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?