Since 1970, Medicare’s per patient costs have increased 34 percent more than have the per patient costs of privately purchased health care, according to Jeffrey Anderson, senior fellow at the Pacific Research Institute. Anderson’s calculations undercut a central claim that the Obama administration has been making about its health care reform plans: that creating a public insurance option modeled on Medicare will help control costs.
Other research, including that of Cristina Boccuti and Marilyn Moon, and of Jacob S. Hacker, has claimed to show that Medicare does a better job of controlling costs than does private health care. That research has helped build the case for a public insurance option. According to Anderson, however, Boccuti, Moon, and Hacker compared only private insurance costs to Medicare costs, forgetting that out-of-pocket expenditures are also a component of privately purchased health care. Anderson writes:
By selecting only the private-insurance segment of privately purchased care, these analyses neglect a major shift in privately purchased health care. From 1970 to 2007, out-of-pocket expenditures dropped from 62 percent of the privately purchased health care market to just 26 percent. Correspondingly, insurance expenditures increased from 38 percent to 74 percent. These authors make no allowances for that change. That’s like looking at LP or CD sales, but ignoring MP3s, and concluding that Americans are no longer as fond of music.
According to Anderson, the cost advantage for privately purchased health care is likely greater than his calculations show, because his estimates make some assumptions favorable to Medicare. For instance, because Medicare began covering prescription drugs only since 2006, Anderson counts all prescription drug expenditures as part of privately purchased health care in order to maintain a constituent basis for comparison since 1970. He does this in spite of the fact that much of the prescription drugs covered now by Medicare were previously covered by Medicaid, and thus never really part of private health care expenditures. Anderson also removes anyone on Medicare or Medicaid from the pool of patients receiving privately purchased health care, even though a significant portion (32 percent in 2000) of the health care received by those on Medicare was purchased privately. Anderson’s analysis also does not take into account the fact that Medicare’s low reimbursement rates lead providers to shift $88 billion of costs to private payers annually.
Using these assumptions, Anderson calculates that since 1970, Medicare’s per-patient costs have risen 26.2 times, while the per patient costs of total national health care expenditures minus Medicare and Medicaid have risen only 19.6 times. The policy implications?
If Medicare has in fact fared particularly poorly versus private out-of-pocket spending, then this gives even more credence to the argument, made by former U.S. Health and Human Services Secretary Mike Leavitt and others, that the real key to keeping health care costs in check is to increase consumer choice, price transparency, and cost consciousness, which is best accomplished by increasing the percentage of care paid for out of pocket. If we know how well Medicare has controlled overall costs versus privately purchased health care, then we necessarily also know this: that the better Medicare has controlled costs versus private insurance, the worse it has controlled costs versus private out-of-pocket spending. Thus, the more Boccuti, Moon, and Hacker are right that private insurance has not controlled costs as well as the whole of privately purchased care, the more Leavitt and others are right that consumers, paying out of pocket, are the best bargain shoppers and the surest pursuers of value in the American health care market.
(See “Medicare Costs Have Risen Far More than the Costs of Private Health Care” by Jeffrey H. Anderson, published by the Pacific Research Institute, June 2009.)