Wednesday, July 9, 2014

Study: Medicare's Cost Increases Over Last Decade Have Doubled That of Employer Plans

Much is made over the fact that the U.S. spends more on health care than any other developed country, specifically 50% more per capita than the next highest OECD country.  Less attention has been paid, however, to the differences in what employers, government, and individuals pay for health care, and the different trends in those costs. These differences are important for policy makers to be aware of in determining what future changes need to be made to the Patient Protection and Affordable Care Act (PPACA or Health Reform), and to health care in general. In reviewing the results of this study, it is also important to remember that the federal and state governments provide about one-half of healthcare in the United States.  Employers and individuals procure the other half on their own.

In 2012, employers spent an average of $3,430 per covered life for employer provided coverage.  The government spent $9,130 per covered life for government health care programs. In other words, government health care spending on a cost per covered life is nearly three-times higher than private sector employer spending on that same basis.  And while this difference is not surprising given the different age and health status of the populations covered, the different methods the private sector and government use for cost containment can have significant implications for the future of U.S healthcare given that we will be moving more people from the employer-sponsored system to government plans under Health Reform.  A recent study showed that about 3 million people have moved from private plans to government plans so far in 2014.  That is 6-times more than the 500,000 the CBO projected during the first full year of PPACA.

A recently released 2014 study from the American Health Policy Institute, reveals:

  • On average, all U.S. employers spent $3,430 per covered life on health care in 2012, up 13.6% from 2003 after adjusting for inflation; 
  • Medicare spent $10,830 per covered life in 2012, up 28.2% from 2003 after adjusting for inflation.  This more than doubles the increases in employer plans; and 
  • Households spent an additional $2,570 per person on health care, up 11.6% from 2003 after adjusting for inflation.  

Unfortunately, some of the steps taken to keep Medicaid costs from rising over the past ten years have simply shifted the actual costs of the program to private payers. According to a recent study by the Kaiser Family Foundation, data suggest that both Medicare and Medicaid payments are significantly less than actual hospital costs, while private insurance payments exceed hospital costs by over 30 percent. 

For a variety of reasons employers pay significantly lower health care costs per covered life than government programs.  This stems not only from the differences in the age and health status of the populations covered by employers and the government, but it also comes in part from the significant amount of fraudulent and improper payments that are still made by Medicare and Medicaid.  Approximately 7% of all payments made by medicare and medicaid are fraudulent.  At the same time, large employers spend considerable time and resources studying trends within their health care plans and taking a variety of actions to address the underlying causes of what is driving their cost increases. 

Although both employers and the government have taken steps to “bend” their health care cost curves, they have taken significantly different approaches. Large employers have adopted a consumer oriented approach that more actively engages their employees to seek out high quality, low cost health care. Medicaid, in contrast, has mandated reductions in provider reimbursements and shifted costs to both employers and Medicare, which has effectively enabled the program to reduce its cost per covered life by 2.8 percent from 2003 to 2012.  However, these kinds of reductions in provider payments can have negative consequences on the availability of providers and the quality of care.

Source: American Health Policy Institute, 2014 Study by Tevi D. Troy and D. Mark Wilson.

American Health Policy Institute (AHPI) is a non-partisan 501(c)(3) think tank.