North Carolina’s Medicaid expansion comes with inconvenient truths

North Carolina recently became the 40th state to expand Medicaid. No politician wants to talk about an inconvenient truth — employers and workers in North Carolina will pay higher premiums and out-of-pocket costs because the Medicaid expansion will drive up hospital prices. And it is the federal government’s fault. 

North Carolina legislators will levy a tax on North Carolina hospitals’ costs as a result of the expansion. Hospitals will then receive federal matching funds more than three times the tax they pay to win hospitals’ support, under a program called Health Care Access and Stabilization Program. The deal is being touted by North Carolina’s politicians as a win for state taxpayers because federal taxpayers are on the hook to pay.

In the first post-expansion year alone, at least $3.2 billion in federal taxpayers’ money will arrive. This enormous open-ended flow of federal money incentivizes hospitals and the state to continuously hike hospitals’ costs, which will generate more flow of federal money.

When hospitals’ costs rise, their commercial prices will rise. Employers, workers and anyone else covered by commercial insurance health plans will be forced to pay higher hospital prices — through higher premiums and greater out-of-pocket costs — and end up with less access to health care and lower take-home pay.

This program is also regressive in nature. A few large hospital systems dominating North Carolina’s market will reap most of the federal windfall money and expand their already-immense political influence, which will allow them to continue to consolidate the market and impose even higher commercial prices.

Furthermore, North Carolina is planning to exploit a federal rule loophole that allows states to set Medicaid managed care reimbursement rates as high as commercial rates. This rule invites hospitals to hike their commercial rates so as to effectively raise the ceiling on their Medicaid reimbursement rates at the same time.

Ironically, North Carolina’s so-called Health Care Access and Stabilization Program will actually reduce access for privately insured patients and destabilize the commercial market.

There is a long history of states joining forces with hospitals to draw down federal matching funds for hospitals to more than compensate hospitals for taxes levied on them. Congress and the Centers for Medicare and Medicaid Services have been slow to respond and sometimes complicit in dubious payment schemes to claim billions of federal matching funds, without transparency for the public about how they are calculated and distributed.

According to a 2022 Government Accountability Office report, since July 1, 2021, CMS has approved an estimated $20 billion in such payments to 28 states, only demanding scant information from states before the approval. No evidence has suggested that these payments were based on measures of need or used to maintain essential medical services. 

Medicaid expansion should not be used as a shell game to channel excessive federal taxpayer dollars to hospitals, causing higher prices for commercial payers and motivating consolidation in the provider market. This vicious cycle will only exacerbate as the system becomes more complex and political and business interests become more entrenched. 

Taxpayers get a double whammy — higher taxes and higher health care spending. It is not caused by health care market failure but by the federal government’s policy failure.

Ann Kempski is an independent health care consultant and former executive director of the Delaware Health Care Commission. She is also a former director of policy for the Permanente Federation of Kaiser Permanente, and former director of health care policy for SEIU, where she led the policy team focused on health reform and the enactment of the Affordable Care Act. 

Ge Bai is a professor of accounting at Johns Hopkins Carey Business School and professor of health policy and management at Johns Hopkins Bloomberg School of Public Health.