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Government Health Plan Spending Growth Has Been Slower than Private Plans’, Doh

By February 15, 2019Commentary

Every now and then I run across a report and I just have to ask myself what kind of idiot wrote it.  One such is an Urban Institute report purporting to discover the totally-unexpected fact that government health programs have experienced lower spending growth than private ones.   (UI Report)  Let’s just cut to the chase first; if you can set prices by fiat, which Medicare and Medicaid do, you better have lower spending growth.  And it may be that those government programs limiting reimbursement has caused faster growth in charges to private health plans.  But I state the obvious, at least to everyone but the authors of this report apparently.  Now to the basic facts.  As has been well documented, national health spending has moderated over the last few years for all payers, but many, including CMS, are projecting more rapid growth in the next ten to fifteen years.  The authors correctly point out that the right way to analyze spending is on a per enrollee basis.  From 2006 to 2017 for Medicare that annual average was 2.4% and for Medicaid it was 1.6%, while commercial insurers experienced a 4.4% per member rise in spending.  As the researchers also note, Medicare and Medicaid spending growth was likely constrained by the addition of many new, and relatively healthy, beneficiaries.

On a service category basis, Medicare had highest rates of growth in drug and administrative spending, while Medicaid spending had the highest growth in the administrative costs and physician services category, partly because the reform law funded a temporary bump in fees to bribe more physicians into caring for the new Medicaid members.  Administrative costs were higher for both programs due to increased use of managed care plans, which probably offset those costs through better care and cost management.  It also be noted that what this report apparently categorizes as administrative costs also includes profits to the private plans serving Medicare and Medicaid.  When looking at spending, it would be best to break Medicare and Medicaid into fee-for-service and managed care sub-sectors.  Private insurers had the greatest rise in hospital spending, apparently both inpatient and outpatient, which almost certainly is all due to prices, as plans have actually been reducing inpatient use.  CMS is projecting that per member costs for Medicaid and Medicare in the next ten years will rise 4.8% and 4.7% annually, respectively.  Private plan costs are forecast to rise only 4.3% per year.  The authors cast doubt on this saying that evidence from the past suggests the government plans are doing a better job of slowing spending, and there is little reason to think that will change.

They are missing important considerations.  One is that at some point Medicare, and Medicaid in particular, may have to increase reimbursement to ensure adequate access.  The second is that as the recent surge of Medicare and Medicaid members are in the programs longer, they are likely to cost more.   Given their limited bargaining power, private plans have done a pretty outstanding job of controlling spending by managing utilization and improving wellness and care coordination.  They do such a good job at that that Medicare and Medicaid increasingly use them to provide benefits for beneficiaries.  Imagine what spending trends would look like if those plans could exercise the same price leverage over providers that government plans do.  The authors clearly have a political agenda, speaking favorably of calls to expand government involvement in health care, which is consistent with the Urban Institute’s bent.  So the answer to my earlier question is that ideologically-driven and blinded idiots wrote this report, and missed an opportunity to discuss more thoughtfully what might be done to moderate spending trends for various payers.


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