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Overview of Health Care Financing

by Amal Trivedi, MD, MPH

Health care in the US is technologically advanced but expensive, costing about $2.6 trillion dollars in 2010. For decades, health care spending in the US has increased more than the rate of growth for the overall economy; it increased from about 6% of the gross domestic product (GDP) in the 1960s to 17.6% in 2010. The percentage of GDP spent on health care in the US is significantly higher than that in any other nation. The next highest are 12% for the Netherlands, 11.6% for France and Germany, and 11.4% for Switzerland and Canada.

Also, the amount of money spent per capita on health care in relation to GDP per capita is also higher than that in other countries (see see Figure: 2009 health care spending per capita compared with gross domestic product (GDP) per capita.). The absolute amount and the rate of increase in the US are widely regarded as unsustainable. Consequently, US health care is currently in flux, as the government attempts to find ways to provide universal health care and reduce its costs.

The US spends $8,233/yr per capita, which is 2 1/2 times more than the Organization for Economic Cooperation and Development (OECD) average health expenditure per person and twice as much as that of relatively wealthy European countries such as France, Sweden, and the United Kingdom.

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

Dollar values are expressed as purchasing parity power in dollars (PPP$), which adjusts for the differences in purchasing power of different currencies for real goods and services. The data points in the graph represent 24 developed countries from the Organization for Economic Cooperation and Development (OECD). Health care spending per capita varies greatly among these countries. But there is a strong linear relationship between the ability to pay (GDP per capita) and per capita spending, except for the US outlier.

The US spends so much more than other countries partly because of the following:

  • More widespread use of costly equipment and procedures

  • Higher costs for the same goods and services

  • Higher administrative costs

Adapted from Organization for Economic Cooperation and Development (OECD) Health at a Glance 2011: Why is health spending in the United States so high? Available at OECD Health at a Glance 2011 . Accessed April 15, 2013.

Consequences of increased US spending on health care include the following:

  • Increased government spending (resulting in higher national debt, decreased funding for other programs, or both)

  • Slowed growth or a real decline in workers’ earnings due to higher payments for health insurance premiums

  • Increased costs to employers (resulting in increased product cost and movement of jobs to countries with lower health care costs)

  • Increased numbers of people without health insurance (resulting in large increases in uncompensated health care, shifting of cost burden, and poor health outcomes)

Even though US health care spending per capita is the highest in the world, about 48 million people in the US do not have health insurance, whereas other developed countries, despite lower per capita expenditures, ensure universal access to health care. Furthermore, the high spending may not lead to correspondingly superior outcomes; the US ranks comparatively low on many health care outcome measures, such as the following:

  • Infant mortality: 27th

  • Life expectancy at birth: 29th for males and 28th for females

  • Healthy life expectancy: 24th

Funding

Health care providers in the US are paid by the following:

  • Private insurance

  • Government insurance programs

  • Individual 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 is purchased from for-profit and not-for-profit insurance companies, which are accredited separately in each state. Although there are many health insurance companies in the US, a given state tends to have a limited number.

Most private insurance is purchased by corporations as a benefit for employees. Premiums are typically shared by employers and employees. But because the cost of employer-provided health insurance is not considered taxable income for the employee, the government in effect provides some subsidization.

People may also purchase private health insurance themselves. However, unlike in employer-provided policies, applicants for privately purchased policies typically undergo extensive evaluation (underwriting) to identify and reject applicants likely to require costly care, including those with preexisting conditions or a high likelihood of developing 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, partly because individual purchasers do not have the negotiating power and ability to pool risk that large groups do and partly because administrative costs of writing and managing numerous separate policies are higher.

Private insurance in the US typically has high overhead. In many cases, about 20 to 30% of premiums are spent on administrative costs, compared with about 2% in the government Medicare program.

The Patient Protection and Affordable Care Act (PPACA, or Affordable Care Act [ACA]) is US health care reform legislation intended, among other things, to increase the availability, affordability, and use of health insurance. Many of the ACA's provisions involve an expansion of the private insurance market; it creates incentives for employers to provide health insurance and mandates that nearly all individuals not covered by their employer or a government insurance program (eg, Medicare, Medicaid) purchase private health insurance (individual mandate). To enable risk pooling and minimize overhead, the ACA requires creation of health insurance exchanges within each state. These exchanges are government-regulated, standardized health plans that are administered and sold by private insurance companies. States may join together to run multistate exchanges. The federal government may establish exchanges in states that do not do so themselves. There will be separate exchanges for individuals and small businesses. To qualify for listing on an exchange, a plan must provide a defined minimum level of coverage (as well as higher levels of coverage). Subsidies may be available to individuals on a sliding scale depending on income.

The ACA requires that private insurance plans, including those available on the exchanges, 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 main government insurance programs include

  • Medicare (see Medicare), which funds the elderly, the disabled, and people receiving long-term dialysis therapy

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

Other government programs include

  • State Children’s Health Insurance Program, which provides matching federal funds to states for health insurance for families with children and which was designed to help ensure coverage for uninsured children when family income was below average but too high to qualify for Medicaid

  • Tricare, which covers about 9 million active duty and retired military personnel and their families (some Tricare subscribers use government-provided care)

  • Veterans Health Administration (VHA), which is a government-operated health care system that provides comprehensive health services to eligible military veterans (about 8 million veterans are enrolled)

  • Indian Health Service, which is a system of government hospitals and clinics providing 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. The ACA expands the eligibility criteria for Medicaid and provides federal funding assistance to state Medicaid programs. However, states cannot be penalized for not complying with the new criteria, so it is uncertain how many additional people will be enrolled.

Out of pocket

People pay for care not covered by other sources out of their own funds, often using their savings for small expenditures and borrowing (including using credit cards) for large expenditures.

Flexible spending accounts (FSAs) 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 any unused money is forfeited at the end of the year.

Health savings accounts (HSAs) can also be used to pay out-of-pocket expenses; these accounts earn interest, and unused balances need not be forfeited. Most people who are eligible for these accounts are eligible because their health insurance plans limit their reimbursements enough to be classified as high-deductible health plans.

About 17% of health care costs in the US are funded out-of-pocket. Charges for health care services tend to be much larger for individuals than for large payors such as insurance companies that can negotiate discounts. Thus, individuals paying out-of-pocket charges that are not covered by insurance can have particularly large bills; these bills may be so large that expecting an individual to pay them is unrealistic. Out-of-pocket expenditures for health care contribute significantly to a large number of bankruptcies in the US.

The ACA requires that nearly all individuals have some type of health insurance coverage. However, the penalties for no doing so are only financial and are less costly than purchasing health insurance, so a significant number of individuals are thought likely to remain uncovered and to continue to pay out of pocket for health care.

Key Points

  • Costs of health care are much higher in the US than in other countries, but the US still ranks low on important outcome measures such as infant mortality and life expectancy.

  • Health care is paid for by government programs (eg, Medicare, Medicaid), private health insurance plans (usually through employers), and personal funds (out-of-pocket).

  • By not taxing employer-paid health insurance or money in flexible spending or health savings accounts, the government subsidizes private health insurance to some extent.

Resources In This Article

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