CBO’s Proposals Do Not Address The Real Causes of Rising Commercial Health Insurance Premiums

The Congressional Budget Office (CBO) recently released a paper that includes several policy options ostensibly intended to reduce health insurance premiums. However, CBO does not explore a single solution that would directly address premiums, nor does it provide any statistics on premium growth or cost sharing trends that shift costs from insurers to patients. Instead, the paper focuses on three approaches to cut reimbursement for physician and hospital services that would have negative effects on patients and the organizations that care for them, and questionable effects on lowering premiums.

At best, this paper can be described as incomplete; at worst, it contains numerous omissions, inaccuracies and misleading assertions. CBO ignores a wide body of research on the factors driving premium costs, makes unfounded assumptions about insurer and employer behavior and declines to consider the very real and potentially dire consequences that these approaches could have on patients’ access to care, as well as quality and innovation.

Let’s set the record straight:

Provider Prices Are Not Driving Health Insurance Premiums

This paper is premised on the erroneous assumption that hospital prices are the primary driver of high health insurer premiums. That is wrong. Hospital price growth, as measured by the U.S. Bureau of Labor Statistics, has trailed health insurance premium price growth by a significant degree over the last decade (4.5% for insurance premiums vs. 2.1% for hospital prices). Were hospital costs the primary driver, they should at least equal, if not exceed, the price growth in insurer premiums. CBO seemingly ignores the many other factors that contribute to premium growth, including utilization trends (versus prices) and the cost of prescription drugs, which make up a substantial share of premiums and for which extraordinary price growth over the past decade is well-documented.

Commercial Insurer Market Power is Real and Pervasive

CBO also fails to examine how insurers’ vast market power impacts that industry’s ability to set premiums. Insurers have substantial market power in most of the markets in which they operate. Studies have shown that highly concentrated insurer markets are associated with higher premiums and that insurers are not likely to pass on to consumers any savings achieved through lower provider rates. In fact, Blue Cross Blue Shield plans recently agreed to a $2.67 billion settlement in which they were accused of using trademarking and other anticompetitive practices in certain insurance markets.

The implications of insurers’ vast market power extends more broadly than the premiums they charge employers and employees. Many insurers (or their parent companies) do more than provide health care coverage – through years of strategic acquisitions, they now play a role in adjudicating claims, licensing revenue cycle software, and managing pharmacy benefits. Their market power as a payer allows them to drive up costs for providers through administrative requirements for which they sell ancillary product and services solutions.

The paper would have readers believe that UnitedHealth Group (over $80 billion in revenue in the second quarter of 2022, covering over 45 million Americans), Elevance (over $38 billion in revenue over the same period, covering over 47 million Americans) and other large insurers are helpless in their dealings with local hospitals and health systems. Portraying health insurers as powerless in the health care system does a disservice to attempts to analyze true drivers of health care costs and, in doing so, takes many critical policy tools to contain costs off the table.

Benefits of Consolidation Are Ignored

The CBO paper overlooks research that highlights the benefits of increased integration among providers. Studies have shown that hospital mergers are associated with reductions in operating expenses and revenue, increases in service offerings and improvements in certain quality measures, including in rural settings. Moreover, consolidation can be a lifeline to some hospitals in financial distress, particularly during the pandemic. One study found that more than 80% of hospitals facing bankruptcy had been saved from closure by consolidation.

Hospital Input Costs and Structural Underpayments Are Real

Despite focusing on hospital prices, the paper dismisses two of the most fundamental determinants of hospital prices: input costs and structural underpayments. Input costs include salaries and benefits for nurses, doctors and other caregivers and workers that make up 50% or more of a hospital’s costs. Other input costs include drugs, equipment, supplies and the technology and tools needed to comply with the complex administration of health care, such as determining eligibility for coverage with a patient’s health plan.

Hospitals and health systems are at an unprecedented crossroads because input costs are growing unsustainably. Historic workforce shortages and intense inflation are projected to increase hospital and health system expenses by nearly $135 billion over 2021 levels. Much of this is due to labor costs, but the exorbitant rise in prescription drugs per patient also plays a significant role as those grew nearly 40% between 2019 and 2021. None of CBO’s policies address these important factors.

The second major driver of hospital prices for commercial payers are structural underpayments in both public and private health insurance programs. Most inpatient care is paid for by Medicare and Medicaid, and these programs reimburse substantially less ($100.4 billion in 2020) than the cost of providing care to their beneficiaries and are not subject to negotiations. Second, and of growing importance, is the increasing underpayments by insurers. CBO fails to acknowledge the extent to which insurers do not actually pay the prices they negotiate with providers. In addition to high rates of claims denials, insurers also pass much of the cost back onto their customers, including individuals and families of limited means, through high deductible health plans and copayments that frequently leave patients holding the bag for the care they need.

Alarming Implications for Patients Are Overlooked

The policy options discussed in this paper could have substantial adverse impacts on hospitals’ ability to continue providing care to communities, to ensure the quality of that care and to develop the next generation diagnostics and therapeutics for which the U.S. is world-renowned. Indeed, CBO notes, “the effects of the policy approaches on the quality of health care and patients’ access to care are uncertain.”

Conclusion

Put simply, reducing provider reimbursement would compound the many financial stresses already faced by our nation’s hospitals and health systems. Policies like those CBO puts forth would undermine hospitals’ ability to provide basic health care services, and even more hospitals could be expected to close, leaving more patients stranded. Such strain on hospital finances could also make it more difficult for hospitals and health systems to provide free and low cost care for those in need and continue to provide the same level of access and quality their communities deserve. Hospitals keep their doors open 24/7 and treat everyone regardless of ability to pay, unlike other parts of the health sector.

America’s hospitals and health systems have worked hard to reduce costs and improve the quality of care for patients. This flawed paper does not advance the policy debate.

Molly Smith is group vice president, public policy at the American Hospital Association. Benjamin Finder is AHA director, policy research and analysis.