The prices that commercial health insurers in the United States pay for hospitals’ and physicians’ services are much higher, on average, and have been rising more quickly than the prices paid by public health insurance programs. Those rising prices—rather than growth in the per-person use of health care services—are an important driver of recent increases in premiums for commercial health plans. Higher premiums in turn increase the amount that individuals and employers pay for health insurance coverage and increase total federal subsidies for commercial health insurance. In this report, the Congressional Budget Office describes policy approaches available to the Congress that would reduce the prices that commercial insurers pay providers and thereby reduce premiums for that coverage.
Factors That Lead to High Prices. The prices that providers negotiate with commercial insurers are high because of several factors, including hospitals’ and physicians’ market power and consumers’ and employers’ lack of sensitivity to those prices.
How Federal Legislation Can Address High Prices. Government policies can reduce commercial insurers’ prices for providers by targeting the factors that contribute to high prices, although many of the causes of those factors are not amenable to change by legislative action. The government can also reduce prices through regulation. By reviewing state laws, draft federal legislation, policy proposals, and published articles, CBO identified three broad policy approaches available to the Congress:
- Promoting competition among providers, which would aim to reduce prices by targeting providers’ market power;
- Promoting price transparency, which would aim to reduce prices by targeting consumers’ and employers’ price sensitivity; and
- Capping the level or growth rate of prices, which would aim to reduce prices by regulating them.
Effects on Prices. In CBO’s assessment, price-cap policies could have the largest effects on prices. Depending on the design of the caps, adopting the most comprehensive set of price-cap policies included in this analysis would reduce prices either by a moderate amount (from more than 3 percent to 5 percent) or by a large amount (more than 5 percent) ) in the first 10 years after the policies were enacted, relative to the trajectory of prices under current law. Adopting all of the provider-competition policies in this analysis would reduce prices by a small amount (from more than 1 percent to 3 percent), and adopting all of the price-transparency policies would reduce prices by a very small amount (0.1 percent to 1 percent). Those amounts reflect anticipated effects in a given year once policies had been fully implemented and stakeholders had fully adjusted to them. Each approach might have larger effects beyond the first 10 years, but those longer-term effects are more uncertain.
Implications for the Federal Budget. Each of the three policy approaches would reduce the federal deficit. In CBO’s assessment, commercial insurers would pass most of their savings from paying lower prices on to customers by reducing premiums (because of competition among insurers, insurance regulations, and other factors), thus decreasing federal subsidies for health insurance.
Other Potential Effects. Lowering the prices paid by commercial insurers would have other effects as well, such as reducing income for some providers and improving financial outcomes for people with commercial health insurance. It could also result in decreases in some aspects of the quality of health care and patients’ access to care.