Medicare controls costs better than private insurance?

A new report, Slow Growth in Medicare and Medicaid Spending per Enrollee Has Implications for Policy Debates, is being used to demonstrate the cost controls of Medicare and Medicaid are better than private insurance because the growth in the programs has been less over the last several years. The purpose of this report from the Urban Institute seems more to support no changes in theses programs rather than to demonstrate some clear unique cost control methodology. The report disputes the conclusions and projections of CMS for future growth.

The issues is not that the growth in Medicare spending has been lower, which the data show is a fact, but how and why.

The how and why is simple, since Medicare does little or no care management and its claim administrators are not permitted to manage care in any way, the answer is that Medicare simply pays less for health care service (and Medicaid, with variations by state, pays even less). To illustrate here are the relative payment levels from a study by the Texas Medical Association.

Here is the question ignored by this paper and by others. Could the health care delivery system be sustained at levels concurrent with the expectations of Americans if all payments to hospitals, physicians, etc. we’re made at the Medicare or Medicaid levels? Or to put it another way, can Medicare pay what it does today only because the private sectors pays what it does and thus sustains the system?

The answer to that question is found in another question. What will cause a shortage of health care providers, what will cause longer wait times as volume attempts to offset unit price?

The report excerpt below concludes that high deductibles and smaller provider networks has caused slower growth and a change in provider cost structures. Actually it has shifted costs to patients, but isn’t it interesting that while this is claimed as a cost control measure, proposals for Medicare for All eliminate all deductibles and co-pays with unfettered access to doctors.

I have my own conclusion. Expert researchers and politicians have no idea what they are talking about and are incapable of considering long-term consequences of much of anything.

Extract from the report.

In this paper, we used CMS data to show that high rates of spending growth in Medicare and Medicaid from 2006 to 2017 were largely driven by increases in enrollment and that growth in spending per enrollee in both programs has been below that in private insurance and below growth in GDP per capita over the last decade or so. Thus, these programs appear to have been relatively successful at moderating spending growth compared to private insurance. 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.

Of course, the conclusion above is only valid if the slower growth rates of the last decade or so are sustainable and current CMS projections suggest that this may not be the case. In fact, the most recent CMS projections suggest significant increases in growth in spending per enrollee in public programs from 2017 to 2026. These projections could materialize if continued economic prosperity leads private and public payers to ease up on cost containment efforts and if inflationary pressures increase input prices. The CMS projections also incorporate an expectation that a new wave of blockbuster drugs will emerge over the next decade. Moreover, the aggressive Medicare payment policies that have characterized the last decade may be hard to sustain, especially in the face of rising input prices. In general, the current CMS projections appear consistent with the view that the recession and sluggish recovery were the dominant reasons for the slow growth in spending in recent years, and that a return to higher rates is inevitable.

Some would argue, however, that the recent slowdown in spending growth involved more fundamental structural changes to the health care system, which suggests that the projections could be overstated. The slower growth in recent years seems to be due to higher deductibles, health plans with more limited provider networks, and aggressive payment policies in public programs. Together, such policies have reduced the flow of revenues to providers and may have caused them to adjust their cost structures. There are no clear signs that a reversal of these policies is on the horizon and therefore there is limited justification for the large projected increases in per enrollee spending growth in Medicare and Medicaid over the next decade. Source: Slow Growth in Medicare and Medicaid Spending per Enrollee Has Implications for Policy Debates.


  1. Q, you are absolutely on target. I do have a question you may be able to answer. When a doctor provides a service and submits a bill to Medicare, let’s say for $500, and Medicare pays the doctor $290, does the doctor get a tax break for the difference of $210, ie, for the so-called write off?

    I suppose this is a minor point given the fact that as you point out, the doctor’s non-Medicare patients subsidize the total health care system by paying the doctor more than the “protected class” of Medicare patients.

    This past election, a local doctor running for office was accused by her opponent ” of turning away Medicare patients. ” She admitted it was true by saying her practice limits the per centage of patients on Medicare because otherwise she would have to close her practice as she could not afford it.


    1. I don’t know the answer to your question, but I rather doubt it. The $500 may be an inflated “retail” fee not allowed by any type of coverage.


  2. As long as Medicare has to basically “must pay first” I do not see how they can provide better cost controls. Most of the fraud cases are large scale Medicare fraud cases with only the occasional insurance fraud case and these are workman comp cases that you hear about on the news.

    I know that Medicare pays less than everybody else. Doctors do limit the number of Medicare patients they have.

    In the chart provided, Medicare pays between 36.2% to 58.1% of what private pays. My problem is that medical billing is so opaque. Last year, my insurance paid my doctors about 88.7% for their “list price” and my lab tests got paid between 24% to 49% of the “list price” of what was billed by my private insurance. So if Medicare is only paying 36% (for labs) of what private is paying, and private insurance is only paying as low as 24% of “list price”, does that make Medicare only paying 8 cents on the dollar for labs? How is anybody still in business?

    Now there are two possibilities here. 1) The billing “list prices” are so inflated as to allow every to make money and you are totally screwed if you do not have insurance or 2) at some point the whole medical system will come crashing down from the low reimbursement rates. I think that all the belt tightening has been done that can be done. A few hospitals have closed and there are more urgent care centers now.


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