U.S. Healthcare Spending: Mixing the Public and Private

The United States is known for its private insurance system. However, the CMS expects that the government will spend almost as much on healthcare as the private sector by 2017. Growth in private spending is projected to decelerate from 6.6% in 2009 to 5.9% in 2017, while public spending should continue to increase 6.4% annually over this period. Demographic shifts, chronic health issues, and increased utilization of health services are expected to drive public expenditures.

Source: Centers for Medicare and Medicaid, January 2008

The State Children's Health Insurance Program (SCHIP) presents an interesting model of the divergent dynamic in a private and public payers' field. SCHIP was established in 1997 by the Balanced Budget Act. While children living below the poverty line were historically entitled to healthcare through Medicaid, the SCHIP program extends this eligibility to children living above the poverty line but still lacking insurance. The program is financed jointly by states and the federal government, but administered by the states exclusively with broad guidance by the federal government. The Congressional Budget Office estimated that in 2006, 6.6 million children were enrolled in the SCHIP program at some point over the course of the year.

The primary effect of the SCHIP program has been the vast numbers of children who are no longer uninsured. Within families living at 100–200% of the poverty line, the rate of uninsurance fell from 22.5% in 1996 to 16.9% in 2005. SCHIP has also reduced the uninsurance rate amongst children below the poverty line because it has increased the number of children eligible for enrollment in Medicaid. These are powerful results that demonstrate the benefits of a public-payer program.

At a time of rapid cost increases in the healthcare industry, the SCHIP program has allowed children who would be otherwise caught in an uninsurance trap to receive care. According to the Kaiser Foundation, health insurance premiums for family coverage have almost doubled since 2000, rising to $12,100 in 2007. While Global Insight does not expect the same type of robust gains seen in the early and mid-2000s, the cost of health insurance coverage will increase at least 4% annually over the next decade, outpacing income gains, and will remain expensive for the average worker.

But the increased public coverage has been offset by a reduction in private insurance coverage. Approximately 60% of the children who were eligible for coverage were covered by private insurance in the year before SCHIP's foundation. Many families of these children, formally on private insurance, transitioned to a mixture of private and public insurance. According to a study in Health Affairs, while 85.1% of families—married couples with children—were utilizing only private health insurance in 1997, that number had dropped to 80.4% in 2005. Over the same time period, families utilizing mixed public and private insurance rose from 3.8% to 5.4%.

According to the Congressional Budget Office, between one-quarter and one-half of the increase in public insurance coverage resulted directly from SCHIP. Evidence suggests that much of this reduction is related to parents who chose to forego private coverage and enroll their children in SCHIP. Another theory suggests that the availability of public insurance has caused employers who hire mostly low wage workers to respond by raising employee contributions to family coverage. This discourages workers from covering their children through private insurance and instead encourages them to rely on SCHIP as an alternative.

This increasingly mixed insurance coverage may result in a crowding-out effect, with families dropping private insurance for public coverage. The fact that the composition of coverage has changed for families with children, who increasingly rely on public insurance through SCHIP instead of private insurance through employers, creates an interesting dynamic for the healthcare market.

Policymakers have a variety of issues to consider in the shifting public and private health insurance dynamic. As a model, SCHIP presents the results of a growing public involvement in the healthcare industry. The first issue to consider is the large numbers of individuals, many of whom were previously uninsured, who may rely on a public program like SCHIP. The other issue to consider is that some individuals choose public insurance over private employer-based insurance when public coverage is available. In order to avoid this, the government may encourage employer-based insurance coverage through some sort of subsidy program for low-income families. But this may prove costly and inefficient—funding families who already have private insurance available to them.

The rapid cost and demand increases in the healthcare industry will continue to affect the shifts in coverage from private to public, and gains in public expenditures are expected to outpace those in private spending over the next decade. To allow affordability and accessibility of care, the United States must continue to examine the effects of programs like SCHIP on the overall healthcare industry.