Who would really bear the burden of the hospital tax to pay for Medicaid expansion? | Eastern North Carolina Now

    Publisher's note: This post, by Brian Balfour, appears on BCN courtesy of Civitas's online edition.

• Roy Cooper and other advocates want you to believe Medicaid expansion will place no financial burden on North Carolinians
• Cooper's own budget proposal, however, recommends using a new "hospital tax" to pay for the state portion of expansion
• The actual burden of the tax will fall on workers and increase the number of uninsured

    Gov. Cooper has insisted that North Carolina can expand its Medicaid program "without any additional state tax dollars."

    But Cooper's own budget proposal for FY 2019-20, says that the state share of the costs would be "paid by hospitals and health plans." How would they fund the state share of expansion? By paying a new tax.

    With the first full year of expansion projected to cost $4.1 billion - according to Cooper's budget - the state share would be roughly $410 million.

    Cooper and other expansion advocates attempt to deceive the public by calling it an "assessment" on hospitals, but make no mistake, it is a tax.

    Leaving aside the deceptiveness of the terminology, North Carolinians are supposed to be relieved that their taxes won't be going up to pay for expansion. We are supposed to believe that the burden will be handled by "hospital assessments" and we'll be insulated from any financial burden.

    But will we? Who will really bear the burden of the hospital assessment/tax?

    Economists use the term "tax incidence" to differentiate between who is legally required to submit tax payments and who actually ends up shouldering the burden.

    It is crucial to recognize that changes in taxes change the behavior of those being taxed, and we must trace the impact of those changes in behavior to understand who is truly harmed by a tax.

    In the case of a hospital tax, hospitals would respond in one of two ways (or a combination of the two): pass along the cost of the tax to consumers or reduce their costs of doing business.

    Hospitals are less likely to try to compensate for the added tax burden by reducing the costs of doing business. Because there is a relative shortage of doctors and healthcare workers, attempting to reduce salary or benefits for employees would make it very difficult to fill needed positions.

    Conversely, hospitals can seek to pass along the added tax burden to consumers. Typically, if a business attempts to pass along the cost of a tax to consumers in the form of higher prices, consumers will respond with a drop in demand and buy less. But when this concept is applied to the price of medical care, keep in mind that most medical care costs are paid by a third party other than the patient himself. Many consumers of medical care would be insulated from price increases. Medicaid, Medicare or private insurance coverage ends up paying about 90 percent of medical costs currently in the U.S.

    Because Medicaid and Medicare rates are set by government bureaucrats and not responsive to market forces, hospitals can't pass along the cost of additional taxes to those programs. That leaves private insurance patients. And because of increasing hospital consolidation, hospitals have bargaining power to drive up reimbursement rates they receive from insurance companies.

    In turn, insurance companies must raise premiums on customers to compensate for the higher reimbursements they pay to providers. And because government regulations restrict competition in the insurance market, and health insurance is such an important high demand product, consumers have few options other than to pay the higher premiums.

    For businesses that provide health insurance to their employees (the most popular form of insurance coverage), the higher premiums leave less money for salaries. Smaller businesses and those with slimmer profit margins will be impacted the most.

    In sum, the hospital tax ends up largely being paid in the form of lower wages for small business workers.

    Furthermore, for others in the individual insurance market, higher premiums make health insurance unaffordable, and they join the ranks of the uninsured.

    Gov. Cooper and other Medicaid expansion advocates want to convince people that expansion will come at no additional financial burden to regular North Carolinians. But tracing the true incidence of the hospital tax allows us to conclude that the state's burden of Medicaid expansion will be borne by lower worker salaries and, ironically, more uninsured.