Private Health Insurance vs. Government Program

V. International Comparisons vs. Net Cost of Private Health Insurance and 12 Government Program The U.S. has by far the most costly health care system in the world, both per-person and as a percent of our nation’s total economic resources. In 2000, we spent $4,631 per person on health care, 69 percent more than in Germany, 83 percent more than in Canada, and 134 percent more than in the average of all members of the Organization of Economic Cooperation and Development (OECD)29 (Exhibit 18). Higher U.S. costs cannot be attributed to aging; in fact, the U.S. population is “younger” than the populations of most European countries. Nor is the situation improving. Despite a decade of experimenting with managed care in the U.S., health spending rose faster than in other countries. Between 1990 and 2000, U.S. health spending, adjusted for inflation, increased by 3.2 percent a year, compared with the OECD average of 3.1 percent (Exhibit 19). By contrast, real spending per capita increased by 1.8 percent in Canada and by 2.1 percent in Germany. Moreover, most countries with above-average rates of increase in the 1990s were those that had particularly low spending on health care, such as the U.K. and Japan.  The U.S. is alone among major industrialized nations in other respects. Over half of health care spending is paid for privately, compared with about one-fourth or less in other countries (Exhibit 20). Ironically, because the U.S. is so expensive, the government—while it accounts for only 45 percent of all health care spending—spends as much as a percent of GDP on health care as do other countries with publicly financed health systems. For example, U.S. public spending as a percent of GDP is 5.8 percent, compared with 5.9 percent in the U.K. and 6.5 percent in Canada.30 The U.S. is also alone among major industrialized nations in failing to provide universal health coverage. But even when people are insured by private insurance or Medicare, that coverage is less comprehensive than the coverage typically afforded in other countries. As a result, Americans pay more out-of-pocket for health care than do people in other countries—an average of $707 per person in 2000 versus $405 in Canada, $335 in all industrialized countries, and $171 in the U.K. (Exhibit 21).  . O Prescription drugs remain the fastest growing health care item,   and increased use of costly specialty drugs.  In recent history, increases in prescription drug costs have outpaced other categories of health care spending, rising rapidly throughout the latter half of the 1990s and early 2000s (see Figure 1). [1] While the rate of growth in spending has slowed somewhat, it is projected to exceed the growth rates for hospital care and other professional services in 2010 and through 2019. [2] http:/ Average Annual Percentage Increase in Selected National Health Expenditures, 1996-2008/www.kaiseredu.org/~/media/Images/EDU/Issue%20Modules/Prescription_Drugcosts.jpg?w=600&h=381&as=1http://www.kaiseredu.org/~/media/Images/EDU/Issue%20Modules/Prescription_Drugcosts.jpg?w=600&h=381&as=1 Figure 1 Average Annual Percentage Increase in Selected National Health  Expenditures, 1996-2008 Net Cost of Private Health Insurance and 12 Government Program Administration, (in billions) 1970–2012

Billions

1970 1980 1993 2002* 2012*

*Projected Source: Levit et al., “Trends in U.S. Health Care Spending, 2001,” Health Affairs (January/February 2003): 154–164 and Heffler et al., “Health Spending Projections for 2002–2012,” Health Affairs (February 7, 2003).

. The California CALPERS public employees health benefits program, for example, recently experienced a 26 percent premium increase.¹ In 2003, premiums in the Federal Employee Health Benefits Program are up 15 percent.

It is important, though, to distinguish between increases in health insurance premiums and the underlying increase in the cost of providing health care.

One of the most significant contributors to recent spending growth is health care price inflation.

. Because of increasing prices, new drugs coming on the market, and more prescriptions being written, spending on prescription drugs is growing faster than all other services (Exhibit 4). Increased spending on prescription drugs accounted for about one-third of overall spending growth in 1999, and about one-fourth of spending growth in 2002^12.

¹⁴ Hospital care represents one-third of personal health care spending and contributed about half of the total increase in 2001 spending. Most of that increase occurred in the outpatient department.¹⁵ Hospitals are labor-intensive institutions. In tight labor markets, hiring and retaining nurses and other skilled personnel in short supply puts upward pressure on wages. Once the economy recovers, upward pressure on wages could cause an even greater resurgence in hospital costs. Managed care may have succeeded in reducing hospital admissions and shortening lengths of hospital stays in the mid-1990s, but those were one-time savings.

Private insurance is the dominant mode of health coverage for the working-age population, while public programs cover elderly and disabled individuals as well as certain low-income populations, especially children and pregnant women. Administrative costs for private insurance include marketing, sales commissions, profits and reserves, as well as the cost of enrolling individuals and paying claims. Government programs, by contrast, do not incur marketing and sales expenses and do not require premiums high enough to generate profits and reserves. Medicare enrollment is stable, typically

IV. Public vs. Private Sector Spending Growth Most health care in the U.S. is provided in the private sector; only the Defense Department, Veterans Administration, Indian Health Service, and state and local governments provide care directly in public facilities. However, the government is a major purchaser of care, paying about 45 percent of the national health bill (Exhibit 14). Medicare (18%) and Medicaid (16%) alone purchase more than one-third of all care and therefore constitute a major influence on the use of services, the quality of care provided, and costs of care. Private health insurers purchase more than another third of care (36%) and consumers most of the rest, either directly out-of-pocket (15%) or through philanthropic giving. Consumer out-of-pocket spending is actually an even larger share than reported, because the numbers do not reflect the premiums consumers pay for Medicare and private insurance. It reflects only their deductibles, coinsurance, copays, and payments for services not covered by insurance.25 The public sector has been growing faster than the private sector in the last few years (9.4% vs. 8.2% in 2001), but these numbers reflect changes in enrollments as well as use, prices, administrative costs, and other factors. For example, Medicaid rolls grew 8.5 percent in 2001 as a result of the new SCHIP program covering low-income children, Medicaid expansions to some of their parents, and a weakening economy that brought more low-income persons onto the rolls (Exhibit 15). Without this increase in Medicaid enrollment, the numbers of uninsured would have been even greater than what they were. But it meant also that Medicaid spending overall went up 10.8 percent, placing a squeeze on both federal and state budgets. 25 Levit et al. Private health insurance experienced a similar growth in 2001 (10.5%), but enrollment declined sharply rather than increased. Private insurance expenditures rose because of increased use of services and higher provider payments, insurance profits, and administrative costs. Responding to the weakening economy and double-digit premium increases, employers cut back the share of premiums they paid or dropped coverage altogether. Many employees found they could not pay their increased share. Because they lacked insurance, some consumers may have forgone care. Despite the higher administrative expenses of private insurance and the higher payment rates to providers, the belief that private insurance is more “efficient” is strongly entrenched. However, a recent study comparing the growth in per-enrollee payments for comparable services in Medicare and private insurance found that Medicare outperformed private insurance over the long term26 (Exhibit 16). Following the implementation of the hospital prospective payment system in 1984, Medicare per enrollee spending has moved slower than employer-based insurance. The physician fee schedule, implemented in 1992, also contributed to lower spending. In 2002, Medicare fees were about 77 to 79 percent of private rates; physician program participation, however, reached about 90 percent of physicians in the same year.27 The implementation of the newer prospective payment systems for nursing homes, home health care, and the hospital outpatient department are expected to continue to have a dampening effect on spending. A newly released study projects that in 2003, Medicare per-enrollee costs will have risen at about one-third the rate of employer premiums and less than one-third that of the Federal Employee Health Benefit Program (FEHBP) (Exhibit 17). Administrative costs in FEHBP are estimated at nearly three to six times those in Medicare.28 26 Christina Boccuti and Marilyn Moon, “Comparing Medicare and Private Insurers: Growth Rates in Spending Over Three Decades,” Health Affairs (March/April 2003): 230-237. 27 Medicare Payment Advisory Commission, Report to the Congress: Medicare Payment Policy. March 2003. 28 Mark Merlis, The Federal Employees Health Benefits Program: Program Design, Recent Performance, and Implications for Medicare Reform. Henry J. Kaiser Family Foundation, May 30, 2003.