Note: This post is a version of a post first published on Health Affairs on September 20, 2011. The links on this version of the post are to the same CBO, MedPAC and other documents in the Health Affairs post. But, because of CBO, MedPAC and others updated their web sites since the post was published, most of the links on the Health Affairs post are broken.
Contrary to claims made by John Goodman and Thomas Saving in a Health Affairs Blog post, non-partisan data from the Congressional Budget Office (CBO) and the Center for Medicare and Medicaid Services (CMS) demonstrate definitively that private insurance is increasingly less efficient than Medicare. The data show that Congress should examine and address the role that private insurance is playing in driving up overall health care costs.
- According to CMS, for common benefits, Medicare spending rose by an average of 4.3 percent each year between 1997 and 2009, while private insurance premiums grew at a rate of 6.5 percent per year.
- According to a calculation by the National Academy for Social Insurance, if spending on Medicare rose at the same rate as private insurance premiums during that period, Medicare would have cost an additional $114 billion (or 31.7 percent).
- The CBO explicitly stated that its data on relative cost growth should not be used to make the argument that Goodman and Saving make, writing that the relatively low growth rate of all health care expenditures other than Medicare and Medicaid “should not be interpreted as meaning that Medicare or Medicaid is less able to control spending than private insurers.” Goodman and Saving mistakenly suggest that the growth rate of private insurance is the same as the growth rate of all health care expenditures other than Medicare and Medicaid; however, as CBO points out, the growth rate of all health care expenditures other than Medicare and Medicaid includes not just spending by private insurers, but also government programs and out-of-pocket costs paid by the uninsured.
- The CBO has predicted that the rising cost of private insurance will continue to outstrip Medicare for the next 30 years. The private insurance equivalent of Medicare would cost almost 40 percent more in 2022 for a typical 65-year old.
Medicare Has Lower Administrative Costs Than Private Plans.
- According to the Kaiser Family Foundation, administrative costs in Medicare are only about 2 percent of operating expenditures. Defenders of the insurance industry estimate administrative costs as 17 percent of revenue.
- Insurance industry-funded studies exclude private plans’ marketing costs and profits from their calculation of administrative costs. Even so, Medicare’s overhead is dramatically lower.
- Medicare administrative cost figures include the collection of Medicare taxes, fraud and abuse controls, and building costs.
So-called “competition” in the private health care market has driven costs up.
- In most local markets, providers have monopoly power. Consequently, private insurers lack the bargaining power to contain prices.
- In most areas, two or three dominant insurers dominate the regional market, limit competition and make it extremely difficult if not impossible for new insurers to enter the marketplace and stimulate price competition.
- Medicare Advantage, which enrolls seniors in private health plans, has failed to deliver care more efficiently than traditional fee-for-service Medicare. Both the CBO and the Medicare Payment Advisory Commission (MedPAC), the commission which advises congress on Medicare’s finances, have calculated that Medicare Advantage plans covering the same care as traditional Medicare cost 12 percent more.
- Karen Ignagni, who heads America’s Health Insurance Plans (AHIP), the insurance industry’s trade association, has admitted that private plans cannot bargain down provider costs and has asked Washington to intervene.
Medicare Is Publicly Accountable, Private Plans Are Not
When it comes to how much it costs private plans to deliver care, or individual insurer innovations that deliver value, the publicly available data are scarce. Goodman and Saving present only one study on the ways that insurers try to control costs, and this was published by AHIP. Because Medicare is publicly accountable, it allows us to study what works so that we can improve the health care system.
- The authors cite a number of innovations that could lower the cost of care, but all of them have been introduced by doctors and clinics, not insurers. Because insurance companies treat their claims data as trade secrets, we do not know if they have adopted such innovations.
- Even government-funded Medicare Advantage plans don’t release payment and coverage data.
A closer look at the data shows that, contrary to Goodman and Saving’s claims, Medicare delivers health care more efficiently than private insurers. Medicare’s public accountability and bargaining power give it the ability to drive system change and control skyrocketing health care costs, while profit-driven private insurers have offered no solution.
Updated data: July 2016 Kaiser Family Foundation data reveal that between 2010 and 2015 Medicare per person costs rose by an annual average of 1.4 percent, less than half the growth rate of private insurance, 3 percent.