Who Pays for Medicare and Medicaid?

In our last post, we found that physicians receive higher payments from the privately insured and the uninsured for office visits than they receive from the publicly-insured (i.e. Medicare and Medicaid), but as long as the publicly-insured pay the variable costs of providing care, most physicians have a financial incentive to treat them. This incentive to treat all payer types causes physicians to prefer hospitals that treat all payer types. Therefore, even though the average hospital loses money from treating the publicly-insured in the long run and the uninsured in general, they have a financial incentive to treat all payer types.

Despite the losses incurred from treating the publicly-insured and the uninsured, do hospitals make positive economic profits in general? The answer is “yes”, with some qualifications. Figure 5. shows mean and median net income as a percent of expenses from the treatment of patients in 2017. In other words, this does not include government subsidies and other capital infusions. The chart also breaks the hospitals into three types: Private For-Profit, Private Not-For-Profit and Government-Owned.

Figure. 5 Short-term Hospital Net Income Percent of Expenses, 2017

Source: 2017 Health Care Cost Report Information System from the Centers for Medicare and Medicaid Services. Includes only hospitals that reported both revenues and expenses.

For all short-term hospitals in general, revenues received from the treatment of patients are about 1% less than expenses. But these loses are incurred primarily by the Private Not-For-Profit and Government-Owned hospitals. These hospitals are not required to cover their capital costs in the long run and the Government-Owned hospitals don’t even need to cover their operational costs in the long run.

The Private For-Profit hospitals earn a positive rate of return, 10% on average although the median For-Profit hospital only earns 3.3%. Remember that Private For-Profit hospitals must earn a positive rate of return to cover their capital costs. Something in the 3% range is quite sufficient.

The big picture here is that hospitals are not in economic crisis. The combination of profitable payments from private insurers and unprofitable payments from the other payers adequately covers both the operational and capital costs incurred by For-Profit hospitals on average. Not-For-Profit and Government-Owned hospitals charge lower prices for the treatment of patients and receive outside funding.

Private insurers are in effect covering the capital costs of hospitals. The government leverages its market power to force private insurers and their premium-paying customers to shoulder some of the cost of providing public insurance. This is a form of cross subsidization.

In a government-run single-payer system, the cost of health insurance is borne entirely by taxpayers. Remember that the cost of raising a dollar of tax revenue is greater than a dollar. Taxes affect economic decisions of consumers and suppliers. We call this the deadweight loss of taxation. Therefore, the cost of a single-payer system is undercounted if we rely strictly on the amount of money spent on purchasing healthcare.

This is the under-appreciated part of the US healthcare system. Countries which have single-payer systems, like the UK, must place very noticeable limits on the provision of healthcare in order to control costs. These limits take the form of long wait times to see a physician and denied coverage for some surgical procedures and prescription medications. Medicare (and to a lesser extend Medicaid) is practically devoid of these types of restrictions. The US can afford to be very generous with its single-payer system for the elderly because people who purchase private health insurance are subsidizing a substantial part of the costs of that system.

This is why the expansion of Medicare to all age groups (i.e. Medicare For All) would be financially ruinous. Without private insurance, Medicare would have to cover both the operational and capital costs of providing healthcare. The only way to limit an enormous increase in taxes would be to install limits like the UK. The US consumer has no tolerance for this type of limitation.

Published by TheLoneEconomist

I am a PhD economist who studies just about anything and proudly specializes in nothing.

One thought on “Who Pays for Medicare and Medicaid?

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: