Thanks as always for reading the Paragon newsletter. To distract myself from the Phillies’ summer swoon, I’m subbing in for Brian this week. I’m going to start with a new study I coauthored on Vice President Harris’ 2019 proposal to end private health coverage and move everyone to Medicare. This study was featured on The Wall Street Journal editorial page on Monday. I will also review an interesting new article in Health Affairs on how a Biden administration rule will raise both Medicaid and commercial health care spending.
The Staggering Cost of Vice President Harris’ 2019 Medicare for All Proposal
Now that Vice President Kamala Harris is the new Democratic nominee for president, health economist Steve Parente and I took a minute to examine the federal budgetary impact of the most significant health care proposal in her career – the single payer health care plan she authored in 2019.
In our analysis for the American Action Forum, we find there would be a staggering (yet unsurprising) cost to the federal government: $44 trillion in new spending over a decade. The huge tax increases Harris called “good options” to pay for the proposal would yield trillions of dollars in revenue yet still not cover even half of this new spending.
Harris called the plan Medicare for All, but it would be a significant departure from the existing Medicare program. Her proposal would virtually eliminate cost-sharing and provider networks, which, while creating good talking points, would leave huge question marks on how spending would be constrained in any meaningful way. Price controls can only do so much if there is no ability to control for volume, quality, or appropriateness of care. Relatedly, we did not even try to model how much her proposal to add dental, hearing, and vision could cost in the absence of such controls for lack of a realistic starting point.
Perhaps some will shake off this version of Medicare for All as an unserious political document from a previous campaign, and the VP’s team clearly wants to distance her from it (without alienating others by her personally denouncing it either). While I wish that we could “trust the process” of the American political system to eliminate profoundly flawed and outrageously expensive policy ideas like this one, the American Rescue Plan Act remains too engrained in my memory. Moreover, it provides useful information for where her instincts are on health policy.
New Medicaid Rule Will Fuel Hospital Price Inflation
Medicaid is a public program to finance medical services for the poor, yet the program is so poorly designed that it often fuels health inflation in the private sector. A classic example is the 1990 law that required the “best price” pharmaceutical manufacturers offered in the commercial market to be passed on to state Medicaid programs. Unsurprisingly, drug companies reacted by reducing the size of the discounts offered to private payers.
In Health Affairs last week, a coalition concerned with rising cost of health care for employers and workers noted a new regulation from the Biden administration could have a similar affect. This follows work by Ge Bai, a Paragon advisor, and Ann Kempski to expose the same flaw in North Carolina.
Medicaid has a reputation as a frugal program, but it increasingly has become a way for states to steer federal money to politically favored entities – in this case hospitals – with little accountability. Theoretically to encourage prudent spending, states are required to contribute a certain percentage of any dollar spent in the program – roughly 40 percent for traditional Medicaid populations on average and only 10 percent for those who gained coverage due to the Affordable Care Act. But what happens in reality is that states create the illusion of contributing money, raising the funds through taxes on providers or intergovernmental transfers and then steering it right back to those same entities through Medicaid supplemental payments or increasingly directed payments made through managed care organizations (read more in this handy primer by the Government Accountability Office).
The federal government is aware these gimmicks are happening but cannot track them all, so they traditionally put an upper limit on what can be paid to any class of providers. This limit is complicated but usually is roughly what Medicare pays providers. However, in this recent rule, the Biden administration capped state directed payments made to providers at the much higher price of “average commercial rates.” As explained in Health Affairs, this creates an incentive for hospitals to increase the prices they offer in the commercial market to increase the amount of money they can receive from Medicaid.
So why is someone like myself, who dislikes price controls, concerned with the laxity of something that looks awfully like a price control? While I’d prefer to just let states and Medicaid managed care plans determine the appropriate rates to providers, currently states get to use the federal checkbook to make these payments with little restraint. The intended “skin in the game” approach has been circumvented by financing gimmicks. In the absence of reasonable upper payment limits, states can use the extremely flawed financing mechanism to simply rip off the federal government. It would be better to redesign Medicaid financing to remove these incentives in the first place, but, in the meantime, the Centers for Medicare and Medicaid Services should not be making the problem worse.
All the best,
Theo Merkel
Paragon Health Institute
