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Overview of Health Care Financing

By Amal Trivedi, MD, MPH, Associate Professor, Department of Health Services, Policy and Practice and Department of Medicine, Brown University

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  • Costs of health care are higher in the United States than in other countries and put a strain on the overall economy.

  • These higher costs do not necessarily translate into better health.

  • Health care is paid for by government programs (such as Medicare and Medicaid), private health insurance plans (usually through employers), and the person's own funds (out-of-pocket).

In the United States, health care is technologically advanced but expensive. Health care costs were about $3 trillion dollars in 2014 (1). For decades, the amount of money spent on health care has increased more than the overall economy has grown. In the United States, the percentage of GDP spent on health care is substantially higher than that in any other nation. (GDP is the total market value of goods and services produced within the borders of a country. It is the main measure used by government departments to monitor the economy in the short term.) According to the Organization for Economic Cooperation and Development (OECD), in 2013 the United States spent 16.4% of GDP on health care compared to around 11% for the next highest countries, including the Netherlands, Switzerland, Sweden, Germany, and France (2).

Also, the amount of money spent per person on health care is higher in the United States than that in other countries. In 2013, the United States spent more than $8700 per person for health care (3). This amount is twice as much as France spends, and France is generally thought to provide very good health services.

The high cost of health care can have several negative effects, including the following:

  • When the government spends more on health care, the national debt increases and/or funds available for other programs decrease.

  • When people spend more on health care, they have less money to spend for other things, and when health insurance is paid by their employer, they are paid less.

  • When employers spend more on health care, the costs of their products and services increase, and jobs may be moved to countries with lower health care costs.

  • More people cannot afford health care insurance. When people without health care insurance receive health care, they usually cannot pay for it. As a result, this care is paid for by other people who are paying into the health care system. Or, people without health care insurance may not seek care when they need it and thus develop a serious disorder that could have been prevented.

  • Medical bills that are not covered by health insurance can lead to bankruptcy.

Even though the United States spends more on health care per person than any other country, many people in the United States do not have health insurance, although the number of uninsured people is dropping due to the Affordable Care Act. In contrast, other developed countries provide universal access to health care, even though they spend less. In addition, the large amount spent may not result in better health. For example, the United States ranks comparatively low on many measures of health care's effectiveness, such as infant deaths and life expectancy at birth.

Reference

Health Care Funding

In the United States, health care providers (such as doctors and hospitals) are paid by the following:

  • Private insurance

  • Government insurance programs

  • People themselves (personal, out-of-pocket funds)

In addition, the government directly provides some health care in government hospitals and clinics staffed by government employees. Examples are the Veteran’s Health Administration and the Indian Health Service.

Private insurance

Private insurance can be purchased from for-profit and not-for-profit insurance companies. Although there are many health insurance companies in the United States, a given state tends to have a limited number.

Most private insurance is purchased by corporations as a benefit for employees. Costs are typically shared by employers and employees. The amount of money employers spend on an employee's health insurance is not considered taxable income for the employee. In effect, the government is subsidizing this insurance to some degree. People may also purchase private health insurance themselves.

The Patient Protection and Affordable Care Act (PPACA, or Affordable Care Act [ACA]), which became effective in 2014, is U.S. health care reform legislation intended, among other things, to increase the availability, affordability, and use of health insurance (www.hhs.gov/healthcare/rights/). Many of the ACA's provisions involve an expansion of the private insurance market. It creates incentives for employers to provide health insurance and requires that nearly all people not covered by their employer or a government insurance program (for example, Medicare or Medicaid) purchase private health insurance (individual mandate).

The ACA requires creation of health insurance exchanges, which are government-regulated, standardized health plans that are administered and sold by private insurance companies. Exchanges may be established within each state, or states may join together to run multistate exchanges. The federal government also may establish exchanges in states that do not do so themselves. There are separate exchanges for individuals and small businesses. The ACA requires that private insurance plans do the following:

  • Put no annual or lifetime limits on coverage

  • Have no exclusions for preexisting conditions (guaranteed issue)

  • Allow children to remain on their parent's health insurance up to age 26

  • Provide limited variations in price (premiums can vary based only on age, geographic area, tobacco use, and number of family members)

  • Allow for limited out-of-pocket expenses (currently $5950 for individuals and $11,900 for families)

  • Not discontinue coverage (called rescission) except in cases of fraud

  • Cover certain defined preventive services with no cost-sharing

  • Spend at least 80% to 85% of premiums on medical costs

Government insurance programs

The largest government insurance programs include

Other government programs include

  • State Children’s Health Insurance Program: This program was designed to help provide coverage for uninsured children when their family's income was below average but too high to qualify for Medicaid. The federal government provides matching funds to states for health insurance for these families.

  • Tricare: This program covers about 9 million active duty and retired military personnel and their families.

  • Veterans Health Administration (VHA): This government-operated health care system provides comprehensive health services to eligible military veterans. About 9 million veterans are enrolled.

  • Indian Health Service: This system of government hospitals and clinics provides health services to about 2 million American Indians and Alaskan natives living on or near a reservation.

Overall, about 30% of the population is covered by government insurance or government-provided care.

Out of pocket

When care is not covered by other sources, people pay out of their own funds. They often must use their savings to pay small bills and must borrow (including using credit cards) to pay large bills.

Flexible spending accounts are offered by some employers. Through these accounts, employees can choose to have a limited amount of money deducted from their paychecks to pay for out-of-pocket health care expenses. The money deducted is not subject to federal income taxes. However, the account does not earn interest, and if any money is unused at the end of the year, the employee does not get it back.

Health savings accounts can also be used to pay out-of-pocket expenses. These accounts earn interest, and any unused money is not lost. However, to be eligible to use a health savings account, people must have a health insurance plan that has lower premiums (the fee paid to have insurance) and higher deductibles (the fee paid each time a health service is used) than a traditional health plan. Such plans are called high-deductible health plans.

In the United States, about 17% of health care costs are paid for out-of-pocket. Having to pay for health care out-of-pocket contributes significantly to many bankruptcies in the United States.