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Capping Private Insurance Payouts to Medicare Rates Would Cut Healthcare Spending by $350B

Analysis  |  By John Commins  
   March 01, 2021

However, hospitals, physicians and other providers would bear the brunt of the cuts.

The nation's $3.8 trillion healthcare sector could reduce costs by as much as $350 billion a year if private health insurance payments to providers were capped at the same rates as Medicare, according to a new study by Kaiser Family Foundation.

However, the study concedes that hospitals, physicians and other providers would bear the brunt of the reimbursement reductions, and it's not clear how that would affect patient care.

Relying on data from MarketScan and FAIR Health, the researchers estimated the total annual reduction in healthcare spending by employers and privately insured people that would result with a Medicare reimbursement cap on private insurance.

"A variety of policy levers could be used to move the health system in this direction, including Medicare for all, a public option, or regulatory controls over private prices," KFF said.

The KFF study said smaller reductions could be reached if private plans were reduced "to some multiple of current Medicare rates or if lower rates were phased in gradually."

"We discuss but do not model the potential effects of price reductions on the supply of services, utilization of healthcare services, or quality of healthcare," KFF said. "We also do not estimate the effects on tax obligations for individuals or employers, nor quantify the impact of this change on the federal budget or the Medicare program."

The study found that:

  • Healthcare spending for privately insured people would be $352 billion lower in if employers and other insurers reimbursed healthcare providers at Medicare rates. This represents a 41% decrease from the $859 billion that is projected to be spent in 2021.
     
  • Employer contributions toward employee premiums would drop by $194 billion, assuming employers' share of premiums stays constant after private rates drop to Medicare levels.
     
  • Employees and their dependents would spend at least $116 billion less for healthcare, through a combination of lower premiums and out-of-pocket spending.
     
  • The reduction in federal and individual spending on healthcare for an estimated 19 million people in the non-group market would total $42 billion.
     
  • Nearly half of the spending cuts (45%) would be for outpatient hospital services, due in part to high private rates relative to Medicare rates for outpatient care, compared to most other services. Inpatient services account for 27% of the decrease in spending, and physician office visits account for 14% of the decrease.
     
  • Healthcare spending for privately insured adults ages 55 to 64 would be $115 billion lower if private insurers used Medicare rates—this is one third of the estimated total reduction in spending. The proportion of the decrease in spending attributable to adults 55 to 64 is roughly equivalent to their share of current spending.

“A variety of policy levers could be used to move the health system in this direction, including Medicare for all, a public option, or regulatory controls over private prices.”

John Commins is a content specialist and online news editor for HealthLeaders, a Simplify Compliance brand.


KEY TAKEAWAYS

Healthcare spending for privately insured people would be $352 billion lower in if employers and other insurers reimbursed healthcare providers at Medicare rates. 

Employer contributions toward employee premiums would drop by $194 billion, assuming employers' share of premiums stays constant after private rates drop to Medicare levels.

Employees and their dependents would spend at least $116 billion less for healthcare, through a combination of lower premiums and out-of-pocket spending.

The reduction in federal and individual spending on healthcare for an estimated 19 million people in the non-group market would total $42 billion.

Nearly half of the spending cuts (45%) would be for outpatient hospital services, due in part to high private rates relative to Medicare rates for outpatient care, compared to most other services.

Inpatient services account for 27% of the decrease in spending, and physician office visits account for 14% of the decrease.

Healthcare spending for privately insured adults ages 55 to 64 would be $115 billion lower if private insurers used Medicare rates—this is one third of the estimated total reduction in spending.


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