Employers fear hospital rate hikes if GOP cuts Medicaid

Large employers want hospitals to know they will not pay up if President Donald Trump and congressional Republicans follow through with their plan to deeply slash Medicaid funding.

The threat of a shrunken Medicaid program, leading to more uninsured people and more unpaid hospital bills, reignites a long-running debate about whether, or to what extent, providers raise prices on commercial insurers and employers to compensate for lower Medicare and Medicaid reimbursements.

Related: House sets up potential Medicaid cuts with budget bill passage

“Cost-shifting is a well-established practice among hospital leaders. There’s a reasonable risk that if Medicaid is cut, they will be seeking to make up those losses from employers,” said Elizabeth Mitchell, president and CEO of the Purchaser Business Group on Health, which represents large businesses such as Walmart, Microsoft and Salesforce.

Employers are fearful because they're already contending with a crisis, Mitchell said. The Purchaser Business Group on Health projects employee health benefit spending will rise 7.8% this year, the most in more than a decade, and its annual survey consistently shows that healthcare prices rise for private insurers when Medicaid rates decline.

The American Hospital Association and others in the sector have sounded the alarm over the consequences of slashing Medicaid, including higher costs throughout the healthcare system when providers seek to make up for lower volumes and more uncompensated care by securing higher reimbursements from other payers.

“It is a convenient excuse by hospital systems and the American Hospital Association to say, ‘Any cuts to Medicaid will mean higher prices for you.’ We've heard them say that to us explicitly. The fact is, we're paying more already,” said Shawn Gremminger, president and CEO of the National Alliance of Healthcare Purchaser Coalitions, which comprises national, regional, state and local employer organizations such as the Purchaser Business Group on Health.

Trump and the GOP majority in Congress are aggressively moving forward with the president's top legislative priority: extending tax cuts for corporations and wealthy households that Trump enacted in 2017, which are due to expire at the end of the year. Along with that, Republicans are considering $1.5 trillion in spending cuts, with $880 billion coming from Medicaid alone, through the so-called budget reconciliation bill. The House adopted a budget resolution to move this effort forward on Tuesday and the Senate has begun its proceedings.

The AHA, which declined an interview request, opposes the proposed Medicaid cuts, which include instituting a per capita cap on federal Medicaid payments to states, banning mechanisms such as provider taxes that states use to help finance the program, eliminating funding for the Medicaid expansion from the Affordable Care Act of 2010 and imposing work requirements that would reduce enrollment.

Hospitals have long complained that Medicaid rates are too low and contribute to financial strain and even closures. Taking an ax to the Medicaid budget would only worsen the situation, the AHA and others warn.

"We urge you to consider the implications of hinging the budget reconciliation bill’s fate on removing healthcare access for millions of our nation's patients. These are hardworking families, children, seniors, veterans and disabled individuals who rely on essential healthcare services," AHA President and CEO Rick Pollack said in a news release Tuesday. "We ask the House to construct a path forward that protects Medicaid from harmful cuts that would impact access to care for millions of Americans."

Rate negotiations between providers and insurers involve myriad factors, such as patient mix, inflation and the parties' relative market power, said Dan Jones, senior vice president of federal affairs at the Alliance of Community Health Plans, a trade group that represents nonprofit insurers and integrated health systems such as Oakland, California-based Kaiser Permanente.

If the Medicaid cuts come to fruition, health systems would pressure private insurers into rate increases, Jones said. “That’s just a dynamic of the marketplace,” he said.

Financial pressures from less Medicaid revenue and more uncompensated care also may encourage consolidation among providers, which could decrease competition and enhance their negotiating leverage over employers and insurers, said Paul Fronstin, director of health benefits research at the Employee Benefit Research Institute.

Employers know they're in a bind because the public would sympathize with health systems that assert they must make up for Medicaid losses elsewhere or face dire circumstances, Mitchell said.

“Traditionally, hospitals have always said that whatever they are not paid through public programs, they will make up through shifting those expenses to the privately insured. There are several flaws in that logic, but that doesn't mean it isn't happening,” Mitchell said.

Yet research findings on whether cost-shifting or cross-subsidization have a significant effect on what private insurers pay are mixed. “It's not like hospitals could just raise prices,” Fronstin said. “If they could do that, they would have already done so.”

And hospitals have other levers to pull if they find themselves facing a huge Medicaid shortfall, such as reducing administrative spending and attracting more commercially insured patients, said Loren Adler, associate director of the Brookings Institution Center on Health Policy.

Nonprofit hospitals responded to Medicare cuts by reducing operating expenses and for-profit hospitals simply absorbed the losses, according to a Center for Studying Health System Change review of hospital prices from 1995-2009. Contrary to the Purchaser Business Group on Health's findings, commercial prices actually declined nearly 8% when Medicare rates fell 10%, according to the 2013 Center for Studying Health System Change study.

In part, that's because providers contending with government rate cuts want to treat more privately insured patients to generate revenue, Adler said. “When you reduce public payer rates, it makes it more important for a hospital to get private commercial patients in the door,” he said. But that diminishes their bargaining power because employers know hospitals can't afford to be out-of-network, he said.

Therein lies another potential downside to Medicaid cuts from an employer perspective. Even if providers cannot extract higher payments from employer plans, generating more business from patients with employer-sponsored health benefits means businesses paying more medical bills.

Moreover, some portion of the millions who would lose Medicaid coverage under the Republican agenda would join their employers' plans, leading to higher spending, the Congressional Budget Office concludes in an analysis of per capita caps published in December. GOP lawmakers describe that as a positive effect of Medicaid cuts, and work requirements in particular.