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Overview of Health Care Financing

By

Roger I. Schreck

, MD, The Manuals

Last full review/revision Dec 2021| Content last modified Dec 2021
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Health care in the US is technologically advanced but expensive, costing about $3.8 trillion ($11,582 per capita) in 2019, which was 17.7% of gross domestic product (GDP) and an annual increase of 4.6% (1 General references Health care in the US is technologically advanced but expensive, costing about $3.8 trillion ($11,582 per capita) in 2019, which was 17.7% of gross domestic product (GDP) and an annual increase... read more ). This expense is significantly higher than in any other nation. According to the Organization for Economic Cooperation and Development (OECD), the next highest spending country was Germany (about 12% of its GDP), while the average of the OECD countries was 9.1%. Costs per capita were next highest in Switzerland ($7,138), while the average of the OECD countries was $4,413 (2 General references Health care in the US is technologically advanced but expensive, costing about $3.8 trillion ($11,582 per capita) in 2019, which was 17.7% of gross domestic product (GDP) and an annual increase... read more ).

Consequences of increased US health care costs include the following:

  • Increased government spending (which may result 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 (which may result in increased product cost and movement of jobs to countries with lower health care costs)

Even though US health care spending is the highest in the world, many people in the US do not have health insurance, whereas other developed countries, despite lower expenditures, ensure universal coverage. An estimated 40% decrease in uninsured people under age 65 years in the US (from 48.2 million in 2010 down to 28.2 million in 2016) has been attributed to the Affordable Care Act (ACA), particularly to its dependent coverage and Medicaid expansion provisions. However, subsequent changes to the ACA and Medicaid may be reversing this trend, reflected in a 14% increase of the uninsured to 32.8 million by 2019. In 2021, new changes were enacted to strengthen ACA and Medicaid policies and again help decrease the number of uninsured people in the US (3 General references Health care in the US is technologically advanced but expensive, costing about $3.8 trillion ($11,582 per capita) in 2019, which was 17.7% of gross domestic product (GDP) and an annual increase... read more ).

The absolute amount and the rate of increase of health care spending in the US are widely regarded as unsustainable, yet US health care spending continues to increase, and the number of uninsured people remains in flux.

General references

Health Care Funding

Health care providers in the US are reimbursed by the following payors:

  • Private insurance (33% share of total payments in 2019)

  • Government insurance programs (Medicare, 22%; Medicaid, 17%)

  • Individual out-of-pocket funds (11%)

  • Other sources (16%)

Other sources include government programs that directly provide health care in government hospitals and clinics staffed by government employees (eg, the Veteran’s Health Administration and the Indian Health Service) and other public and private programs (eg, Children's Health Insurance Program and workers' compensation) (1 Funding references Health care in the US is technologically advanced but expensive, costing about $3.8 trillion ($11,582 per capita) in 2019, which was 17.7% of gross domestic product (GDP) and an annual increase... read more ).

The payors are themselves funded (sponsored) by the government (45%: 29% federal, 16% state and local), households (28%), private businesses (ie, employers, 19%), and other private sources (7%) (2 Funding references Health care in the US is technologically advanced but expensive, costing about $3.8 trillion ($11,582 per capita) in 2019, which was 17.7% of gross domestic product (GDP) and an annual increase... read more ).

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 businesses 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.

The Affordable Care Act (ACA) (also known as the Patient Protection and Affordable Care Act of 2010, implemented in 2014) is US health care reform legislation intended to increase the availability, affordability, and use of health insurance and to establish minimum standards of quality for health insurance (see US Department of Health and Human Services ACA information). Many of the ACA's provisions involve an expansion of the private insurance market; it creates incentives for employers to provide health insurance, and it mandates that nearly all individuals not covered by their employer or a government insurance program (eg, Medicare, Medicaid) purchase private health insurance (individual mandate). Subsidies (in the form of tax credits) may be available to individuals on a sliding scale depending on income.

To enable risk pooling and minimize overhead, the ACA requires creation of health insurance exchanges (marketplaces) within each state. These exchanges offer 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 are separate exchanges for individuals and small businesses. To qualify for listing on an exchange, a plan must provide a defined minimum essential coverage plus coverage for birth control and breastfeeding (see Healthcare.gov: What Marketplace health insurance plans cover).

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

  • 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)

  • Put a maximum limit on annual out-of-pocket expenses

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

  • Cover certain defined preventive services with no cost-sharing

  • Spend at least 80% of premiums on medical costs (85% for group coverage of > 50 employees)

Government insurance and assistance programs

The main government insurance programs include

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 whose family income was below average but too high to qualify for Medicaid (see also Healthcare.gov: The Children's Health Insurance Program (CHIP))

  • Children and Youth with Special Health Care Needs, which coordinates funding and resources across diagnoses to provide care to people with special health needs (see also Children with Special Health Care Needs [CSHCN]—official website of the Maternal and Child Health Bureau's of the Health Resources & Services Administration)

  • Tricare, which covers about 9 million active duty and retired military personnel and their families (almost 9.5 million Tricare subscribers use government-provided care) (see also TRICARE—official website of the Defense Health Agency, a component of the Military Health System)

  • Veterans Health Administration (VHA), which is a government-operated health care system that provides comprehensive health services to eligible military veterans (about 9 million veterans are enrolled) (see also Veterans Health Administration—official website of the US Department of Veterans Affairs)

  • Indian Health Service, which is a system of government hospitals and clinics providing health services to about 2.6 million American Indians and Alaskan natives living on or near a reservation (see also Indian Health Service—official website of the Federal Health Program for American Indians and Alaska Natives)

  • The Federal Employee Health Benefits (FEHB) Program, which 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—US Office of Personnel Management)

  • Substance Abuse and Mental Health Services Administration (SAMHSA)—Agency within the US Department of Health and Human Services that leads public health efforts to advance the nation's behavioral health

  • Refugee Health Promotion Program, which provides short-term health insurance to newly arrived refugees (see also Refugee Health Promotion Program (RHP)—official website of the US 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. The ACA expands the eligibility criteria for Medicaid and provides federal funding assistance to state Medicaid programs to encourage states to make Medicaid more available and enroll additional people.

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. If any money is unused at the end of the year, the balance may be spent over a 2.5-month grace period, or up to $550 of it may be carried over into the next year (these restrictions have been temporarily stayed until 2023, at the discretion of the employer).

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.

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.

Funding references

Key Points

  • Health care spending is much higher in the US than in other countries, yet many people in the US lack health insurance and thus cannot access health care.

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

  • The Affordable Care Act seeks to increase access to health care by expanding the availability of health insurance and establishing minimum essential standards of coverage.

  • US health care costs continue to increase annually.

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