Committee for a Responsible Federal Budget

Reducing Private Health Care Costs

May 25, 2021 | Health Care

Erica Socker and Mark Miller of Arnold Ventures last week penned a blog post in Health Affairs on the need to contain the costs of employer-provided health insurance. While public policy has focused mainly on the individual market and Medicare, a plurality of Americans — more than 150 million — obtain health care through job-based coverage. Socker and Miller argue that employer-provided costs have risen rapidly thanks to lack of competition and that federal reforms to limit prices can help hold costs down.

As the authors explain, high health care costs have led to increases in average employer-provided insurance premiums by 55 percent since 2010, which is nearly three times the pace of inflation and nearly twice as fast as wage growth. High costs have also led to increases in cost sharing and less generous employer benefits overall. 

Rising health care costs also reduce federal revenues and worsen budget deficits. The cost of the income tax exclusion for employer-provided health care has grown 60 percent over the last decade, from $106 billion in 2010 to $170 billion in 2020. The authors attribute these high health care costs to a lack of provider competition as a result of an increase in consolidation. That consolidation — helpfully explained in this short video from West Health — was also the topic of a May 19 Senate hearing. Currently, hospitals charge privately-insured patients nearly 2.5 times what Medicare pays for the same service, largely due to lack of competition.

One way to address hospital consolidation would be to remove the incentive for hospitals to buy physicians’ offices. As part of our Health Savers Initiative (a collaboration with Arnold Ventures and West Health) we looked into the impact of Medicare adopting site-neutral payment policies while encouraging private insurers to do the same. We estimate this could save the health system between $346 and $672 billion total over a decade and the policy would reduce federal deficits by $217 to $279 billion.

Socker and Miller suggest the federal government go further, addressing the cost of private health care costs directly. They specifically point to another Health Savers Initiative option to cap hospital payments at a share of Medicare costs. They explain:

“The idea is that market-based negotiations should function as usual where they are working reasonably well. But in instances where a large health system is able to extract rates that exceed, for example, 200 percent of Medicare, it is an indication that the system is exploiting excessive market power. There may be some legitimate concerns around the adequacy of Medicare rates and differences in quality. However, limiting what hospitals can charge to twice what Medicare pays seems like one place to draw the line between a fair reimbursement and curbing the abusive pricing practices we are seeing now. Prices limits could also be based on a multiple of negotiated private-sector rates, as some have proposed.”

We estimate a full 200 percent of Medicare cap would reduce premiums by about $900 billion over ten years, lower cost-sharing by $100 billion, and save the federal government roughly $200 billion. The authors cite other proposals by the Urban Institute, the RAND Corporation, and the Henry J. Kaiser Family Foundation that would limit payment rates and create similar levels of savings.

As Americans face higher health care costs, policymakers should consider these and other bold proposals that could not only create savings for taxpayers but would also lower health care costs for states, households, and businesses around the country.