National Health Spending by Payer Type

By July 27, 2018 Commentary

Health insurance for Americans is mainly split into three large buckets:  Medicare for the elderly; Medicaid for lower-income people and private insurance for the employed.  A report from the Altarum Institute finds that over the last few years these payment sources have had different spending trends driven by different factors.   (Altarum Report)   The report looks at trends following the recession.  The headline item is that in the last year or so private insurance spending has begun to grow faster than public payer spending, a reversal of earlier post-recession years.  In 2018, on an annualized basis, Medicaid accounts for 16.6% of total national health spending, or around $600 billion, Medicare is 20.2%, or about $730 billion, and private payer spending is 34.2%, or $1.24 trillion.  The rest is out-of-pocket, military health programs and other miscellaneous sources.  Since the recovery began in 2009, total Medicaid spending has grown by almost 73%, while Medicare spending rose 51% and private insurance increased 49%.  The Medicaid spending growth was largely due to enrollment gains following the ACA expansion–yippee, more people getting “free”, gold-plated insurance coverage on the backs of taxpayers.  On a more meaningful per person basis, private health plan spending has grown much more rapidly, at 46% over this time period, while Medicare per person spending rose 14.7% and Medicaid increased 14.9%.

On a per person basis, Medicare and Medicaid are growing at the about the rate of economic growth, while private insurance is growing much faster.  A desirable goal would be to bring the private payer spending growth rate down to the rate of GDP rises.  Decomposing spending into its price and utilization components indicates that the reason for faster private payer growth is prices.  From June 2014 to the present, prices paid by commercial health plans rose 8.2% while those paid by Medicare rose about 2.5% and Medicaid’s prices increased 2%.  Utilization has also increased in the private system, but a lot of that utilization growth is “intensity”, the use of new treatments.  These treatments tend to cost more, which again is really due to pricing.  Almost all the growth in Medicare and Medicaid spending is related to enrollment increases.  One likely cause of the recent acceleration in private insurance spending is the greater market power of providers, which allows them to charge more to private payers, while public ones like Medicaid and Medicare set reimbursement by fiat.  It is critical to the control of national health spending, and to relieving out-of-pocket spending by hard-working, tax-paying citizens who are supporting all of the health system, that we address this pricing power issue soon.

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