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Economists predict shockwaves if health insurance subsidies are nixed

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(Reuters) — As the U.S. Supreme Court prepares to rule on whether people in 34 states can continue to receive health care reform law insurance subsidies, economists are projecting billions of dollars in lost health care spending for hospitals, drugstores and drugmakers if the justices say the payments are illegal.

The immediate consequences of such a ruling would fall on the 6.4 million people who receive the subsidies and live in states that did not establish their own insurance exchanges under President Barack Obama's health care law, instead relying on the federal HealthCare.gov website.

The case, known as King v Burwell, would not affect subsidies in the District of Columbia or in the 13 states that run their own exchanges. The decision is expected sometime this month.

Health economists calculate the economic impact of a ruling against the subsidies in different ways, but one thing many agree on is that about two-thirds of people who receive subsidies through HealthCare.gov would drop their insurance altogether rather than foot the entire bill.

Businesses that have benefited from spending by the newly insured would take a hit, though estimates of the lost revenues vary significantly based on which assumptions are built into the calculation.

For instance, a Kaiser Family Foundation economist put the 2015 figure at about $15 billion, based on the proportion of insurance premiums that are earmarked solely for medical costs under the health care law.

“There will absolutely be these second-order effects,” said Larry Levitt, a senior vice-president and health care researcher at the Kaiser Family Foundation. “A reasonable assumption is that (spending on) health care by people who lose their existing subsidies will drop by at least half.”

That would represent about $7.5 billion in spending on hospitalizations, doctor visits and prescriptions, depending on the baseline estimate.

Another rough estimate based on 2014 medical claims data and 2015 government enrollment data, suggests the federal marketplace states will see about $22 billion in health care spending this year among marketplace plan holders assuming subsidies remain in place, according to Katherine Hempstead, a director at the Robert Wood Johnson Foundation. The majority of the health care marketplace members receive subsidies.

Health policy experts who are critical of the law have taken a different tack, focusing more on the potential financial returns to individual citizens if the Supreme Court ruling exempts them from penalties for not having insurance.

Conservative economist Douglas Holtz-Eakin and Brittany La Couture of the American Action Forum wrote recently that such a ruling could give a boost to small businesses by removing requirements on employers to provide health coverage.

Joseph Antos of the right-leaning think tank American Enterprise Institute says the estimates of health care spending effects are imprecise at best. He expects that a ruling invalidating the subsidies would be followed by a “fix” in which Congress or states somehow restore subsidies, at least temporarily.

In that case, he said, any drop in health care spending would be temporary and only “a very minor downward bump.”

“They are going to extend the subsidies in some manner,” Mr. Antos said. “I don't know how they are going to do it, but they are going to find some way.”

The Affordable Care Act is one of the most politically divisive U.S. laws, opposed by many Republicans. Party lawmakers have fought in particular against its requirement that all Americans have health insurance or pay an annual penalty, and say they have plans to replace the law if the subsidies are ruled out.

Hospitals

Without a legislative fix, however, policy experts and Wall Street analysts expect hospitals will take the biggest hit, as they bear the brunt of costs for patients who must be treated but can't pay their own medical bills. Hospital associations said an increase in such costs could “devastate” some of their members, according to a brief filed with the Supreme Court.

When health care reform was conceived, hospitals were so confident that newly insured patients would increase their revenues that they agreed to $269 billion in cuts to the government's Medicaid and Medicare health plan reimbursement over 10 years.

“It was a quid pro quo, with hospitals agreeing to these reductions in return for coverage of more people,” said Kevin Brennan, executive vice-president for finance at Geisinger Health System in Pennsylvania, which relies on HealthCare.gov.

Geisinger offers an insurance plan through the exchange and estimates that 80% of the 22,000 people who hold those polices receive subsidies.

Pennsylvania is one of a handful of states that plans to set up its own exchange if the Supreme Court rules against the subsidies, and has said it could be ready for 2016.

Data from publicly-traded hospital operators show their costs for treating uninsured patients have dropped since the law took full effect in 2014.

In the first half of that year, admissions of “self-pay” patients, who are almost always uninsured and unable to pay the full bill, fell 14.7% at Community Health Systems, 6.6% at HCA Holdings, 6.5% at Tenet Healthcare Inc., and 9.3% at Universal Health Services, according to an analysis by consultants at PricewaterhouseCoopers L.L.C.

Drug companies like Pfizer and Merck & Co. and medical device makers such as Medtronic agreed to new taxes in exchange for the expected increase in paying customers. The bet has paid off: Pharmacy benefits manager Express Scripts Holding Co. estimates that each reform law patient now accounts for an average of $79 per month in prescription drug spending.

That works out to roughly $6.1 billion a year for the 6.4 million people whose subsidies would be eliminated.

Not all of the $6.1 billion would dry up, since drug spending by the uninsured is not zero, said Rand Corporation economist Christine Eibner, who has studied health care utilization by health reform marketplace patients. “On average, people will not fill as many prescriptions” if losing their subsidies causes them to drop their insurance, she said.

Insurers will see a more limited hit to revenue if the subsidies are thrown out, largely because marketplace customers are only a small percentage of any single health insurer's total business. At the nation's largest insurer, UnitedHealth Group, for instance, about 1% of its 46 million members are receiving subsidies that are at risk.