they DO pay FICA taxes which are also exempted for employer provided. And if you don’t think people who work full time – who don’t have kids – don’t pay Federal and State taxes – you’re sadly mistaken. Even folks who earn as little as 25K – pay Federal and State taxes.

        education – you make my point TMT – everyone pays taxes that goes for and everyone has access to education.

        it’s not exactly singling out when some folks get generous subsidies for health care – and others do not – and the folks who get the generous subsidies argue that others should not get them.

        Even the principled Republicans who argue health care reform – advocate tax credits and subsides for everyone – not just some – actually doing away with employer-provide tax breaks – everyone would get the same breaks whether it came from the employer or they bought on the open market.

        The problem is you cannot do this without increasing the deficit because these tax expenditures actually do reduce tax revenues and in turn add to the deficit – those revenues coming from folks who currently don’t get those tax expenditures/tax breaks.

        This is why you do not see any actual legislation to that effect – make it’s way all the way through Congress and presented for a POTUS signature.

        the simple reality is – that right now – some people get subsidies for health insurance – and actually argue against others getting similar subsidies.

        1. TooManyTaxes Avatar

          Many low-income people who, of course, pay FICA and Medicare, are eligible for the Earned Income Credit, which, in turn, reduces or eliminates much of their tax burden. People without a child dependent can be eligible for the ETC if they are between 26-64.

          And it’s not terrible for people having relatively low income pay some federal taxes. It reminds everyone that government is really not free. Every thoughtful person who gets the first paycheck sees that reality.

          My point is that, if Uncle Sam taxes the value of employer-paid health insurance, there are many other things that should be taxed as well. Why not tax, for example, the value of federal tax credits for purchasing health insurance on an exchange? I don’t see any economic, legal or public policy justification for drawing a distinction. Do you? Yet, I suspect all those lefties who want to tax employer-paid health benefits would want to exempt Obamacare tax credits. It’s all just trolling for votes. Bread and circuses.

          1. LarrytheG Avatar

            earned income credit is miniscule if you don’t have kids… most low-income folks without kids still pay Federal and State taxes.

            no – you’re missing the point here – because people should be treated the same for a particular tax benefit not in such a way that one can get health insurance and the other not.

            this is not some inconsequential tax benefit for a small thing like energy efficiency – this is the difference between being able to survive financially from being sick or an auto accident.

            the only thing “lefty” about this is the totally lack of any basic moral compass when one essentially favors policies that provide health care to some and oppose the same equivalent fair treatment to others.

            even many Republicans know the difference here… and favor the same tax treatment for everyone when it comes to something so important as health insurance – which can be the difference between bankruptcy or even dying … for lack of timely access to medical attention.

            and the thing is – this even costs those who would deny health insurance to others – it comes right back on them when they have to pay higher taxes to pay for charity care… and higher insurance premiums to cover ER costs.

            it’s economically dumb, morally corrupt and politically divisive – it leads to higher health care costs for everyone… and lower life expectancies for many such that out of all the advanced economy nations – we rank virtually last of both measures..

            we choose this path…

  6. LarrytheG Avatar

    2017 EITC Income Limits, Maximum Credit
    Maximum Credit Amounts

    Earned income and adjusted gross income (AGI) must each be less than:
    Single, Head of Household or Widowed $15,010
    Married Filing Jointly $20,600

    The maximum amount of credit for Tax Year 2017 is:

    $6,318 with three or more qualifying children
    $5,616 with two qualifying children
    $3,400 with one qualifying child
    $510 with no qualifying children <——–

    The amount of Federal taxes on 15K of income at the 10% level is $1,500
    so they get back a max of 510… and still end up paying more than 1,000
    in taxes.

    and I quite sure they’d give up that $510 – to get FICA, Fed, and State tax breaks instead for guaranteed health insurance through ObamaCare.

    TMT's "argument" is just awful… it boils down to a "let them eat cake" argument.

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