Paragon Pics

They say a picture is worth a thousand words. Well, data visualization is worth at least that much. Paragon Pic makes health policy easier to see and understand by demonstrating with images what researchers would normally try to explain with a lecture or text. Check for a new figure every week.

Medicare’s Growing Costs Are Outpacing Dedicated Revenue Sources, Adding to the National Debt

Medicare is on a fiscally unsustainable trajectory. Policy experts rightly point out that the looming insolvency of Medicare’s Part A hospital insurance program risks sudden and sizeable cuts to benefit payments. But Medicare’s overall finances are much more precarious than the trust fund insolvency date suggests. Medicare’s rising costs are the number one programmatic factor driving unsustainable federal deficits and debt.

This week’s Paragon Pic shows that spending on every Medicare component is rising. Overall expenditures are outpacing Medicare’s dedicated sources of funding, mainly payroll tax receipts for Part A and beneficiary premium payments for the other parts.

The fastest growing part of Medicare is the Part B program, which mostly covers outpatient and clinician services. According to the Medicare trustees, Part B payments grew by 82 percent between 2013 and 2022. During that time, Part A payments grew by about 40 percent – less than half as much. Part B represented 48 percent of total Medicare expenditures in 2022.

Part B’s relatively high growth is due to several factors. On the positive side, medical innovations are allowing more services to shift from inpatient settings to lower-cost and lower-acuity ones like outpatient departments, ambulatory surgical centers, and physician offices.

On the negative side, excessive payments for certain services – such as outpatient hospital services and drugs – are also driving spending in this area. Between 2013 and 2022, Part B spending grew by 90 percent for hospital services and 113 percent for drugs, according to the trustees. This growth partly results from bad incentives created by misguided payment policies. For example, Medicare pays for routine services at a significantly higher rate when they are delivered in a hospital than when they are delivered in a physician’s office. It also pays an average of 48 percent above the maximum acquisition cost for drugs that hospitals acquire at a discount through the 340B program.

Part B does not face the same insolvency threat as Part A because most Part B funding comes from general revenue transfers rather than Medicare payroll taxes. (See this Paragon brief for an explainer of Medicare’s financing.) Every dollar spent on overpriced care in Part B is a dollar that cannot be spent on other public priorities – and another dollar added directly to federal deficits and debt.

Even without an insolvency date, the fiscal reality will make it more difficult to preserve Medicare benefits for future generations without crippling taxes. And by overpaying for certain outpatient services and drugs, Medicare significantly distorts the entire health care system today.

Physician, NP, and PA Growth Has Significantly Outpaced Population Growth

This week’s Paragon Pic shows, contrary to popular belief, that the United States has more physicians per 10,000 people today than it has ever had. In addition, U.S. patients now have the benefit of the nearly 600,000 currently practicing nurse practitioners (NPs) and physician assistants (PAs). Overall, the number of these health professionals per 10,000 people more than doubled between 1980 and 2020—from 21.4 per 10,000 to 44.4 per 10,000. Roughly 43.6% of that increase was from the growth in physicians and about 56.4% of that increase was from the growth of NPs and PAs, two classes of professionals that were largely nonexistent in 1980.

This figure was adopted from Paragon’s paper, “Where are Provider Shortages? Reassessing Outdated Methodologies,” authored by Bill Finerfrock, an expert on rural health issues. In the paper, Bill discusses how the current way that the federal government defines health provider shortage areas is based on the 1970s workforce. It fails to include NPs and PAs in the methodology for evaluating shortages even though they have rapidly grown in number since then. Bill recommends several changes to the methodology, including the incorporation of NPs and PAs in the provider-to-population ratio so that federal resources would be better directed to areas of the country where there are actually provider shortages.

Arbitration Flood: Number of Payment Disputes 14 Times Above Projections

The No Surprises Act, legislation enacted to cure surprise medical bills, is not working as intended and is likely raising health care expenditures. Understandably, Congress wanted to protect insured patients from excessive costs in two situations: 1) in medical emergencies and 2) when they go to in-network facilities but receive treatment from a provider who is out of their network. In both cases, Congress limited patient cost-sharing to no more than they would owe for receiving in-network services.

Rather than leaving insurers and providers to settle on the price for services in which there was no prior contractual arrangement, Congress opted for an arbitration system—so-called independent dispute resolution (IDR). This led to the creation of a new bureaucracy through the Department of Health and Human Services in which the federal government is now a party to resolve payment disputes.

As the figure below shows, there has been a flood of cases submitted to IDR. Here is HHS’s own description:

In the first year … disputing parties submitted 14 times the number of disputes that the Departments had expected to receive in an entire calendar year. Due to this unexpectedly high volume, the limited number of certified IDR entities, the complexity of determining disputes’ eligibility for the Federal IDR process, and a large number of ineligible disputes submitted, it is taking certified IDR entities longer than the timeframes established … to process payment disputes.

In addition to an overwhelming flood of cases, the selected prices are much higher than expected. According to a new Brookings Institution review, the median IDR decision is nearly 4 times what Medicare would pay and the median decision is at least 50% higher than historical mean in-network commercial prices.

Unfortunately, much of what the federal government does in health policy does not work as politicians intend—almost always to the detriment of American families. It appears that The No Surprises Act is no exception. Early evidence shows it will increase what Americans pay for health care, largely through higher insurance premiums, while adding additional administrative complexity to an already too complicated payment system.

ACA & HRSA Rulemaking Ignites Unprecedented 340B Contract Pharmacy Growth

The 340B Drug Pricing Program started as a small program in 1992 to better enable safety-net hospitals and other 340B covered entities (CEs) to provide care to more indigent patients by mandating that pharmaceutical manufacturers give the CEs large discounts on prescription drugs. CEs like qualifying hospitals were allowed only one off-site contract pharmacy in case they did not have an on-site pharmacy. A 340B contract pharmacy is a pharmacy that has entered into a written agreement with a 340B CE to dispense discounted drugs to eligible patients on behalf of the CE, such as retail or specialty pharmacies.

340B Growth

Explosive growth from the Affordable Care Act and an Obama administration rule implementing it have caused the 340B Program to become the second-largest drug program in the country behind Medicare Part D.

Starting in 2010, CEs were permitted to have virtually unlimited numbers of contract pharmacies, resulting in a nearly exponential increase in contract pharmacies in the program. As shown in the Paragon Pic, the number of contract pharmacies increased from 503 in 2010 to 34,840 in 2024 – a whopping 6,826 percent increase.

According to the Pioneer Institute, hospitals used 17,250 contract pharmacies in 2024, up from 76 in 2010. By comparison, the number of CEs more than tripled from 3,866 in 2010 to 12,279 in 2024. Accordingly, as the Paragon Pic demonstrates, the ratio of contract pharmacies to CEs has substantially increased.

Lack of Transparency

The contract pharmacy surge also correlates with a major increase in the program’s cost (as measured in purchases at discounted 340B prices)—from $9.0 billion in 2014 to $53.7 billion in 2022. Despite the increased number of contract pharmacies that are helping CEs bring in record revenue, it is unclear if this revenue is being used to support the program’s original intent due to lack of transparency requirements.

As a 2014 report from the Government Accountability Office notes: “without adequate oversight, the complications created by contract pharmacy arrangements may introduce vulnerabilities in the 340B Program.” Moreover, although the purpose of the 340B Program is to support safety-net providers, increasing evidence suggests that the opposite is occurring. A 2022 JAMA paper found that “contract pharmacy growth was concentrated in affluent and predominantly White neighborhoods, whereas the share of 340B pharmacies in socioeconomically disadvantaged and primarily non-Hispanic Black and Hispanic/Latino neighborhoods declined.”

In 2024, Over Half of Exchange Enrollees Have Income Below 150% of the Federal Poverty Level

Most exchange enrollment is now driven by enrollees choosing plans where taxpayers bear the entire cost, according to new data released last week by the Centers for Medicare and Medicaid Services. As is increasingly clear, the Affordable Care Act (ACA) is more a welfare program that transfers income than a health care program that benefits the middle class. According to CBO, federal subsidies—largely directly deposited into health insurers’ coffers —through the ACA totaled $218 billion in 2023. The vast majority of this was for Medicaid expansion and massive subsidies for people earning less than 150 percent of the federal poverty level (FPL).

The American Rescue Plan Act of 2021 significantly increased premium subsidies to insurers. The subsidy amount limits the premium people must pay for a benchmark plan (the second lowest-cost silver plan), although the subsidy can be applied to any plan. The subsidies are larger for lower-income people. People below 150 percent of the FPL also pay virtually no cost-sharing, including a de minimis deductible, if they select a silver plan.

As a result of ARPA, individuals making under 150 percent of the FPL now pay no premium for a benchmark plan, whereas previously, they had to contribute 2 to 4 percent of their income. These increased subsidies substantially increased exchange enrollment. The Paragon pic below shows that new enrollment is coming from people who now pay nothing for coverage because taxpayers foot the entire bill.

In 2019, roughly 35 percent of people who selected a plan during open enrollment had income below 150 percent of the FPL. In 2024, this population accounted for 53 percent of enrollment.

Prior to ARPA, many people below 150 percent of FPL were unwilling to pay the $25 or less per month required to enroll in an ACA plan—a strong sign that they just don’t place much value on the coverage and that the main beneficiaries of the enhanced subsidies are health insurers. As last week’s Paragon pic demonstrated, health insurers’ profits have soared over the past few years with the large ACA subsidies.

Insurer Stock Prices Soaring After Giant ACA Subsidies

As we approach the 14-year anniversary of the Affordable Care Act, the law is quite different from what Congress originally enacted and has turned out to be enormously profitable to the health care industry, particularly insurers. Major subsidies to insurers, such as the law’s Medicaid expansion and premium tax credits for exchange plans, are significantly growing while the major provisions that they disliked—the Cadillac tax, the health insurance tax, and the Independent Payment Advisory Board—have been repealed.

In fiscal year 2023, federal subsidies through the ACA Medicaid expansion and the exchanges, which almost all flowed to insurers, totaled $218 billion. About half of all health care spending and the majority of health insurer revenue now comes directly from the government. While private health insurance can provide financial protection and manage risk, the design of the ACA has led to inflationary premiums and spending, often with little value to patients, and has led the industry to be even more reliant on government.

As the Paragon Pic shows, the weighted average of health insurer stock prices are up 1,032 percent from 2010, when the ACA was enacted, and 448 percent from 2013, the year before implementation of the ACA’s key provisions. By comparison, the average respective growth of the most popular S&P 500 exchange-traded fund (ETF) was 251 percent and 139 percent. ETFs are actively-traded funds that own a basket of securities. They often try to track the financial performance of an index, such as the S&P 500 or a specific sector of the economy.

The figure shows the trends over time for the S&P 500 ETF (navy blue), a general health care ETF (light blue), a general insurance ETF (gray), and a market value-weighted group of health insurer stocks compiled by Paragon (orange). Generally, the four industry categories tracked each other closely prior to the ACA taking effect. However, a large divergence appeared once the ACA was implemented, with the health care fund, and particularly the group of health insurer stocks, surging.

Insurers getting windfalls from the ACA’s Medicaid expansion

The ACA’s Medicaid expansion has produced a windfall for health insurers, with federal spending on expansion enrollees equal to $126 billion in 2023 per CBO (the state share would add about another $13 billion). Through the ACA, the federal government pays nearly the entire cost of Medicaid expansion enrollees, and most enrollees are covered by Medicaid managed care, where insurers provide coverage. Since states are almost entirely using federal dollars, they set very high payment rates to insurers for Medicaid expansion enrollees. In inflation-adjusted dollars, Medicaid spending on insurers more than quadrupled from 2010 to 2021. Insurers have also benefited from porous state eligibility determinations that have led to millions of people being placed in a Medicaid managed care plan who are not eligible or without proper eligibility reviews.

Here’s how the Los Angeles Times put it: “Medicaid is rarely associated with getting rich….But some insurance companies are reaping spectacular profits off the taxpayer-funded program in California, even when the state finds that patient care is subpar.”

The main insurers that participate in Medicaid managed care—Molina and Centene—have experienced very large upswings in their stock prices between January 2013 and 2024. Molina is up more than 1,000 percent, and Centene is up more than 425 percent.

Insurers reaping benefits of massive subsidies through the ACA exchanges

The ACA created large subsidies that insurers receive on behalf of most people who enroll in an exchange plan. In essence, the ACA turned the unsubsidized individual market into a market with much higher premiums that people typically need massive subsidies to afford. These subsidies give insurers significant pricing power as the burden of premium increases over time is almost entirely borne by taxpayers. CBO estimates these subsidies equaled $92 billion in 2023. President Biden signed legislation that significantly expanded these subsidies, essentially creating zero-premium plans for many enrollees and making the subsidies available to some households that earn in the top 5 percent of all household income.

Government will continue to subsidize health care for lower-income Americans, but the ACA subsidies need reforms that limit open-ended government commitments and reduce insurers’ substantial pricing power. Reforms, such as Paragon’s HSA option proposal, should also aim to directly assist the individual to enable them to purchase the care that best meets their needs and so providers better meet the demands of patients, rather than those of third-parties.

Before Biden Obama Trump Health Savings Paragon Pic V4

Before Biden, Recent White House Budgets Included Health Savings

On March 11^th, President Biden released the final budget request of his term. These annual White House budgets include a policy wish list that can provide important insight into an administration’s priorities. Unsurprisingly, the Biden budgets have envisioned major expansions of federal health programs. But what is unusual about them is that their proposed health savings do not offset new health spending. As a result, the Biden budgets have federal health care spending increasingly crowding out other public priorities and gobbling up economic output.

Every budget released under the Trump administration and President Obama’s second term included net savings to federal health programs managed by the Department of Health and Human Services. The Obama budgets proposed Medicare savings, with a portion of those savings often redirected to Medicaid and CHIP. The Trump budgets proposed savings in major federal health programs, with the most significant reforms being to Medicaid and Affordable Care Act (ACA) subsidies to health insurers.

By contrast, the Biden budgets exacerbate the already unsustainable fiscal trajectory of federal health programs. The latest budget would increase such spending by about $390 billion over 10 years. While most of President Biden’s budgets proposed some savings to Medicare (largely by expanding Medicare price controls on drugs), those are more than offset by increased spending on Medicaid, ACA subsidies to insurers, and other areas.

White House budgets have significant leeway on what policies they can include and how they estimate their fiscal impacts, so it is notable that the Biden administration has identified relatively few areas worth trying to pare back spending – it does not even include policies with past bipartisan agreement between the Obama and Trump administrations, such as site neutral payments in Medicare.

Along with interest payments on the debt, health care programs are the fastest growing component of federal spending. With proposals that increase federal health program costs, the president is laying out an agenda for higher future taxes, inflation, and interest rates.

ACA and IRA Both Targeted Medicare Spending

At last year’s State of the Union, President Biden declared “if anyone tries to cut Medicare, we’re going to stop it.” A spirited back-of-forth with members of both parties seemed to confirm that such policies were off the table.

But legislation signed when Biden was president and vice president significantly reduced projected Medicare spending.

The Affordable Care Act signed into law by President Obama in 2010 contained changes to Medicare that reduced payments to Medicare Advantage plans and health care providers. The ACA used these Medicare savings to significantly expand Medicaid and finance new subsidies for people who obtain health insurance through exchanges. When the ACA was enacted, CBO estimated the law would reduce Medicare spending by $450 billion over the first decade. By 2015, CBO estimated that the law would reduce Medicare spending by $800 billion.

The Inflation Reduction Act signed into law by President Biden in 2021 also contained significant Medicare payment reductions for prescription drugs. The IRA used a significant portion of these savings on a variety of new government programs, including green energy subsidies. When the IRA was enacted, CBO estimated the law would reduce Medicare spending by $240 billion over the first decade.

Medicare is on an unsustainable financial trajectory and needs to be reformed in ways that improve the efficiency of the program. Making Medicare more efficient is important to extend the life of the Part A trust fund and contain costs for enrollees and taxpayers, but savings from Medicare payment reductions have often been used to expand other government programs. Last month, Paragon put out a thoughtful, targeted package of policies that would improve the Medicare Advantage program while saving taxpayers an estimated $250 billion in the process. Last year, Paragon released a menu of health policies that would reduce inefficient government health care expenditures, including more than $500 billion in Medicare savings that have attracted bipartisan support and would not reduce benefits.

Medicare Advantage Plans Typically Cover Benefits Below Traditional Medicare Costs

Medicare Advantage (MA) plans receive payments from the government to provide health care coverage for their enrollees. These payments are calculated using a complex bidding process. Data from these bids suggest that MA plans are usually more efficient than traditional fee-for-service (FFS) Medicare.

Each MA market area (usually a county) receives a “benchmark” that corresponds to the level of FFS spending in that area. There are four benchmark levels under current law: 95 percent, 100 percent, 107.5 percent, and 115 percent of FFS spending. The lowest quartile of counties in terms of FFS spending receives benchmarks of 115 percent, the second lowest quartile receives 107.5 percent, the second highest receives 100 percent, and the highest receives 95 percent.

Plans submit a “bid” that reflects the expected cost of covering Part A and Part B benefits. If a plan bids above its benchmark, then the government sets its payment at the benchmark and requires it to collect the difference through additional premiums. If a bid falls below the benchmark, the difference is split between the government and a “rebate” that the plan must use to reduce its premiums or provide supplemental benefits.

In 2023, bids were 83 percent of FFS costs on average. In each county quartile, bids at the 75^th percentile ranged from 79 to 93 percent of FFS costs—demonstrating that the vast majority of plans can deliver core Medicare benefits at significantly lower cost than FFS. These efficiencies present policymakers with an opportunity to achieve targeted savings in MA without compromising access to benefits or coverage options.

Capping MA benchmarks so that they cannot exceed 100 percent of FFS costs – at least in areas where access to MA coverage is not a concern – would pass along more savings to taxpayers. Most plans would continue receiving rebates to provide extra benefits. Paragon proposes to pair these changes with other policies to improve the accuracy of its benchmark calculations by using only cost data from individuals who .

Paragon Pics

340B Growth

Insurers getting windfalls from the ACA’s Medicaid expansion

Insurers reaping benefits of massive subsidies through the ACA exchanges

Reforming Government. Empowering Patients.