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Overview of Health Care Financing

By

Roger I. Schreck

, MD

Last full review/revision Dec 2019| Content last modified Dec 2019
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Health care in the US is technologically advanced but expensive, costing about $3.6 trillion in 2018, which was 16.9% of gross domestic product (GDP) (1). This percentage is significantly higher than in any other nation. According to the Organization for Economic Cooperation and Development (OECD), in 2018 the next highest spending countries were 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).

The absolute amount and the rate of increase of health care spending in the US are widely regarded as unsustainable. 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)

Even though US health care spending per capita is the highest in the world, many people in the US do not have health insurance, whereas other developed countries, despite lower per capita expenditures, ensure universal access to health care. An estimated decrease in uninsured people in the US (from 48.6 million in 2010 down to 29.3 million in 2017) has been attributed to the Affordable Care Act (ACA) (3); however, recent changes to the ACA may be reversing this trend. In 2019, the US Census Bureau reported that 27.5 million people (8.5% of the population) were uninsured in 2018, an increase from 25.6 million (7.9%) in 2017, with public coverage decreasing 0.4% and private coverage remaining statistically unchanged (4). The Congressional Budget Office has estimated that the 2019 elimination of the ACA individual mandate penalty (tax penalty on US residents who do not purchase health insurance) will increase the number of uninsured by 13 million and reduce federal deficits by $338 billion by 2027 (5).

Thus, US health care spending remains in flux, as the government again struggles to find responsible ways to reduce health care costs.

References

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.

The Patient Protection and Affordable Care Act (PPACA, or Affordable Care Act [ACA]) of 2010 (implemented in 2014) is US health care reform legislation intended, among other things, to increase the availability, affordability, and use of 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 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 are separate exchanges for individuals and small businesses. To qualify for listing on an exchange, a plan must provide a defined minimum level of essential coverage plus coverage for birth control and breast feeding. 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

  • 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

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 expected to be less expensive and are 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 reduced spending may not result, while increased numbers of uninsured or inadequately insured people may result.

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 when family income was below average but too high to qualify for Medicaid (see also InsuredKidsNow.gov)

  • 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 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. However, it is still not yet clear how widely available states will make Medicaid and, thus, 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 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, 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), 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.

  • US health care is currently in flux, as the government attempts to find ways to provide universal health care and reduce its costs.

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NOTE: This is the Professional Version. CONSUMERS: Click here for the Consumer Version
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