Filling the need for trusted information on national health issues…

Trending on kff Ebola Marketplaces Consumer Resources

Pulling it Together: An Actuarial Rorschach Test

Drew Altman, Larry Levitt, Gary Claxton

My colleagues have worked on this column with me and I invited them to join me as authors.

As with pretty much every other discussion of health care going back to the days of Roosevelt, the great reform debate of 2009 (and now 2010) has been distilled into an ideological battle over the role of government. A government-sponsored “public option” has been off the table for a while now, yet still critics say the Democratic reform plans would represent a “government takeover” of the health system.

And it’s through that filter that observers and the media reacted to the latest projections from the Centers for Medicare and Medicaid Services (CMS) showing that public spending in health will soon exceed private spending, as if the projections were an actuarial Rorschach test. Is it evidence that the government is “taking over the health care system”? Or that spending for Medicare and Medicaid is “out of control”? Or is it something else altogether?

Predictably, the projections show a big jump in national health spending as a percentage of GDP (to 17.3%). CMS actuaries estimate that health spending rose 5.7% in 2009 while the bottom dropped out of the economy. Equally unsurprising is their forecast that health spending will rise to 19.3% of GDP by 2019, further underscoring the need to get health care costs under control over the long term. (In fact, a little more surprising was their estimate that health spending will grow over the next ten years at an average of 1.7 percentage points faster than GDP. Over the last two decades, the average gap has been more like 2.0 percentage points.)

The conclusions that got more attention were that the public sector will start paying more than half of the nation’s health care bill starting in 2012, and that government spending will grow faster than private spending from 2009 to 2019 (an average of 7.0% per year vs. 5.2%). Why is this happening?

Public spending will exceed private spending because we are coming out of a long and deep recession and because of the basic arithmetic of the baby boom. And while this may surprise some or fly in the face of conventional wisdom, when you compare spending increases in public programs and the private sector fairly, neither looks as good as we would like, but public programs actually look somewhat better (despite the fact that they cover a sicker and more expensive population).

Let’s start with Medicaid. The actuaries estimate that Medicaid spending grew 9.9% in 2009 and will increase by 8.9% in 2010. But that rapid growth is mainly due to more families relying on Medicaid as workers lose their jobs, and with them, their health insurance. A survey of state officials  by the Kaiser Family Foundation’s Commission on Medicaid and the Uninsured found that Medicaid enrollment grew by 7.5% from June 2008 to June 2009. Medicaid is, as intended, serving a counter-cyclical role.

In Medicare — our other major public health insurance program — actuaries predict that spending will grow by 6.9% per year over the next decade vs. 5.2% for health spending in the private sector. The big driver there is an increasing number of people turning age 65 as a result of the baby boom, leading to more people covered by Medicare rather than private insurance. Indeed, Medicare’s trustees project that the ratio of workers to Medicare beneficiaries will fall from about 3.7 in 2008 to around 3 by 2018. That means that while the number of people covered by Medicare is projected to grow by about 30% over that period, the number of workers will grow by only about 6%.

In fact, government programs have done a little bit better job at controlling spending than the private sector. According to figures from the actuaries, Medicare per capita costs grew at an average annual rate of 6.8% over the ten years from 1998 to 2008, while private health insurance costs per capita grew by 7.1%. And, this overstates Medicare cost growth, since a new drug benefit was added during that period. Based on figures from the actuaries that compare costs on a “common benefits” basis, Medicare per capita costs grew at an average rate of 4.9% per year over the period, substantially less than the 7.1% rate for private insurance. Comparable Medicaid spending data only goes back to 2000, but shows a similar result: per capita spending increases for covered families averaged 5.2% per year over the period, compared to 7.2% for private insurance. (These Medicaid figures exclude the elderly and disabled, where cost growth was even lower due to modest increases for long-term care services.)

The share of health spending from public programs is growing, but it’s simply not true that public programs are “out of control” when fairly compared to the private sector on an apples to apples basis. Some argue that public programs achieve lower growth in per capita spending by underpaying providers. Others see their lower payments as a virtue, arguing that they simply succeed in driving a harder bargain than the private sector does. Whatever your view, their rate of increase in per capita spending has generally been lower despite covering higher cost patients.

Given all this, what’s the right way to answer some of the questions that have arisen as people have looked at the “inkblot” spending projections released by CMS:

With a greater share of health spending in government programs, will government have greater control over health care financing? YES, but that control is spread over the federal Medicare program and 50 state-federal Medicaid programs, so it’s quite diffused.

Is government health spending out of control? NO, and in fact contrary to conventional wisdom, government health programs are performing as well, if not better than the private sector.

Are we witnessing a government takeover of the health care system? NO. The greater share of health spending represented by government programs in the actuaries’ projections is not the result of any grand policy decision to push out the private sector, but rather just the byproduct of economic and demographic trends. And, rhetoric notwithstanding, health care in this country is delivered primarily though private doctors, hospitals and other providers. Nothing about that has changed, nor is it likely to do so regardless of what share of the health care dollar is public.

The real message from the CMS report has nothing to do with a government takeover. The report simply underscores the need to control health care costs in the public and the private sectors alike.