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Overview of Health Care Financing


Roger I. Schreck

, MD, Merck Manual

Last full review/revision Mar 2020| Content last modified Mar 2020

Taking the cost of health care into account is an important part of health care planning.

  • 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 are regarded by many as unsustainable.

  • 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 $3.6 trillion dollars in 2018 (1 References Taking the cost of health care into account is an important part of health care planning. Costs of health care are higher in the United States than in other countries and put a strain on the... read more ). The amount of money spent per person on health care is higher in the United States than in other countries. Also, in the United States, the percentage of gross domestic product (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 2018 the United States spent 16.9% of GDP on health care compared to the next highest countries, including Switzerland (12.2% of GDP) and France, Germany, Sweden, and Japan (each about 11%), while the average of the 35 OECD countries (OECD35) was 8.8% (2 References Taking the cost of health care into account is an important part of health care planning. Costs of health care are higher in the United States than in other countries and put a strain on the... read more ).

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, people 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. The number of uninsured people has dropped due to the Affordable Care Act Private insurance Taking the cost of health care into account is an important part of health care planning. Costs of health care are higher in the United States than in other countries and put a strain on the... read more (ACA), which became effective in 2014, but recent changes to the ACA, including an end to the individual mandate in 2019 (requirement that U.S. residents purchase health insurance) may reverse this trend. In contrast, other developed countries provide universal access to health care, even though they spend less.

Thus, health care spending in the United States is currently in flux, as the government attempts to find ways to increase the number of people with health insurance and reduce its costs.


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 (see also the U.S. Department of Health & Human Services ACA official site). Many of the ACA's provisions involve an expansion of the private insurance market. It creates incentives for employers to provide health insurance and originally required 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). Changes to the ACA ended the individual mandate in 2019.

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

  • 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 (based on an individual's or family's income)

  • 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

Recent and impending changes that will affect the ACA include:

  • Stopping government funding of premium tax credits and cost-sharing reductions

  • Expansion of association health plans (AHPs) and health reimbursement arrangements (HRAs), which are less expensive and less comprehensive than ACA marketplace plans

  • Reduced regulatory burden imposed by the Notice of Benefit and Payment Parameters (NBPP), which will give states more leeway in defining essential health benefits

  • Repeal of the individual mandate

These changes are intended to reduce government and individual spending on health plans, but some authors warn that overall spending on health care may not be reduced and that there may be increased numbers of uninsured or inadequately insured people.

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 (see also

  • Children and Youth with Special Health Care Needs: This program coordinates funding and resources to provide care to people with special health needs (see also Children with Special Health Care Needs—Maternal and Child Health Bureau's of the Health Resources & Services Administration)

  • Tricare: This program covers about 9 million active duty and retired military personnel and their families (see also TRICARE—Defense Health Agency (DHA), a component of the Military Health System).

  • Veterans Health Administration (VHA): This government-operated health care system provides comprehensive health services to eligible military veterans. About 9 million veterans are enrolled (see also Veterans Health Administration—U.S. Department of Veterans Affairs).

  • 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 (see also Indian Health Service—The Federal Health Program for American Indians and Alaska Natives).

  • The Federal Employee Health Benefits (FEHB) Program: This program allows private insurers to offer insurance plans within guidelines set by the government, for the benefit of active and retired federal employees and their survivors (see also The Federal Employees Health Benefits (FEHB) Program—U.S. Office of Personnel Management).

  • Substance Abuse and Mental Health Services Administration (SAMHSA): This agency within the U.S. Department of Health & Human Services leads public health efforts to advance the nation's behavioral health (see also

  • Refugee Health Promotion Program: This program provides short-term health insurance to newly arrived refugees (see also Refugee Health Promotion Program (RHP)—U.S. Department of Health and Human Services Administration for Children & Families Office of Refugee Resettlement).

Overall, about 35% 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.

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