The United States will spend nearly $4.3 trillion on health care in 2021, 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? Let’s break it down:
- Government insurance programs, such as Medicare and Medicaid, account for 42 percent, or $1.8 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 28 percent, or about $1.2 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 29 percent, or $1.2 trillion, of national spending for healthcare.
Taken individually, private insurance programs were the largest single source of funding for health care costs in 2021, followed by Medicare (23 percent) and Medicaid (18 percent). The amounts paid for certain services vary among insurance programs and have changed over time.
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 is a federal program that provides health insurance to people 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 for inpatient care services, accounting for nearly 40 percent, or $351 billion, of spending in 2021. Such high levels of inpatient care spending are not surprising because hospitalizations are associated with high-cost healthcare episodes. However, hospital care has been declining 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 $120 billion dollars in 2021.
Medicaid is a joint federal-state insurance program aimed at lower-income Americans. About 77 million Americans, including children below the poverty line, nursing home residents, and nonelderly disabled adults, 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 on inpatient care is the largest portion of total payments for the program, averaging about 35 percent of total spending and 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 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 health care provided by the Department of Defense and the Department of Veterans Affairs. In total, they account for about $172 billion, or about 4 percent, of total national health care spending in 2021. Federal, state, and local governments also spent on health care through public health programs, including assistance programs created or enhanced in response to COVID-19.
Private insurance includes employment-based insurance plans as well as plans purchased directly from the marketplace. In 2020, private insurance programs covered 217 million people, nearly 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. Hospital costs are the largest source of payment from private insurance programs. That spending has tripled over the past two decades, from $150 billion to $449 billion — about $98 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 $70 billion in 2000 to $152 billion in 2021.
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 March 2022 projections, Medicare spending will rise from about $1.0 trillion in 2022 to $1.7 trillion in 2030, an increase of 68 percent. Medicaid spending would rise from $0.8 trillion to $1.2 trillion, a 48 percent increase. Meanwhile, spending on private insurance programs would increase from $1.3 trillion to about $2.0 trillion, a 50 percent increase. By 2030, federal spending will account for 48 percent of the source of funding for health care spending; private insurance will make up just 31 percent. The rise in government health care spending will be driven in part by changing demographics, with the population 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.
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 US health care by reducing costs and improving outcomes.
Related: Why Are Americans Paying More for Health Care?
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