CBO: Commercial insurer spending rising faster than Medicare 

Spending for health care services has risen faster for commercial insurers than the government-sponsored Medicare program, a new report has found. The study, from the Congressional Budget Office (CBO), examined the different market forces that are driving the higher rate of health care spending.

“In recent years, commercial health insurers’ per-person spending on hospitals’ and physicians’ services has grown more quickly than analogous spending by the Medicare fee-for-service (FFS) program,” the report said. “The main reason for the growth of per-person spending by commercial insurers—and for the difference from the growth of per-person spending by Medicare FFS—has been rapid increases in the prices that commercial insurers pay for hospitals’ and physicians’ services.”

The higher spending by commercial insurers can lead to higher premiums for private health insurance such as employer-sponsored plans, increased federal spending on health care via subsidies and tax preferences, and slow the growth of wages, the report said.

Health care spending outpaces inflation

The study found that between 2013 and 2018, commercial insurers’ spending per person for inpatient and outpatient hospital care and physicians’ services grew by an average of 3.2% a year. Per-person spending for Medicare enrollees grew at an average of 1.8% per year.

The report noted that the higher spending by commercial insurers for health care services was due to higher prices from providers. Those prices rose by an average of 2.7% annually during that time, about 1 percentage point faster than average inflation during that same period. “The prices that commercial insurers pay for hospitals’ and physicians’ services are much higher, and have grown much more rapidly in recent years, than the Medicare program’s prices,” the CBO report said.

The analysis noted that Medicare has stricter price controls and greater market negotiating power than the various commercial insurers, which are subject to factors such as variations in regional health care costs. With Medicare acting as a single-payer for about half of the citizens in the U.S., it has a stronger negotiating position. “Medicare offers payment rates to providers on a take-it-or-leave-it basis,” the report noted. “Providers that do not want to accept those rates can decline to participate. But because Medicare accounts for a large share of U.S. health care spending, providers may have limited financial ability to opt out of the program.”

Some have speculated that the lower reimbursement from Medicare means that hospitals charge commercial insurers more to compensate for those lower payments. However, the study found little evidence that this kind of cost-shifting is going on.

The impact on employer-based insurance

The report noted that any rise in providers’ prices will increase health insurers’ spending and would likely be passed on to enrollees in some form. Employers try to limit the impact of increases on premiums, but the other option is often passing the cost on through out-of-pocket expenses.

“A recent study found that price increases for hospitals’ services were associated with a rise in employees’ out-of-pocket costs, an increase in the use of high-deductible health plans, and slower wage growth for employees,” the report said. It also referred to another CBO study that found premiums for health insurance have been growing faster than wages.

Another factor in higher spending is the growth of market concentration among providers. Mergers and acquisitions among health care systems have been increasing in recent years, and this consolidation of health care market share has resulted in higher prices, according to several studies.

“Evidence suggests that concentration in the markets for hospitals’ and physicians’ services has been growing and that, in many areas, those markets are now moderately or highly concentrated,” the CBO report said. “The percentage of physicians’ practices that are owned by or affiliated with hospitals has also increased. Such vertical integration can increase concentration in the market for physicians’ services (by consolidating physicians into larger groups) and can increase hospitals’ market power (by steering physicians’ referrals to the acquiring hospital). In addition, evidence suggests that a growing number of health care providers have been acquired by private equity firms, which may leverage providers’ market power to raise prices.”