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WebMemo #250 on Health Care

April 8, 2003

Comparing Medicare and Private Health Insurance Spending

By and

Introduction

Limiting the growth of health care spending is a top priority. Comparing the performance between Medicare and private insurance is receiving most of the attention, with some arguing that Medicare cost control has been more effective over the long term than private-sector efforts.

 

Examining several data sources -- with results displayed below -- suggests that Medicare does not have an advantage over the private sector in limiting the growth of health care spending.

 

We examined and graphed data from the National Health Accounts for 1970 through 1999. These data are from the Office of the Actuary, Center for Medicare and Medicaid Services. We also examined data from the National Medical Care Expenditure Survey (NMCES) and the Medical Expenditure Panel Survey (MEPS).

 

It should be noted that the calculations are confined to spending for hospital and physician services. Those services are common to both private insurance and Medicare, and represent the bulk of health spending. By limiting the analysis to services covered by both types of insurance, we avoid attributing to the private sector an increase in cost resulting from coverage of services not offered by Medicare, such as prescription drugs.

 

Health policy analysts and policymakers will find that the data reveal several crucial points in comparing Medicare and private health insurance spending over time.

Chart 1 shows that (click here to view chart):

  • Spending for hospital and physician services by private insurance grew 18.1 percent faster than comparable Medicare spending between 1970 and 1999.
  • Spending trends began to diverge in the late 1980s, coincident with Medicare's move to price schedules and crackdowns on fraud and abuse in the traditional fee-for-service program.

Chart 2 shows that (click here to view chart):

  • Private insurance became more generous over the period. In 1970, private insurance paid for 59.6 percent of total private spending on hospital and physician services. By 1999, insurance paid for 85.4 percent of the total.
  • The percentage of health spending that was paid directly out of the pockets of beneficiaries declined as insurance financed a growing share of health services.

Chart 3 shows that (click here to view chart):

  • Over the past 30 years, although private insurance costs rose more quickly than Medicare, cost per unit of private coverage grew more slowly.
  • The gap between higher Medicare costs and lower unit costs of private insurance first appeared in the late 1970s and has widened in recent years.

We were unable to adjust Medicare spending for possible increases in Medicare's generosity because of data limitations of the National Health Accounts. Data on spending for all health services from NMCES for 1977 and MEPS for 1996 provide evidence of the Medicare program's lagging generosity. We calculated the percent of total spending paid by private insurance for people under age 65 and the corresponding percent of total spending paid by Medicare for people 65 and older.

 

Chart 4 shows that (click here to view chart):

  • The value of Medicare is not keeping pace with private insurance. For persons under age 65, the generosity of private health insurance grew by 41.5 percent between 1977 and 1996. For persons 65 and older, the generosity of Medicare grew by only 22.2 percent over the same period.

Conclusion

Although private insurance spending has risen faster than Medicare spending over the past 30 years, the value of private insurance has grown just as rapidly. These data suggest that Medicare does not have an advantage over the private sector in limiting the growth of health care spending.

 

Comparisons using National Health Accounts data cannot prove the superiority of one model of cost containment over the other. Private insurance spending includes spending on behalf of Medicare beneficiaries, many of whom have their Medicare coverage supplemented by private retiree policies or private Medi-gap insurance. The spending data cannot account for differences in the age, health status, or other characteristics of the beneficiary population, all of which clearly affect the use of health services. The direction of any bias caused by inadequate data cannot be determined.

 

Joseph R. Antos, Ph.D., is Wilson H. Taylor Scholar in Health Care and Retirement Policy at the American Enterprise Institute and a former Assistant Director for Health and Human Resources at the Congressional Budget Office. Alfredo Goyburu is a Policy Analyst in the Center for Data Analysis at The Heritage Foundation.

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