NC Medicaid expansion deal could jack up hospital prices, some experts argue. Here’s how.

When North Carolina expanded Medicaid earlier this year, the bipartisan law drew few criticisms.

The legislation would extend health insurance coverage to about 600,000 low-income North Carolinians while coming at “no additional cost to the state,” thanks to ample federal funding and a tax on hospitals.

“This is a win-win,” a sponsor of the legislation said.

But as some health policy experts sifted through the program’s complicated financing scheme, they began to think that the program did come at a cost to North Carolinians.

They fear North Carolina’s approach to expansion — which is expected to bring billions of dollars into the state’s hospitals — could ultimately cause health care prices to rise for all of the state’s residents.

Two health care policy experts explained their concerns about North Carolina’s Medicaid expansion plan in the research journal Health Affairs last month.

“This is almost like the elephant in the room,” said Ge Bai, a Johns Hopkins researcher and one of the article’s authors.

“People want to paint Medicaid expansion as this perfectly successful program and don’t want to highlight these hidden costs.”

A windfall for North Carolina hospitals

When hundreds of thousands of people become newly insured, someone needs to pay for it.

In North Carolina, the federal government agreed to pay for the vast majority of the cost — it will cover 90% of the cost of insuring this new group of people. The state government is on the hook for the rest.

Earlier this year, state lawmakers struck a deal to tax hospitals to generate that remaining 10%. But the N.C. Hospital Association wanted something in exchange.

“Hospitals came to the table and said, ‘We’ll do it,’” said Anthony Okunak, executive director of financial services for the NCHA. “‘But can we look at another program that also helps hospitals…?’”

Lawmakers agreed to write a separate funding opportunity for hospitals into the law. The “Healthcare Access and Stabilization Program” lets hospitals take advantage of a federal program that boosts how much they are paid for serving Medicaid patients.

If the details of this program are approved by the U.S. Centers for Medicare & Medicaid Services, the state’s hospitals will receive at least $3.2 billion to raise Medicaid rates, which are far lower than what hospitals receive from commercial insurance companies.

The problem with this program, the authors of the Health Affairs article argued, comes down to nuance in how much hospitals can take from this big pot of money.

Payments from this federal program used to have an upper limit — for each service, hospitals could only charge a fraction of what they charge commercial insurers. This was to stop hospitals from providing unnecessary services at the federal government’s expense.

But a 2016 federal rule change removed that cap, meaning hospitals — using taxpayer money — could suddenly more than double their rates for low-income patients.

The rule now allows hospitals to raise Medicaid payments up to “commercial rates,” the amount companies like Blue Cross and Aetna pay for services, said Ann Kempski, an author of the Health Affairs article and former executive director of the Delaware Health Care Commission.

Bai and Kempski argue this creates dangerous incentives.

“(It) invites hospitals to hike commercial rates to effectively raise the ceiling on their Medicaid rates at the same time,” they wrote.

Higher hospital prices mean higher costs for insurance companies, which then raise premiums for their customers, Bai said.

Raising health care prices

The NCHA rejects the argument that this funding model will lead to higher health care prices.

Okunak called this argument “misleading,” adding that commercial prices aren’t just set by hospitals — they’re negotiated between the hospitals and insurance companies.

Blue Cross NC, which covers more than 80% of the individual market, has significant leverage in those negotiations to keep prices down, he said.

“It’s not like hospitals are going to be able to go and negotiate higher commercial rates and jack up the cost of health care,” Okunak said.

But Barak Richman, a health care policy expert at the Duke-Margolis Center for Health Policy, said that is exactly what they’ll be able to do. Richman did not contribute to the Health Affairs article, but agreed with Gai and Kempski’s concerns.

Hospitals, which are also heavily consolidated in North Carolina, have much more power at the bargaining table than they let on, Richman said. If a large health care system like Atrium threatens to leave negotiations, the insurance companies have little recourse.

“If you are a resident of Asheville, you cannot purchase (insurance) that doesn’t include Atrium or Mission,” Richman said.

Richman said the best evidence of the health care system’s bargaining power is the fact that current commercial prices are already more than two times greater than Medicare rates in North Carolina.

Experts raise concerns

Twenty-eight states have been approved for payments from this program, which cost the Centers for Medicare & Medicaid approximately $20 billion between June 2021 and February 2022, the U.S. Government Accountability Office found.

This massive flow of money into hospitals around the country has generated concern from several groups, including a nonpartisan agency that advises Congress on Medicaid.

But Kempski said North Carolina’s financial arrangement is the most worrisome she’s come across. Because the state has some of the most consolidated health care markets in the country, its hospitals are more likely to use their negotiating power to raise prices.

Furthermore, she said, a windfall of cash could also allow the hospitals to buy up smaller practices, further consolidating health care in North Carolina.

“This is the biggest boondoggle for hospitals that I’ve seen,’” she said.

Several stakeholders, including Bai and Kempski, have written to the Centers for Medicare & Medicaid Services, asking the agency to reinstate the cap on payments from this federal program. (The NC Hospital Association wrote to encourage them to maintain the status quo.)

State Treasurer Dale Folwell, a vocal critic of the state’s hospitals and candidate for governor, asked CMS to quickly take action to avoid a “historic level of hospital consolidation and price increases.”

“North Carolinians cannot afford to shoulder the unintended price inflation that could be unleashed,” he wrote.

Teddy Rosenbluth covers science and health care for The News & Observer in a position funded by Duke Health and the Burroughs Wellcome Fund. The N&O maintains full editorial control of the work.

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