Medicare, Medicaid contain costs better than private insurers, study says

Calls for funding cuts to popular entitlement programs, including Medicare and Medicaid, have been fueled by the growing U.S. deficit and the fear that the Medicare trust fund will soon run out. Some Republican lawmakers insist that trimming those programs is the only way to rein in federal spending.

But Urban Institute researchers released a study Monday showing that Medicare and Medicaid have done a better job at controlling spending than private payers have. They concluded that lawmakers should shift their focus toward containing costs in the private insurance market.

"After accounting for the enrollment growth in these programs, Medicare and Medicaid have experienced much slower growth in spending per enrollee compared with private health insurance," John Holahan, a fellow at the Urban Institute who authored the study, noted in a statement.

In an interview, Holahan said the study findings show there's no need to dramatically overhaul Medicare and Medicaid to control national spending on healthcare. Rather, the U.S. has a bigger spending problem in the private market.

Overall spending on Medicare and Medicaid is growing at a faster rate than spending on private insurance, which largely includes coverage that workers obtain through jobs. But that's because enrollment in public programs has exploded in the past decade while enrollment in private coverage has remained flat, according to the study.

By breaking it down to a per-person basis, the study shows that average spending on private health insurance per enrollee grew 4.4% per year between 2006 and 2017—faster than the growth of spending per enrollee in Medicaid and Medicare, and faster than the growth of the gross domestic product per capita, which grew an average 2.4% each year.

Per-enrollee spending in Medicare grew an average 2.4% per year while per-enrollee spending in Medicaid grew 1.6% each year. Holahan said Medicare and Medicaid experienced slower spending growth than private insurance because public programs have more leverage over provider payment rates, helping them to keep costs down. Private payers end up paying higher hospital and physician prices.

The study noted that CMS projects faster Medicare and Medicaid spending growth per enrollee from 2017 to 2026 than in the past decade, but the authors suggest that those projections may be overestimated.

Medicare enrollment grew 2.8% to 57.2 million as the baby boomer generation began turning 65 and became eligible for the program. Medicaid enrollment grew 4.3% to 72.6 million in 2017 because income growth was slow over that period, and there was an increase in the number of disabled people as the population aged. Many states also opted to expand Medicaid under the ACA, which boosted enrollment. Enrollment in the private insurance market hovered at 197 million, however.

As enrollment has increased in Medicaid and Medicare, so did total spending in those programs. Medicare spending grew an average 5.2% annually to $705.9 million and Medicaid grew 6% annually to $581.9 million in 2017. Spending on private health insurance grew 4.4% on average each year during the period, hitting $1.2 billion in 2017.

The healthcare services that drove spending differed between the payers. Hospital expenditures drove spending in the private insurance market, while growth in hospital spending was slow for both Medicaid and Medicare. Private insurers also experienced rapid growth in spending on nursing and home health services over the study period.

The study found that growth in administrative costs and spending on physician services drove Medicaid spending. Medicare spending growth, meanwhile, was driven largely by growth in spending on prescription drugs and administrative costs between 2006 and 2017.