Everyone agrees that there’s a cost crisis in the American health care system, but little attention is being paid to a major piece of the problem—enormous private insurance costs resulting in exorbitant premiums and cost-sharing for Americans. The focus instead is on Medicare’s costs. Policymakers are struggling to find ways to cut Medicare spending in order to slow the growth of the federal deficit, and some have even proposed greater (even total) reliance on the private market to reduce costs.
But the private health care market offers no solution to escalating health costs. Indeed, without some kind of intervention in the private market, the exploding cost of private insurance will bankrupt millions of Americans.
Over the last decade, the growth of health care costs has outpaced economic growth, and that is projected to continue for at least a decade. Once you focus on per-person health care costs, private-sector health spending is most concerning because it is the biggest contributor to rising national health expenditures. The cost of employer-sponsored insurance has grown much faster than Medicare. Private premiums grew by 50 percent more than Medicare’s per capita costs between 1997 and 2009 (see table 13). Overall, private plans pay about 25 percent more for physician services and about 30 percent more for hospital care than Medicare.
A Deteriorating Private Insurance Market
The private insurance system is already beginning to fall apart. Even though household spending has fallen dramatically as a share of total national health care spending (relative to spending by employers and the government), costs have risen so much that Americans are paying more for health care than they ever have. Over the last decade, health insurance costs doubled for the average family of four, and health costs ate away at real income, eliminating any wage gains that occurred.
Health insurance premiums (for both employers and workers) now amount to one-quarter of median family income and are projected to rise to 35 percent in the next decade. And these higher premiums are buying thinner and thinner coverage: We are paying more and more every time we go to the doctor or hospital – deductibles and copays have risen rapidly over the last decade. The share of workers paying a deductible greater than $1,000 has risen from 10 percent to over 30 percent since 2006.
Costs are rising for employers as well, and the share of workers who even receive insurance from their employer is plummeting, having fallen from more than 69 percent to 61 percent in the last 10 years. Meanwhile, fewer large employers continue to offer supplemental coverage to retirees. Since the early 1990s, the percentage of large employers offering retiree coverage has fallen from 40 percent to only 21 percent.
Ballooning costs in the private insurance market are all the more concerning because they drive up the prices facing Medicare. According to Glenn Hackbarth, chairman of the Medicare Payment Advisory Commission (MedPAC), the inability of private insurers to control prices is responsible for the constant upward drift of health care costs that is putting fiscal pressure on Medicare.
Shifting Americans with Medicare into private pools is not a serious solution to the rising cost of health care, given the far higher costs in the private sector. Privatizing Medicare, or even raising the age of eligibility and forcing more of our parents and grandparents into the commercial market, would actually raise overall costs, and it would only save the government money by forcing more of the cost burden onto people who cannot afford it.
A Better Way Forward: Smart Medicare Reforms And Controlling Private Insurance Costs
If Congress simply wants to shift new costs to Medicare enrollees, imposing higher premiums or cost-sharing would not raise overall costs, but it would also make health care unaffordable for many of the most vulnerable Americans with Medicare. They already typically pay for more than half of the cost of their health care. There are smart reforms to Medicare that would control spending without shifting costs, such as putting systems in place so that Medicare does not pay for unnecessary and fraudulent services; coordinating care for the dual-eligibles so as to reduce hospital admissions; requiring drug companies once again to provide a drug rebate for dual-eligibles; and rationalizing rates for outpatient hospital care so they are in line with what Medicare pays for the same services in a doctor’s office.
Historically, Congress has found ways to ensure Medicare remains financially strong without shifting costs to enrollees or raising overall health care costs. Health reform strengthened Medicare substantially, reducing its unfunded liability over a 75-year horizon by more than $10 trillion and extending the life of the hospital insurance trust fund by several years. If it chooses, Congress can strengthen the private insurance marketplace as well. The Affordable Care Act intervened in the insurance market to expand coverage dramatically, but it did not do nearly enough to control costs in the private health care market. Congress needs to act to fill those gaps in health reform.