V. International Comparisons vs.
Net Cost of Private Health Insurance and 12 Government Program
Nor is the situation improving. Despite a decade of experimenting with managed care in the
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).  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. 
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
Average Annual Percentage Increase in Selected National Health
Net Cost of Private Health Insurance and 12 Government Program Administration, (in billions) 1970–2012
1970 1980 1993 2002* 2012*
*Projected Source: Levit et al., “Trends in
. 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 200212.
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
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,