The hidden costs of cutting Medicaid

With the passage of the big Republican tax and spending bill, the federal government is poised to reduce support for Medicaid and the insurance marketplaces established by the Affordable Care Act. The Congressional Budget Office estimates that these cuts could cause 10 million Americans to lose health insurance by 2034.
Lawmakers have justified these cuts as a necessary step to address the bigger budget deficit exacerbated by tax cuts and other spending increases in the big bill. However, that doesn't capture how these cuts will send costs spilling out around society, to be paid by hospitals, clinics, individuals and then in the end, back to the federal government.

Where do people go if they are uninsured?

Health care is different from other goods, like movie tickets, cocktails, or cars. If people can't pay for health care, they don't suddenly stop needing it. So, where do people get their health care if they don't have health insurance?

One option is federally qualified health centers (FQHCs) – community clinics that provide low-income people comprehensive primary care, dental services, mental health and substance abuse services and specialty care. FQHCs charge a subsidized rate based on ability to pay, with 90% of their patients at or below 200% of the federal poverty line. They are a vital source of care for the uninsured or the underinsured, with over 15,000 sites serving over 31 million patients in 2023.

Sure, slashing the number of people on Medicaid will reduce taxpayer dollars going to the Medicaid program. But FQHCs rely on Medicaid patients as their primary source of revenue, and use grant funding from the federal government to cover the costs of providing care to the uninsured.

Cuts to Medicaid coverage, without commensurate increases in federal grants to cover the costs of the uninsured, could threaten the stability and scope of FQHCs. Even with grants amounting to $5.6 billion in 2023, FQHCs operate on razor-thin margins, and declining Medicaid enrollment following the COVID-19 pandemic has further exacerbated their financial strain. So, short of increased grant funding, clinics may have to cut spending per patient, could have a harder time recruiting and retaining medical providers, or reduce the number of services offered to patients. This could result in more uninsured patients resorting to the hospital emergency rooms to close the gap.

Hospitals as insurers of last resort

Due to a variety of factors, hospitals must treat patients regardless of their ability to pay. For example, federal law requires that hospitals provide care to all patients who show up in their emergency departments. In addition, federal law mandates that non-profit hospitals must provide some community benefit via charity care, or "free or discounted health services" to maintain their tax-exempt status. Nonprofit hospitals are an important source of care – nearly half of all hospitals in the U.S. are nonprofit. Medical ethics also compel physicians to be "Good Samaritans" and treat patients regardless of their ability to pay.
Through the tax-exempt status of nonprofit hospitals, taxpayers are effectively subsidizing some of this charity care for the uninsured. But, cutting Medicaid is going to hurt hospitals, too. Half of rural hospitals are already operating at a deficit, and the Medicaid cuts threaten to push an additional 300 hospitals "towards a fiscal cliff". While concern over rural hospital closures led to an additional $50 billion being allocated to a "Rural Health Transformation Program," an analysis by KFF estimates that this only offsets one-third of the lost revenue from the Medicaid cuts.
A paper by economists Craig Garthwaite, Tal Gross, and Matthew Notowidigdo argues that hospitals act as "insurers of last resort." When policy makers cut Medicaid enrollment, hospitals ultimately bear the cost. According to MACPAC (the Medicaid and CHIP Payment and Access Commission), hospitals provided $22.5 billion worth of uncompensated care to uninsured individuals in 2021, for a total of nearly $40 billion spent on charity care and bad debt (or, around 5 to 6% of hospital expenses). Using hospital financial data, the authors estimate that for each visit from the uninsured, hospitals bear on average $11,000 of uncompensated care costs.
Nonprofit hospitals, both religious and secular alike, report higher uncompensated care costs. When the uninsured population increases, for-profit hospitals report small and insignificant effects on uncompensated care costs. Each additional uninsured person in the country leads to, on average, an additional $800 that hospitals pay in uncompensated care costs.

Medical debt

So far, we've found that increasing the uninsured population places financial burdens on two important parts of the social safety net: community health clinics and nonprofit hospitals. But what about the patients themselves?
Even among those with health insurance, expensive medical bills coupled with high deductibles and cost-sharing can lead to medical debt and in some cases, bankruptcy. An analysis from KFF found that 20 million people, or around 8% of adults, have some form of medical debt, with around 6%of adults owing more than $1,000. In total, people in the U.S. hold a whopping $220 billion in medical debt. The incidence of medical debt is higher among the uninsured (11%), low-income people (11%), and those with disabilities (13%).

Being uninsured and having an inpatient hospital stay can spell financial disaster. This study, entitled "The Economic Consequences of Hospital Admissions," finds that having a hospital admission while uninsured increases the probability of bankruptcy by nearly 40%. They estimate that hospital admissions are estimated to be responsible for around 6% of bankruptcies for the uninsured, and even 4% of bankruptcies for the insured.
However, the research consistently shows that getting coverage can save the uninsured from medical ruin. Using the Medicaid expansions from the mid-1990s and early 2000s, another study finds that a 10 percentage point increase in Medicaid eligibility reduces consumer bankruptcies by 8%. The famed Oregon health insurance experiment, which randomly gave people Medicaid coverage, finds similar results. Having health insurance reduces the probability of an unpaid medical bill sent to collections agencies by 25% and reduces the probability of having out-of-pocket medical expenditures by 35%.

Poor health makes us all poorer

Being uninsured is, understandably, bad for your health: the uninsured receive less preventative care, have greater difficulty obtaining prescription drugs and dental care, and are less likely to get the specialty care they need. It's also bad economically for the uninsured themselves as we've shown above. But a more unhealthy populace is bad for the economy itself, too: long-term evidence shows that having insurance coverage as a child improves future productivity as an adult. By the age of 28, those who had Medicaid coverage as a child had higher college enrollment, higher wages, and used fewer government benefits. This paper estimates that the government was able to recoup 58 cents on every dollar spent on childhood Medicaid coverage. Having a sick workforce is just bad for economic growth: workers in poor health work fewer hours, reducing our overall labor productivity.
So, the federal government may save money by tightening Medicaid eligibility, but this will put strain on other parts of the economy. Community health clinics, hospitals, patients, and taxpayers, will all be footing the bill in some ways, and of course the uninsured themselves.
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