Limiting Private Insurance Reimbursement to Medicare Rates Would Reduce Health Spending by About $350 Billion in 2021
The cost of health care is becoming less affordable for both privately insured individuals and employers who offer health insurance coverage. Long-standing concerns about high and rising health care costs in the United States have been recently exacerbated by the COVID-19 pandemic, which has increased financial pressure on many employers and individuals and led to record unemployment, furloughs and reduced wages.1 A large body of research has documented that private insurers pay higher prices than Medicare and that this gap is growing. Health care spending in the United States is nearly double the average amount spent by other high-income countries on a per-person basis without clear evidence that the overall quality of care is proportionately higher in the United States. This disparity is driven largely by higher health care prices across the United States. Reducing the prices private insurers pay for health care services could help alleviate the financial burden of health care for employers and individuals with private insurance. However, doing so would reduce revenue for hospitals and other health care providers, with uncertain effects on patient care.
In this analysis, we use data from MarketScan and FAIR Health2 to estimate the total annual reduction in health care spending by employers and privately insured individuals that would result from having private insurers reimburse hospitals and other health care providers at Medicare rates. 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. Our estimate illustrates the extreme of what could be accomplished in terms of reductions in spending; smaller reductions would be achieved if private sector health care prices 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 health care services, or quality of health care. 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. For additional information about our approach, see the methods appendix and limitations section of this report.
With ongoing interest in proposals to address the burden of health care costs for individuals and employers—including options that align private insurance rates more closely with Medicare rates—our analysis illustrates the potentially substantial decrease in health care spending that would come from lowering private insurance rates to align more closely with Medicare levels.
Our analysis finds:
- Total health care spending for the privately insured population would be an estimated $352 billion lower in 2021 if employers and other insurers reimbursed health care providers at Medicare rates. This represents a 41% decrease from the $859 billion that is projected to be spent in 2021.
- Aggregate employer contributions toward employee premiums would decrease by about $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 health care, through a combination of lower premiums and out-of-pocket spending. The reduction in federal and individual spending on health care for an estimated 19 million people in the non-group market would total $42 billion.
- Nearly half of the total reduction in spending (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.
- Health care spending for privately insured adults ages 55 to 64 would be an estimated $115 billion lower in 2021 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 detailed description of our data and methodology is discussed in the appendix of this brief. Our estimates of spending reductions are sensitive to assumptions, such as the current ratio of private-to-Medicare rates by service and market area. In addition, the estimates are sensitive to policy choices, such as whether private insurance payments should be adjusted to Medicare levels, or a higher ratio. We discuss the potential impact of these assumptions on our results in the limitations section.