How does government health care spending differ from private insurance?
How does government health care spending differ from private insurance?

The United States will spend $4.5 trillion on health care in 2022, according to the Centers for Medicare and Medicaid Services (CMS). But what does this huge number actually mean, given the complex, overlapping system of public and private health insurance? Who “spends” all this money and who receives it? Here’s a breakdown:

  • Government insurance programs, such as Medicare and Medicaid, account for 45 percent, or $1.9 trillion, of national health care spending.
  • Private insurance programs, including employer-provided health insurance as well as plans purchased through the Affordable Care Act, account for 30 percent, or about $1.3 trillion.
  • Out-of-pocket costs, such as premiums paid by individuals and other out-of-pocket costs, costs by third-party payers, investments in research and equipment, and public health activity account for the remaining 24 percent, or $1.0 trillion, of national spending for healthcare.

The share of government spending on health care is increasing

Taken individually, private insurance programs were the largest single source of funding for health care spending in 2022, followed by Medicare (22 percent) and Medicaid (19 percent). The amounts paid for certain services vary among insurance programs and have changed over time.

Private insurance programs are the largest source of funding for health care costs

How do payments differ between programs?

Payments vary among programs due to various factors, such as the type of services provided, the population enrolled in each type of program, and certain provisions of law that limit payment for certain goods. For example, Medicare does not allow coverage for hearing aids or prosthetics. Below is a breakdown of the cost breakdown by program type.

Medicare

Medicare is a federal program that provides health insurance to people age 65 or older, blind, or disabled. In 2022, about 64 million Americans received health insurance through the program. The largest component of Medicare spending is for inpatient care services, accounting for 37 percent, or $353 billion, of spending in 2022. Such high levels of inpatient care spending are not surprising because hospitalizations are associated with episodes of high cost healthcare. However, hospital care has declined as a share of Medicare spending since prescription drug benefits became part of the program in 2006. Over the past two decades, prescription drug spending has grown from less than $2 billion in 2000 to $130 billion dollars in 2022.

Prescription drugs are a growing component of Medicare spending

Medicaid

Medicaid is a joint federal-state insurance program aimed at lower-income Americans. About 91 million Americans, including children below the poverty line, nursing home residents, and nonelderly disabled adults, received health insurance through the program in 2022. Medicaid programs are required by law to cover hospital and physician care, but states may also choose to cover other services such as physical therapy and dental care. Medicaid spending on inpatient care is the largest portion of total payments for the program, accounting for approximately 33 percent of total spending, and is expected to remain relatively stable. Overall, growth in Medicaid payments is driven by spending on dental and other health care, housing, and personal care. Over the past 20 years, these costs have nearly quadrupled from $46 billion to $177 billion.

Other health, housing, and personal care costs are a growing component of Medicaid spending

Other government programs

Other government insurance programs include the Children’s Health Insurance Program, as well as health care provided by the Department of Defense and the Department of Veterans Affairs. In total, they accounted for about $172 billion, or 4 percent, of total national health care spending in 2022. Federal, state, and local governments also spent on health care through public health programs, including assistance programs created or enhanced in response of COVID-19.

Private insurance

Private insurance includes employment-based insurance plans as well as plans purchased directly from the marketplace. In 2022, private insurance programs covered about 199 million people, which was nearly twice the number of Americans covered by public programs that year. Among people under age 65, 173.6 million, or 87 percent, were covered by private health insurance in 2022. Hospital costs are the largest source of payment from private insurance programs. Such spending has tripled over the past two decades from $166 billion to $486 billion — about $133 billion more than the amount spent on this category by Medicare. Another driver of overall private insurance cost growth is prescription drugs. Such spending has grown from $76 billion in 2002 to $155 billion in 2022.

Prescription drugs and hospital care are the main drivers of private insurance costs

How are costs projected to change in the future?

CMS projects that federal spending on Medicare and Medicaid — and therefore their share of total health care spending — will increase faster than private insurance spending. For example, according to their 2023 projections, Medicare spending will rise from about $1.0 trillion in 2023 to $1.8 trillion in 2031, an increase of 81 percent. Medicaid spending would rise from $0.8 trillion to $1.2 trillion, a 44 percent increase. Meanwhile, spending on private insurance programs will increase from $1.3 trillion to about $2.1 trillion, a 53 percent increase. By 2031, federal spending will account for 49 percent of the funding source for health care spending; private insurance will make up only 30 percent. The increase in government health care spending will be driven in part by changing demographics, where the population is aging and living longer — and thus using more health care. In addition, public health spending will also be affected by additional spending growth where health spending outpaces the growth rate of the economy.

Growth in health care costs will outpace that of private insurance

Conclusion

Health care spending is an extremely important part of the American economy and the federal budget. Putting the nation on a sustainable fiscal path requires lawmakers in Washington to understand and address the growing budget pressures from national health care spending. Many solutions exist to improve the efficiency of health care in the United States by reducing costs and improving outcomes.


Related: Why Are Americans Paying More for Health Care?


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