Who Is Picking Up the US Healthcare Tab? – Managed Healthcare Executive

A Congressional Budget Office puts some numbers to the common knowledge that commercial payers pay providers significantly more than Medicare fee for service. The consequences include lower taxable wages and escalating federal subsidies of health insurance.

First of three parts

It is not news that commercial insurers pay providers more than Medicare. But a Congressional Budget Office (CBO) report documents just how large the difference is and traces it to prices, not utilization.

From 2013 to 2018, commercial insurers’ spending person on inpatient and outpatient hospital care and physician grew by an average of 3.2% a year and prices paid for services increased by 2.7%, more than a full percentage point higher than increase in the gross domestic product price index increase of 1.6%, according to the CBO report that came out earlier this month.

During that same period, spending by the Medicare fee-for-service (FFS) program grew by 1.8% and prices the program paid to providers increased by 1.3%, so a bit less than the 1.6% increase in the gross domestic product price index.

But healthcare spending is the product of a two-factor equation that also includes utilization of services, which itself also comprises two factors: the number of services used and also the intensity of those services (the intensity of a coronary bypass operation is much higher than, say, a routine office and a routine procedure to repair, for example, an abdominal hernia would fall somewhere n between).The CBO found that the utilization was a comparatively minor contributor to the spending by insurers and the Medicare FFS program. For insurers, utilization went up 0.4% per year per person in the 2013-2018 time period. For the Medicare FFS program, the per-year increase was just a little higher at 0.5% per year.

Here is a chart from the CBO report that shows the commerical and Medicare spending and its relationship to the price index:

The report also compares private payer payments to hospitals with Medicare FFS payments relative to hospital costs. The hospital cost data came from American Hospital Association. And for the purposes of this report, private payers included not just commercial insurers but also individuals without insurance, automobile liability insurers and workers’ compensation insurers.

The CBO figures show a widening gap between the private payers and Medicare FFS with respect to hospital costs. In 2000, they were 16.1 percentage points apart: private payers paid 115.7% of hospital costs and Medicare, 99.1%. By 2018, that gap had widened 58.2 percentage points, with private payers paying 144.8% of hospital costs and private payers, 86.6%.

Here is the chart in the CBO report that shows how private payer and Medicare FFS payments have diverged as a percentage of hospital costs:

The CBO report discusses some of the implications of these spending and price trends. It doesn’t hold any surprises for those who are familiar with the dynamics of U.S. healthcare costs, insurance, provider prices and their ripple effects. The report notes that spending on health insurance represents a large part of their employees’ nonwage compensation. As health insurance spending increases, employers take action to protect profits, says the report, which cites a study that found increases in hospital prices are associated with a rise in out-of-pocket costs, an increase in the use of high-deductible health plans and slower wage growth.

The report also touches upon on the favorable tax treatment of commercial health insurance, both in the group and individual markets. The report describes a cascading effect of insurers passing on higher costs to employers through premiums, which employers and employees pay with pretax dollars, resulting in taxable wages and therefore increasing what are, in effect, federal subsidies for employment-based insurance. Similarly, as premiums go up in the individual market, the ACA tax credits to offset the premiums increase.