Medicare, Medicaid Spending Per Enrollee Slower Than Private Plans

February 18, 2019 - Medicare and Medicaid spending saw significantly slower growth per enrollee than private payer expenditures over the last decade, a new report from the Urban Institute shows.

The public payers may have experienced the fastest rate of spending growth from 2006 to 2017. But enrollment is largely to blame for the rise in Medicare and Medicaid spending, and spending per enrollee during the period was actually much slower compared to that of private payers.

“Thus, these programs appear to have been relatively successful at moderating spending growth compared to private insurance,” the authors wrote. “These patterns do not support drastic calls to restructure Medicare and Medicaid in order to slow national health spending growth, and may actually provide some support for efforts to expand public programs or borrow some of their cost containment strategies for use in the private sector.”

The report, funded by the Robert Wood Johnson Foundation, used CMS estimates from 2006 to 2017 to understand recent healthcare spending patterns by payer, and what the trends mean for the trajectory of spending.

Stakeholders have argued that the growth in national healthcare spending is unsustainable. National healthcare expenditures continue to increase faster than gross domestic product (GDP), and spending represented nearly 18 percent of GDP by 2017.

READ MORE: Medicare Spending, Prices Drive Healthcare Spending Growth

The pressure to significantly reduce healthcare spending has led many policymakers and stakeholders to target Medicare and Medicaid for restructuring. CMS estimated that Medicaid spending reached $581.9 billion in 2017, representing 17 percent of total healthcare spending. Meanwhile, Medicare spending totaled $705.9 billion, accounting for 20 percent of total expenditures.*

While private payer spending was $1.2 trillion in 2017, spending growth on the privately insured decreased. In contrast, Medicare and Medicaid spending grew, and researchers anticipate more dollars to go to the programs as the population ages.

However, the report from the Urban Institute indicates that major restructuring policies for Medicare and Medicaid may not be necessary. Medicare and Medicaid spending may be growing, but the programs are actually better at cost containment compared to private payers, researchers asserted.

Public payers may be experiencing rapid spending growth, but that is largely because of enrollment increases, CMS estimates show. The Urban Institute found that Medicare enrollment increased by an average of 2.8 percent annually, while Medicaid enrollment growth averaged 4.3 percent each year during the period.

In contrast, enrollment in private health insurance remained relatively stable in the past decade.

READ MORE: Primary Care Initiative Continues to Reduce Medicare Spending

Accounting for enrollment trends, researchers found that Medicare and Medicaid were better at containing costs compared to their private sector peers. During the period, spending per enrollee for Medicaid and Medicaid increased by annual averages of 2.4 percent and 1.6 percent, respectively.

On the other hand, private health insurance spending per enrollee rose at an average of 4.4 percent per year.

Furthermore, Medicare and Medicaid spending growth per enrollee was equal to or less than the increase in GDP per capita during the timeframe. Private payer spending per beneficiary increased two percentage points faster than per capita growth in the economy as a whole, researchers reported.

Private payer spending per enrollee primarily increased because of hospital expenditures. Hospital costs increased at an average of 6.2 percent per year compared to slow growth for the public payers.

Researchers attributed higher hospital costs for private insurers to their limited bargaining power. Private payers do not have the same negotiating power as Medicare and Medicaid. As a result, they pay significantly higher prices for hospital services than either program.

READ MORE: The Difference Between Medicare and Medicaid Reimbursement

The Affordable Care Act and the Budget Control Act of 2011 also limit Medicare reimbursement increases for hospital services.

For Medicare and Medicaid, prescription drug and administrative costs grew rapidly. Medicare spending per enrollee on prescription drugs increased 5.9 percent each year and spending on administrative costs increased 4.3 percent annually.

Medicaid spending on prescription drugs was dramatically less compared to Medicare. Prescription drug spending growth in the program only averaged 0.7 percent annually. However, administrative costs rose by an average of 4.5 percent.

The findings have serious policy implications, researchers stressed in the report.

“[T]hough Medicare and Medicaid together represent a large and growing share of the federal budget and are therefore important factors in the current deficit challenge, we conclude that recent health spending patterns do not justify calls for major restructuring of these programs to lower national health spending,” they wrote.

Modest policy proposals may be more appropriate than restructuring since the programs have contained costs. For example, more “reasonable approaches” could be limiting state use of provider taxes in Medicaid, modifying Medicare cost-sharing and restrictions on Medi-gap policies, and implementing small increases to Parts B and D premiums, researchers suggested.

Policymakers can also reduce Medicare and Medicaid spending by targeting their expenditure drivers. For Medicare, targeting prescription drug spending may be the key to bending the program’s cost curve.

“Medicare’s inability to negotiate with manufacturers or to deny coverage for low-value treatments is an important contributor to rising drug prices and spending, and ending these restrictions should be an important component of any cost-containment reform,” the report stated.

Stakeholders should also seek administrative cost reductions for both programs.

“In addition, the growth in administrative costs in both Medicare and Medicaid in recent years is notable and seems largely due to the shifting of more individuals to managed care within each of these programs,” researchers explained. “While additional research is needed to understand whether and how the shift toward private plans has contributed to the slower spending growth in other services, some recent evidence on Medicare Advantage suggests that these plans have been successful at lowering costs without sacrificing quality.”

“There is, however, still room to reduce the costs of the Medicare Advantage program by lowering the fee-for-service benchmarks that determine payments to Medicare Advantage plans.”

*CORRECTION: Previous version of this article stated Medicare spending totaled $7.9 billion in 2017. The correct value is $705.9 billion.