As uncompensated hospital care goes down, your premiums will drop (hardly at all)

Multiple people have contact me about the cost shifting estimate in the recent NBER paper by Craig Garthwaite, Tal Gross, and Matthew Notowidigdo. Page 5 of the paper reads, “A back-of-the-envelope calculation suggests that hospitals absorb approximately two-thirds of the costs from uncompensated care.”

People may have read this as the smoking gun. “Ah-ha! That’s why my premiums are so high, and why they’ll come down a lot as coverage expands.”

Not so fast. First of all, the increase in premiums implied from the estimate is entirely consistent with prior estimates about which I’ve already written. That implies, second of all, that they’re very small.

Here’s how to figure that out:

  • In 2012, hospital uncompensated care costs were $46 billion, according to the paper.
  • One-third of that (the amount estimated to be passed on to the privately insured) is about $15 billion.
  • In 2012, total spending on private premiums was $917 billion, according to National Health Expenditure estimates.
  • Hence, 1.6% of premium spending was due to hospital uncompensated care ($15 billion ÷ $917 billion).
  • To put that in dollar terms, for a typical person with single coverage from an employer in 2012 (at a total cost of $5,615), about $90 is due to uncompensated hospital care.

Now, as coverage expands, this does suggest a reduction in premiums, but only if other support for uncompensated care isn’t withdrawn. Guess what? It is. Don’t expect coverage expansion to pay a dividend to premium payers if it’s, in a sense, already paying it to the government through lower support for uncompensated care.

Furthermore, coverage is not expanding to universal. So, at best, only part of that $90 could be recouped in lower premiums. Moreover, coverage expansion is occurring slowly, over years. So, maybe, at best, you could save $20 one year, $30 another, and so forth. Good luck even noticing that as premiums change (and generally rise) for many other reasons.


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