How Does Government Healthcare Spending Differ From Private Insurance?

The United States spent nearly $4.3 trillion on healthcare in 2021, according to the Centers for Medicare and Medicaid Services (CMS). But what does that huge number really mean, given the complex, overlapping system of public and private healthcare insurance? Who is “spending” all this money, and who receives it? Let’s break it down:

• Government insurance programs, such as Medicare and Medicaid, made up 42 percent, or $1.8 trillion of national healthcare spending.
• Private insurance programs, including employer-provided health insurance as well as plans purchased through the Affordable Care Act, accounted for 28 percent, or about $1.2 trillion.
• Out-of-pocket spending, such as premiums paid by individuals and other out-of-pocket costs, spending by third-party payers, investment in research and equipment, and public health activity accounted for the remaining 29 percent, or $1.2 trillion, of national health spending.

When viewed individually, private insurance programs were the largest single source of funding for healthcare expenditures in 2021, followed by Medicare (23 percent) and Medicaid (18 percent). The amounts paid for particular services vary across insurance programs and have changed over time.

How Do Payments Differ Across Programs?

Payments differ across programs because of various factors, such as the type of services rendered, the population enrolled in each type of program, and certain provisions of law that limit payment for particular goods. For example, Medicare does not allow coverage for hearing aids or dentures. Below is a description of the composition of spending by type of program.

Medicare

Medicare is a federal program that provides health insurance to people who are age 65 or older, blind, or disabled. In 2021, about 64 million Americans received health insurance through the program. The largest component of Medicare spending is on hospital care services, which accounted for nearly 40 percent, or $351 billion, of spending in 2021. Such high levels of spending on hospital care is not surprising, as hospitalizations are associated with high-cost health episodes. However, hospital care has been declining as a share of Medicare spending since a prescription drug benefit became part of the program in 2006. Over the last two decades, spending on prescription drugs grew from less than $2 billion in 2000 to $120 billion in 2021.

Medicaid

Medicaid is a joint federal-state insurance program targeting lower-income Americans. About 77 million Americans, including children below the poverty level, nursing home residents, and non-elderly adults with disabilities, received health insurance through the program in 2020. 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 for hospital care has been the largest portion of total payments for the program, making up roughly 35 percent of total spending on average, and is projected to stay relatively stable. Overall, the growth in Medicaid payments is being driven by spending for dental and other health, residential, and personal care expenditures. In the past 20 years, such spending has more than tripled from about $41 billion to $154 billion.

Other Government Programs

Other government insurance programs include the Children’s Health Insurance Program, as well as healthcare provided by the Department of Defense and the Department of Veterans Affairs. Altogether, they accounted for about $172 billion, or about 4 percent, of total national health consumption in 2021. Federal, state, and local governments also incurred healthcare costs through public health programs, including relief programs established or enhanced in response to COVID-19.

Private Insurance

Private insurance includes employment-based insurance plans as well as plans directly purchased from the marketplace. In 2020, private insurance programs covered 217 million people, which was almost twice as many Americans covered by public programs that year. Among people under age 65, 176.1 million, or 65 percent, were covered by private health insurance in 2021. Spending on hospital care services is the largest source of payment by private insurance programs. Such spending has tripled in the past two decades, from $150 billion to $449 billion — which is about $98 billion larger than the amount spent on that category by Medicare. Another driver of overall growth in spending by private insurance is prescription drugs. Such spending has grown from $70 billion in 2000 to $152 billion in 2021.

How is Spending Projected to Change in the Future?

CMS projects that federal spending for Medicare and Medicaid — and therefore their share of total health spending — will increase faster than spending by private insurance. For example, according to their projections from March 2022, Medicare spending will climb from about $1.0 trillion in 2022 to $1.7 trillion in 2030, an increase of 68 percent. Medicaid spending would grow from $0.8 trillion to $1.2 trillion, an increase of 48 percent. Meanwhile, spending by private insurance programs would increase from $1.3 trillion to about $2.0 trillion, an increase of 50 percent. By 2030, federal spending would account for 48 percent of the source of funding for healthcare expenditures; private insurance would make up just 31 percent. The rise in government spending on healthcare will be driven partly by the changing demographics, in which the population is growing older and living longer — and thereby utilizing more healthcare. In addition, public health spending will also be influenced by additional cost growth, in which healthcare costs outpaces the growth rate of the economy.

Conclusion

Healthcare spending is a critically important part of the American economy and the federal budget. Putting the nation on a sustainable fiscal path requires that lawmakers in Washington understand and address the growing budgetary pressure from national healthcare spending. Many solutions exist to improve healthcare performance in the US by lowering costs and improving outcomes.

Related: Why Americans Paying More for Healthcare?

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