Medical Economics

Who Really Pays For Medicaid?

Here is the thing… people get sick. And they get sick whether or not they have health insurance. And when they get sick, they come to the emergency room. And EMTALA law says that when they come to the emergency room, if they are sick enough, we have to admit them and treat them. So from society’s economic standpoint, is it better to increase availability of Medicaid to low-income people (i.e., “Medicaid expansion”) or is it better to have people go uninsured?

If you hate paying higher taxes, then you probably want to reduce Medicaid because it an entitlement and you don’t want your taxes going to pay for someone else’s benefit. But as with almost everything in life, it is not as simple as it appears on the surface. The reality is that society will end up paying the same cost to provide care to low income people whether you have Medicaid or not.

To understand this, you have to understand the difference in funding for Medicare versus Medicaid. Medicare is largely paid for by payroll taxes – these are 2.9% of all worker’s income. There is no cap on taxable income, unlike social security tax. However, people earning over $200,000 ($250,000 if filing jointly) pay an additional 0.9% for a total of 3.8%.

So, everyone who works pays for Medicare.

Medicaid is paid for by income taxes and not payroll taxes. Most of this comes from federal income taxes and a portion also comes from state income taxes. Herein lies the big difference between Medicare funding and Medicare funding – everyone pays for Medicare but you only pay for Medicaid if you pay income taxes and income tax revenues mostly come from the wealthy. This is because low income workers fall below the threshold that they have to pay income tax, in fact, 45% of American households paid no federal income tax in 2015. The highest earning 20% of Americans paid an average of $50,000 in federal income taxes – that equates to 87% of all income tax received by the federal government. The top 1% of Americans (income > $2.1 million) paid 44% of all income tax received by the federal government. And the top 0.1% of Americans (income > $9.4 million) paid 20% of all income tax received by the federal government.

Therefore, Medicaid is primarily funded by the highest income-earning Americans.

So, what happens if we reduce or eliminate Medicaid? These patients still come into the emergency department and still come into the hospital. In fact, before Ohio’s Governor, John Kasich, enacted Medicaid expansion, about 12% of all patients admitted to our hospital were uninsured and after Medicaid expansion, that dropped to 2.3%. Uninsured patients still require doctor’s time, they still need tests, they still eat hospital food, and they still have to get medications. So, where does the money come from to pay for all of this?

Rarely, it comes from the uninsured patients themselves. For example, a few years ago, we had a patient who owned a 1,000 acre farm that had been in his family for generations. He was a healthy guy so he didn’t buy health insurance. Out of the blue, he developed pancreatitis complicated by respiratory failure and was in the ICU for weeks followed by several months of recovery. He had to sell the family farm to pay his medical bills that approached a million dollars. However, he is the exception – most uninsured patients don’t have any money to pay their bills so the hospitals and the doctors have to write those bills off. But in order to make up for it, the doctors and the hospital have to charge more to everyone else. Since Medicare charges are fixed, this means that most of the money to pay for the uninsured comes from increasing the charges to patients insured by commercial insurance companies.

This is where the analysis gets interesting. Commercial insurance premiums are not paid as a percentage of a worker’s income (like Medicare payroll tax). These premiums are usually a fixed amount and average $6,000 for an individual and $18,000 for a family.

Therefore, everyone pays equally to provide care to the uninsured, regardless of one’s income.

You can’t pass a law to keep poor people from getting sick and needing healthcare services. So, there are really three ways to provide healthcare to the poor:

  1. Continue Medicaid programs and pay for them out of Medicare payroll taxes. In this way, all working Americans contribute to healthcare for the poor as a fixed percentage of one’s income.
  2. Continue Medicaid programs and pay for them out of income tax. This is what we currently do. In this way, the healthcare for the poor is primarily paid by the wealthiest Americans.
  3. Eliminate Medicaid coverage and let the poor be uninsured. This would require those services to be paid for by increasing commercial insurance rates which means that all working Americans would pay the same amount to provide healthcare for the poor, regardless of how much money each working American earns.

So, what’s my take on all of this? Well, option #3 is bad economics – it really hurts the middle class and all of the uninsured people would not have access to basic preventive care or treatment for chronic conditions. This promotes sickness that results in more hospital admissions for patients who can’t pay anything and keeps people from getting well enough to go back to work. Option #1 is not a bad option and it forces everyone to take responsibility for care of the poor. However, this option also increases the amount that middle class Americans would have to pay, just not as much. Option #2 is not a bad option either and it places the responsibility to care for the poor primarily to wealthy Americans.

Every successful society in history has some people who are wealthy and some who are poor. Medicaid is our societal insurance against being poor or disabled. No matter what we do, these poor and disabled will consume healthcare resources. However, it is our choice how and who pays for it: all working Americans or mainly the wealthiest Americans?

March 27, 2017

By James Allen, MD

I am a Professor Emeritus of Internal Medicine at the Ohio State University and former Medical Director of Ohio State University East Hospital