The Hospital Cost Shift Myth, ACA Enrollment Analysis, Longer-Term Insurance, and Colorado’s Medicaid Mess

This week’s newsletter opens with a new Prognosis debunking the myth of hospital cost shifting, which continues to be used by special interest groups to lobby for higher government payments despite lacking both economic and empirical support. I also review new Affordable Care Act (ACA) enrollment data showing improper enrollment remains widespread and that generous subsidies continue to drive coverage patterns.

I highlight an important Trump administration proposal to allow longer-term, more flexible catastrophic health plans—an approach that could better align incentives for prevention and cost-conscious care. Finally, I discuss numerous problems in Colorado’s Medicaid program, which illustrates how perverse incentives and weak oversight drive runaway spending and failures to serve the most vulnerable.

Paragon is hosting a virtual event on the impact of smartphones in schools on Monday, April 13 at 11am EDT. You can register here. We will host leading academics who authored a Paragon research paper on the subject and state policymakers to discuss the case for bell-to-bell smartphone limits and the growing evidence that unrestricted access is harming student learning, behavior, and well-being.

The Myth of the Hospital Cost Shift

The idea that hospitals “cost shift” from government programs to private payers is one of the most persistent—and misleading—claims in health policy. The argument is straightforward: Medicare and Medicaid underpay hospitals, so providers make up the difference by charging higher prices to employers and privately insured patients. The implication is that government programs should pay hospitals more.

That theory may sound intuitive, but it does not hold up under either economic reasoning or empirical evidence. Hospitals, like other providers with high fixed costs, do not set prices to recover losses from one payer by raising prices on another. Instead, they maximize revenue based on each payer’s willingness to pay. As long as a payer covers the marginal cost of treating a patient, hospitals will continue to serve those enrollees.

The data directly contradict the cost-shift hypothesis. If hospitals were offsetting lower government payments by charging more to private insurers, we would expect to see private prices rise when Medicare payments fall. In reality, the opposite tends to occur. Reductions in Medicare payment are associated with declines—not increases—in private prices. In one widely cited analysis, a 10 percent reduction in Medicare payment led to a 7.7 percent reduction in private payment rates.

Not only do hospitals not lose money on government payments, but perverse incentives in government health programs increase costs for all payers. Commercial prices are often linked to a percentage of Medicare rates. Moreover, states are increasingly linking Medicaid payments to average commercial rates, which puts upward pressure on both Medicaid and commercial prices.

The evidence also points to market power as the primary driver of hospital pricing. Prices rise when hospitals gain negotiating leverage over insurers and fall when insurers gain leverage over providers. This dynamic explains both wide variation in hospital prices and sustained growth in commercial rates. Hospital prices rose three times faster than inflation since 2000 and twice as fast as wages.

The cost-shift narrative persists because it serves the interests of providers seeking higher government payments. But increasing Medicare or Medicaid payments will not reduce private prices. It will simply increase overall health care spending.

New ACA Data—Improper Enrollment Barely Changed while Out-of-Pocket Premiums Remain Very Low

New ACA enrollment data show modest declines in total enrollment but continued signs of significant program integrity problems beneath the surface. Total enrollment during the 2026 open enrollment period dropped to 23.1 million—down from 24.3 million in 2025—despite the expiration of the enhanced COVID-era subsidy boosts.

By our preliminary estimates, improper enrollment declined only marginally—from 6.4 million to 6.3 million—indicating that significant underlying problems with eligibility verification and automatic reenrollment persist. One key data point illustrating the problem: the continued concentration of enrollees reporting income between 100 and 150 percent of the federal poverty level (FPL). I had expected the extremely high percentage of enrollees claiming income between 100 and 150 percent FPL to decline from 2025, but it instead ticked up from 45 to 46 percent of all sign-ups.

While the share of enrollees in zero-premium plans has declined—from 41 percent of sign-ups to 29 percent—it remains a central feature of the program. Subsidies continue to be extremely generous. The median enrollee pays approximately $42 per month after advanced subsidies to their insurer, with the federal government covering 94 percent of total premium costs.

Enrollment has shifted significantly away from silver plans (down from 56 percent to 43 percent) toward bronze and gold plans, reflecting intensified silver loading and likely continued enrollment fraud as brokers switch people out of zero-premium silver plans and into zero-premium bronze and gold plans with the expiration of the COVID-era subsidy boosts. At the same time, 87 percent of enrollees continue to receive subsidies, and average subsidized premiums increased only modestly—about $22 per month—despite large increases in underlying premiums.

Taken together, the data suggest that the enrollment decline will be much smaller than the Congressional Budget Office projected, as the program remains heavily subsidized and extremely vulnerable to improper enrollment. The data show the importance of continued efforts to ensure proper eligibility—and the program integrity provisions in the OBBBA and recent proposals in the Centers for Medicare and Medicaid Services Notice of Benefit and Payment Parameters.

Moving to Longer-Term, More Flexible Health Insurance

The Trump administration has proposed an important health insurance design option by allowing catastrophic plans to be offered on a longer-term basis, rather than requiring annual renewal. As I wrote in a recent Prognosis, this would better align incentives for both patients and insurers and represents a meaningful step toward more sensible coverage.

Under the current system, annual contracts create short-term incentives that discourage investment in prevention and cost-effective care. Insurers have limited reason to invest in improving enrollees’ long-term health if those individuals are likely to switch plans within a year. Longer-term plans would allow insurers to take a more forward-looking approach, including encouraging preventive services, chronic disease management, and healthier behaviors that reduce costs over time.

The proposal also includes vital flexibilities in benefit design, including the ability to cover certain high-value services before the deductible. These changes move away from rigid, one-size-fits-all plan structures and toward more targeted and efficient coverage. Longer-term contracts would also permit smoother cost-sharing over time, reducing the financial shock associated with large, front-loaded deductibles. This could make catastrophic coverage more attractive and accessible, particularly for working families.

Colorado’s Medicaid Mess

Colorado’s Medicaid program offers a clear example of how waste, fraud, abuse, and improper spending can spiral under fundamentally misaligned incentives, as detailed in a new Prognosis from Chris Medrano. The program has been thrown into disarray, culminating in the resignation of its leading health care official after a bipartisan vote of no confidence.

At the same time, the state has failed to meet core obligations to its most vulnerable citizens. The Medicaid waitlist for adults with developmental disabilities is set to double to approximately 14 years—an extraordinary failure for a program intended to serve the truly needy.

Meanwhile, improper and questionable spending has proliferated. A recent Health and Human Services Office of Inspector General audit found at least $77.8 million in improper payments for autism services, with errors identified in every single sampled case—effectively a 100 percent error rate. Additional failures include a long-running billing error in non-emergency medical transportation projected to cost more than $30 million in a single year, and explosive growth in home- and community-based services spending—rising more than 1,100 percent since 2018.

Colorado has also experienced major cost overruns in coverage expansions, including programs for certain immigrants that exceeded initial projections by more than 600 percent. Altogether, Medicaid now consumes roughly one-third of the state budget, even as the state faces a $1.5 billion shortfall.

Colorado shows that Medicaid’s financing system rewards spending growth—even when that spending is improper or fails to serve those most in need.