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Overview of Health Care Financing

By Amal Trivedi, MD, MPH, The Alpert Medical School of Brown University;Providence VA Medical Center

  • 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 $2.6 trillion dollars in 2010. For decades, the amount of money spent on health care has increased more than the overall economy has grown. For example, health care spending used to be only about 6% of the gross domestic product (GDP) in the 1960s, but in 2010, it increased to 17.6%. (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.) In the United States, the percentage of GDP spent on health care is substantially higher than that in any other nation. This percentage is

  • 12% in the Netherlands (the next highest)

  • 11.6% in France

  • 11.6% in Germany

  • 11.4% in Switzerland

  • 11.4% in Canada

  • 9.5% in Japan

Also, the amount of money spent per person on health care in relation to the GDP per person (the total GDP divided by the number of residents in a country) is also higher than that in other countries (see Figure: 2009 health care spending per person compared with gross domestic product (GDP) per person.).

The US spends $8233 per person for health care. This amount is twice as much as France spends, and France is generally thought to provide very good health services.

2009 health care spending per person compared with gross domestic product (GDP) per person.

Dollar values are expressed as purchasing parity power in dollars (PPP$). PPP$ adjusts for the differences in purchasing power of currencies in different countries. Each dot in the graph represents a different developed country. Health care spending per person varies greatly in these countries. But except for the United States, the gross domestic product (GDP) per person correlates with the amount spent on health care per person. (The GDP per person is the total market value of goods and services in a country divided by the number of that country's residents.)

The United States spends more partly because of the following:

  • Costly equipment and procedures are used more.

  • Costs for the same goods and services are higher.

  • Administrative costs are higher.

Adapted from Reinhardt UE: Why does US health care cost so much? (part I). Economix November 14, 2008. Available at Accessed January 20, 2010; used with permission.

Many experts think that the United States cannot continue to spend so much on health care, especially considering how quickly costs are increasing. Consequently, the government is in the process of changing health care and considering ways to provide universal health care and reduce health care costs.

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.

Even though the United States spends more on health care per person than any other country, about 48 million people in the US do not have health insurance. 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 the following:

  • Infant deaths: 30th (that is, 29 countries have a lower percentage)

  • Life expectancy at birth: 23rd for males and 25th for females

  • Likelihood of a healthy life: 24th


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. Because the government enables employees to spend less on health care, they may use health care services more. Some experts think this arrangement increases health care costs.

People may also purchase private health insurance themselves. Currently, unlike in employer-provided policies, privately purchased policies typically require applicants to be extensively evaluated. Insurance companies can then identify and reject applicants who are likely to require expensive care, including those who have certain preexisting disorders or who are likely to develop certain disorders. Many applicants are denied policies. Some cannot purchase private insurance at any price. For applicants who do qualify, costs can be much higher for a given policy than when it is purchased through a company or another large group. Part of the reason is high administrative costs, which often make up more than 30% of the total cost of health care.

The Affordable Care Act will prevent individual and group health insurance plans from denying coverage based on preexisting health conditions and from dropping coverage of people who have required costly care (termed rescission). The act will require companies to spend at least 80% of premium dollars on medical care (and not overhead). It will require people who do not have insurance coverage and who are not eligible for government insurance to purchase private insurance.

Government insurance programs

The largest government insurance programs include

  • Medicare (see Medicare), which funds health care for the elderly, the disabled, and people receiving long-term treatment with dialysis

  • Medicaid (see Medicaid ), which funds health care for certain people who are living below the poverty level and/or who have disabilities

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. Some Tricare subscribers use government-provided care.

  • Veterans Health Administration (VHA): This government-operated health care system provides comprehensive health services to eligible military veterans. About 8 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, it is lost.

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 plans. 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.

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* This is the Consumer Version. *