The Spectacle Blog

Did Government’s Share of Health Care Spending ReallyShrink?(UPDATED)

By on 1.6.11 | 9:04AM

The Obama administration has released its annual report on national health care expenditures, and news organizations are seizing on the headline figures showing that as a result of the recession, health care spending rose at a relatively modest 4 percent clip in the United States in 2009 while accounting for a record 17.6 percent of the U.S. economy given the lower gross domestic product. But Cato's Michael Cannon delved a bit deeper into the numbers and discovered something unusual -- the administration's Centers for Medicare and Medicaid Services, which issues the report, reclassified some public spending as private, which makes the government's role in health care appear smaller than it did previously. Interestingly, this comes at a time when government's share of spending was closing in on the 50 percent mark, and when the Obama administration fending off charges that last year's national health care law represents a government takeover of medicine.

As Cannon details in a helpful chart, based on CMS's earlier classification, government spending accounted for 47.3 percent of health care outlays in 2008, but yesterday's revised numbers bring that percentage down to 41.2 percent -- representing a difference of $121.3 billion. The new report estimates that in 2009, government spending accounted for 43.6 percent of all health care expenditures. If you take into account the 6.1 percent discrepancy under the earlier classification, it implies that government spending would have been roughly 50 percent in 2009, a number that it would have no doubt blown past as the new health care law gets implemented. But under the new measurements, it will take several additional years to cross that threshold. (It's also worth noting that the report also finds that government spending on health care grew by 9.9 percent in 2009 while private spending shrank by 0.2 percent -- so the new numbers are clearly the result of this classification change). 

Cannon asks whether the Obama administration is deliberately "cooking the books." Whatever the case, it's certainly an interesting change. I have a call into CMS on the matter, and will update my post if and when I hear back.

UPDATE: Richard Foster, the chief actuary of CMS, emailed me a response saying that, "I can assure you that there was no effort by the Administration to influence our NHE estimates or the associated Health Affairs article in any way.  As Chief Actuary for the Centers for Medicare & Medicaid Services, I take my independent role on behalf of the Administration, Congress, and the public very seriously.  Any effort to 'cook the books' would be rejected." 

In my view, Foster deserves the benefit of the doubt as an honest broker. He has by no means been a cheerleader for ObamaCare. In fact, in a series of prior reports, he contradicted many of the administration's key claims during the health care debate, including the idea that the health care law would bend the cost curve down. Unfortunately, due to the way the Democrats' rushed legislation through Congress, those reports never became public with enough time to influence the passage of the bill. So why the discrepancy that Cannon cited?

According to Foster, CMS has migrated toward a different view of whether a given expenditure is public or private. Instead of concentrating on the end payer (for instance, the insurer who directly pays medical bills), CMS has shifted toward focusing on who finances the spending (in this example, the employer or individual who pays premiums to the insurer). This has had the affect of making the government contribution to total health care spending appear smaller in recent years, relative to the other method, which was typically cited by analaysts in prior years.

As a reason for the shift, Foster explained how the tangled relationship between the public and private sector has blurred the distinction between the two categories of spending:

In fairness, I should add that over the last few years we have been putting more emphasis on the financing estimates, versus the payer estimates.  The reason is that allocating health expenditures by financing category is relatively straightforward, while allocating by payer is becoming more difficult.  A current example involves the Workers Compensation program.  It’s required by law and generally constitutes a “public” program, but most financing is by private businesses and most payments are by private health insurance companies.  Should it be classified as a public payer or a private payer?  Similarly, when the health insurance exchange coverage takes effect in 2014, it will be available through private health insurance companies, but a substantial portion of the premiums will be paid by Federal subsidies.  As the distinction between public versus private payers has become less clear, we’ve opted to focus more on the financing, which is more straightforward to classify and describe.

Foster's full response after the jump.

I wanted to reply to today’s post on the government share of health care spending, which draws from Michael Cannon’s post from yesterday.  My goal is to clarify for you the reporting of our 2009 National Health Expenditure (NHE) data.  In particular, I can assure you that there was no effort by the Administration to influence our NHE estimates or the associated Health Affairs article in any way.  As Chief Actuary for the Centers for Medicare & Medicaid Services, I take my independent role on behalf of the Administration, Congress, and the public very seriously.  Any effort to “cook the books” would be rejected. 
 
Regarding the new NHE estimates, we have not “re-categorized about 6 percent of national health expenditures – well over $100 billion – from ‘government’ to ‘private’…” as Dr. Cannon claimed.  Unfortunately, the table in his post is comparing two different concepts:
  • One is based on who finances health care (our “type of sponsor” concept).
  • The other is based on who directly pays for health care services (our “source of funds” or “payer” concept).
For example, you and the American Spectator jointly pay the premiums for your health care insurance (“financing” concept), while your private insurance company pays most of the bills for your health services (“payer” concept).  Because the two concepts are fundamentally different, it isn’t meaningful to compare, as Dr. Cannon has done, the 2008 NHE estimates under the payer concept with the 2009 estimates based on a financing concept.  Both approaches are useful and appropriate for their intended purposes, but they are apples and oranges.  The NHE estimates under each concept are shown separately in Exhibit 2 and Exhibit 5 of this year’s Health Affairs article.  (Both were also available with last year’s article.)  A detailed description of these concepts is available in the documentation on the CMS website.
In our estimates released last year, we reported that the government financed $916.2 billion of health services and supplies in 2008 (see Appendix Exhibit 1).  The corresponding amount of government financing for total NHE (including investment expenditures for research, structures, and equipment) was $979.8 billion, or 41.9% of NHE.
 
For this year’s estimates, the corresponding amount of government financing for total NHE in 2008 is $985.4 billion, which is referenced in Dr. Cannon’s post.  This amount represents 41.2% of NHE. 
 
As you can see from this data, the total amount financed by the government has not been re-categorized and actually increased slightly from our previous estimates (though it is a slightly smaller share of overall NHE due to other revisions to our 2008 data).  We noted in the new Health Affairs article that the government share of NHE financing increased significantly in 2009, in large part as a result of the recession, with a reduction in the number of employed individuals and an increase in the number of Medicaid enrollees.
 
A corresponding comparison can be made for health expenditures by public versus private payers, with the result that the estimates for 2008 have changed only slightly.  Again, there has been no re-categorization from public to private.
 
In fairness, I should add that over the last few years we have been putting more emphasis on the financing estimates, versus the payer estimates.  The reason is that allocating health expenditures by financing category is relatively straightforward, while allocating by payer is becoming more difficult.  A current example involves the Workers Compensation program.  It’s required by law and generally constitutes a “public” program, but most financing is by private businesses and most payments are by private health insurance companies.  Should it be classified as a public payer or a private payer?  Similarly, when the health insurance exchange coverage takes effect in 2014, it will be available through private health insurance companies, but a substantial portion of the premiums will be paid by Federal subsidies.  As the distinction between public versus private payers has become less clear, we’ve opted to focus more on the financing, which is more straightforward to classify and describe.
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