Health care is not free. Someone must pay. But how? Does each person pay when receiving care? Do people contribute regular amounts in advance so that their care will be paid for when they need it? When a person contributes in advance, might the contribution be used for care given to someone else? If so, who should pay how much?
Health care financing in the United States evolved to its current state through a series of social interventions. Each intervention solved a problem but in turn created its own problems requiring further intervention. This chapter will discuss the historical process of the evolution of health care financing.
The four basic modes of paying for health care are out-of-pocket payment, individual private insurance, employment-based group private insurance, and government financing (Table 2–1). These four modes can be viewed both as a historical progression and as a categorization of current health care financing.
Table 2–1. Health care financing in 2009a
Fred Farmer broke his leg in 1911. His son ran 4 miles to get the doctor, who came to the farm to splint the leg. Fred gave the doctor a couple of chickens to pay for the visit. His great-grandson, Ted, who is uninsured, broke his leg in 2011. He was driven to the emergency room, where the physician ordered an x-ray and called in an orthopedist who placed a cast on the leg. The cost was $1800.
One hundred years ago, people like Fred Farmer paid physicians and other health care practitioners in cash or through barter. In the first half of the twentieth century, out-of-pocket cash payment was the most common method of reimbursement. This is the simplest mode of financing—direct purchase by the consumer of goods and services (Figure 2–1).
Figure 2–1. Out-of-pocket payment is made directly from patient to provider.
People in the United States purchase most consumer items, from DVD players to haircuts, through direct out-of-pocket payments. This is not the case with health care (Arrow, 1991; Evans, 1984), and one may ask why health care is not considered a typical consumer item.
Whereas a DVD player is considered a luxury, health care is regarded as a basic human need by most people.
For 2 weeks, Marina Perez has had vaginal bleeding and has felt dizzy. She has no insurance and is terrified that medical care might eat up her $500 in savings. She scrapes together $100 to see her doctor, who finds that her blood pressure falls to 90/50 mm Hg upon standing and that her hematocrit is 26%. The doctor calls Marina’s sister Juanita to drive her to the hospital. Marina gets into the car and tells Juanita to take her home.
If health care is a basic human right, then people who are unable to afford health care must have a payment mechanism available that is not reliant on out-of-pocket payments.
Whereas the purchase of a DVD player is a matter of choice and the price is known to the buyer, the need for and cost of health care services are unpredictable. Most people do not know if or when they may become severely ill or injured or what the cost of care will be.
Jake has a headache and visits the doctor, but he does not know whether the headache will cost $100 for a physician visit plus the price of a bottle of ibuprofen, $1000 for an MRI, or $100,000 for surgery and irradiation for brain cancer.
The unpredictability of many health care needs makes it difficult to plan for these expenses. The medical costs associated with serious illness or injury usually exceed a middle-class family’s savings.
Unlike the purchaser of a DVD player, a person in need of health care may have little knowledge of what he or she is buying at the time when care is needed.
Jenny develops acute abdominal pain and goes to the hospital to purchase a remedy for her pain. The physician tells her that she has acute cholecystitis or a perforated ulcer and recommends hospitalization, an abdominal CT scan, and upper endoscopic studies. Will Jenny, lying on a gurney in the emergency room and clutching her abdomen with one hand, use her other hand to leaf through a textbook of internal medicine to determine whether she really needs these services, and should she have brought along a copy of Consumer Reports to learn where to purchase them at the cheapest price?
Health care is the foremost example of asymmetry of information between providers and consumers (Evans, 1984). A patient with abdominal pain is in a poor position to question a physician who is ordering laboratory tests, x-rays, or surgery. When health care is elective, patients can weigh the pros and cons of different treatment options, but even so, recommendations may be filtered through the biases of the physician providing the information. Compared with the voluntary demand for DVD players (the influence of advertising notwithstanding) the demand for health services is partially involuntary and is often physician-rather than consumer-driven.
For these reasons among others, out-of-pocket payments are flawed as a dominant method of paying for health care services. Because the direct purchase of health services became increasingly difficult for consumers and was not meeting the needs of hospitals and physicians to be reliably paid, health insurance came into being.
Bud Carpenter is self-employed. He recently purchased a health insurance policy from his insurance broker for his family. To pay the $500 monthly premium, he had to work some extra jobs on weekends, and the $2500 deductible meant he would still have to pay quite a bit of his family’s medical costs out of pocket. Mr. Carpenter preferred to pay these costs rather than take the risk of spending the money saved for his children’s college education on a major illness. When his son became ill with leukemia and the hospital bill reached $80,000, Mr. Carpenter appreciated the value of health insurance. Nonetheless he had to feel disgruntled when he read a newspaper story listing his insurance company among those that paid out on average less than 60 cents for health services for every dollar collected in premiums.
With private health insurance, a third party, the insurer, is added to the patient and the health care provider, who are the two basic parties of the health care transaction. While the out-of-pocket mode of payment is limited to a single financial transaction, private insurance requires two transactions—a premium payment from the individual to an insurance plan (also called a health plan), and a reimbursement payment from the insurance plan to the provider (Figure 2–2). In nineteenth-century Europe, voluntary benefit funds were set up by guilds, industries, and mutual societies. In return for paying a monthly sum, people received assistance in case of illness. This early form of private health insurance was slow to develop in the United States. In the early twentieth century, European immigrants set up some small benevolent societies in US cities to provide sickness benefits for their members. During the same period, two commercial insurance companies, Metropolitan Life and Prudential, collected 10–25 cents per week from workers for life insurance policies that also paid for funerals and the expenses of a final illness. The policies were paid for by individuals on a weekly basis, so large numbers of insurance agents had to visit their clients to collect the premiums as soon after payday as possible. Because of the huge administrative costs, individual health insurance never became a dominant method of paying for health care (Starr, 1982). In 2009, individual policies provided health insurance for only 5% of the US population (see Table 2–1).
Figure 2—2. Individual private insurance. A third party, the insurance plan (health plan), is added, dividing payment into a financing component and a reimbursement component.
Betty Lerner and her schoolteacher colleagues each paid $6 per year to Prepaid Hospital in 1929. Ms. Lerner suffered a heart attack and was hospitalized at no cost. The following year Prepaid Hospital built a new wing and raised the teachers’ prepayment to $12.
Rose Riveter retired in 1961. Her health insurance premium for hospital and physician care, formerly paid by her employer, had been $25 per month. When she called the insurance company to obtain individual coverage, she was told that premiums at age 65 cost $70 per month. She could not afford the insurance and wondered what would happen if she became ill.
The development of private health insurance in the United States was impelled by the increasing effectiveness and rising costs of hospital care. Hospitals became places not only in which to die, but also in which to get well. However, many patients were unable to pay for hospital care, and this meant that hospitals were unable to attract “customers.”
In 1929, Baylor University Hospital agreed to provide up to 21 days of hospital care to 1500 Dallas school-teachers such as Betty Lerner if they paid the hospital $6 per person per year. As the Great Depression deepened and private hospital occupancy in 1931 fell to 62%, similar hospital-centered private insurance plans spread. These plans (anticipating health maintenance organizations [HMOs]) restricted care to a particular hospital. The American Hospital Association built on this prepayment movement and established statewide Blue Cross hospital insurance plans allowing free choice of hospital. By 1940, 39 Blue Cross plans controlled by the private hospital industry had enrolled over 6 million people. The Great Depression reduced the amount patients could pay physicians out of pocket, and in 1939, the California Medical Association set up the first Blue Shield plan to cover physician services. These plans, controlled by state medical societies, followed Blue Cross in spreading across the nation (Starr, 1982; Fein, 1986).
In contrast to the consumer-driven development of health insurance in European nations, coverage in the United States was initiated by health care providers seeking a steady source of income. Hospital and physician control over the “Blues,” a major sector of the health insurance industry, guaranteed that reimbursement would be generous and that cost control would remain on the back burner (Law, 1974; Starr, 1982).
The rapid growth of employment-based private insurance was spurred by an accident of history. During World War II, wage and price controls prevented companies from granting wage increases, but allowed the growth of fringe benefits. With a labor shortage, companies competing for workers began to offer health insurance to employees such as Rose Riveter as a fringe benefit. After the war, unions picked up on this trend and negotiated for health benefits. The results were dramatic: Enrollment in group hospital insurance plans grew from 12 million in 1940 to 142 million in 1988.
With employment-based health insurance, employers usually pay most of the premium that purchases health insurance for their employees (Figure 2–3). However, this flow of money is not as simple as it looks. The federal government views employer premium payments as a tax-deductible business expense. The government does not treat the health insurance fringe benefit as taxable income to the employee, even though the payment of premiums could be interpreted as a form of employee income. Because each premium dollar of employer-sponsored health insurance results in a reduction in taxes collected, the government is in essence subsidizing employer-sponsored health insurance. This subsidy is enormous, estimated at $260 billion per year (Gruber, 2010).
Figure 2–3. Employment-based private insurance. In addition to the direct employer subsidy, indirect government subsidies occur through the tax-free status of employer contributions for health insurance benefits.
The growth of employment-based health insurance attracted commercial insurance companies to the health care field to compete with the Blues for customers. The commercial insurers changed the entire dynamic of health insurance. The new dynamic was called experience rating. (The following discussion of experience rating can be applied to individual as well as employment-based private insurance.)
Healthy Insurance Company insures three groups of people—a young healthy group of bank managers, an older healthy group of truck drivers, and an older group of coal miners with a high rate of chronic illness. Under experience rating, Healthy sets its premiums according to the experience of each group in using health services. Because the bank managers rarely use health care, each pays a premium of $200 per month. Because the truck drivers are older, their risk of illness is higher, and their premium is $400 per month. The miners, who have high rates of black lung disease, are charged a premium of $600 per month. The average premium income to Healthy is $400 per member per month.
Blue Cross insures the same three groups and needs the same $400 per member per month to cover health care plus administrative costs for these groups. Blue Cross sets its premiums by the principle of community rating. For a given health insurance policy, all subscribers in a community pay the same premium. The bank managers, truck drivers, and mine workers all pay $400 per month.
Health insurance provides a mechanism to distribute health care more in accordance with human need rather than exclusively on the basis of ability to pay. To achieve this goal, funds are redistributed from the healthy to the sick, a subsidy that helps pay the costs of those unable to purchase services on their own.
Community rating achieves this redistribution in two ways:
1. Within each group (bank managers, truck drivers, and mine workers), people who become ill receive benefits in excess of the premiums they pay, while people who remain healthy pay premiums while receiving few or no health benefits.
2. Among the three groups, the bank managers, who use less health care than their premiums are worth, help pay for the miners, who use more health care than their premiums could buy.
Experience rating is far less redistributive than community rating. Within each group, those who become ill are subsidized by those who remain well, but among the different groups, healthier groups (bank managers) do not subsidize high-risk groups (mine workers). Thus the principle of health insurance, which is to distribute health care more in accordance with human need rather than exclusively on the ability to pay, is weakened by experience rating (Light, 1992).
In the early years, Blue Cross plans set insurance premiums by the principle of community rating, whereas commercial insurers used experience rating as a “weapon” to compete with the Blues (Fein, 1986). Commercial insurers such as Healthy Insurance Company could offer cheaper premiums to low-risk groups such as bank managers, who would naturally choose a Healthy commercial plan at $200 over a Blue Cross plan at $400. Experience rating helped commercial insurers overtake the Blues in the private health insurance market. While in 1945 commercial insurers had only 10 million enrollees, compared with 19 million for the Blues, by 1955 the score was commercials 54 million and the Blues 51 million.
Many commercial insurers would not market policies to such high-risk groups as mine workers, leaving Blue Cross with high-risk patients who were paying relatively low premiums. To survive the competition from the commercial insurers, Blue Cross had no choice but to seek younger, healthier groups by abandoning community rating and reducing the premiums for those groups. In this way, many Blue Cross and Blue Shield plans switched to experience rating. Without community rating, older and sicker groups became less and less able to afford health insurance.
From the perspective of the elderly and those with chronic illness, experience rating is discriminatory. Healthy persons, however, might have another viewpoint on the situation and might ask why they should voluntarily transfer their wealth to sicker people through the insurance subsidy. The answer lies in the unpredictability of health care needs. When purchasing health insurance, an individual does not know if he or she will suddenly change from a state of good health to one of illness. Thus, within a group, people are willing to risk paying for health insurance, even though they may not use it. Among different groups, however, healthy people have no economic incentive to voluntarily pay for community rating and subsidize another group of sicker people. This is why community rating cannot survive in a market-driven competitive private insurance system (Aaron, 1991).
The most positive aspect of health insurance—that it assists people with serious illness to pay for their care—has also become one of its main drawbacks—the difficulty in controlling costs in an insurance environment. With direct purchase, the “invisible hand” of each individual’s ability to pay holds down the price and quantity of health care. However, if a patient is well insured and the cost of care causes no immediate fiscal pain, the patient will use more services than someone who must pay for care out of pocket. In addition, particularly before the advent of fee schedules, health care providers could increase fees more easily if a third party was available to foot the bill.
Thus health insurance was originally an attempt by society to solve the problem of unaffordable health care under an out-of-pocket payment system, but its very capacity to make health care more affordable created a new problem. If people no longer had to pay out of their own pockets for health care, they would use more health care; and if health care providers could charge insurers rather than patients, they could more easily raise prices, especially during the era when the major insurers (the Blues) were controlled by hospitals and physicians. The solution of insurance fueled the problem of rising costs. As private insurance became largely experience rated and employment based, persons who had low incomes, who were chronically ill, or who were elderly found it increasingly difficult to afford private insurance.
In 1984 at age 74 Rose Riveter developed colon cancer. She was now covered by Medicare, which had been enacted in 1965. Even so, her Medicare premium, hospital deductible expenses, physician copayments, short nursing home stay, and uncovered prescriptions cost her $2700 the year she became ill with cancer.
Employment-based private health insurance grew rapidly in the 1950s, helping working people and their families to afford health care. But two groups in the population received little or no benefit: the poor and the elderly. The poor were usually unemployed or employed in jobs without the fringe benefit of health insurance; they could not afford insurance premiums. The elderly, who needed health care the most and whose premiums had been partially subsidized by community rating, were hard hit by the trend toward experience rating. In the late 1950s, less than 15% of the elderly had any health insurance (Harris, 1966). Only one program could provide affordable care for the poor and the elderly: tax-financed government health insurance.
Government entered the health care financing arena long before the 1960s through such public programs as municipal hospitals and dispensaries to care for the poor and through state-operated mental hospitals. But only with the 1965 enactment of Medicare (for the elderly) and Medicaid (for the poor) did public insurance payments for privately operated health services become a major feature of health care in the United States. Medicare Part A (Table 2–2) is a hospital insurance plan for the elderly financed largely through social security taxes from employers and employees. Medicare Part B (Table 2–3) insures the elderly for physician services and is paid for by federal taxes and monthly premiums from the beneficiaries. Medicare Part D, enacted in 2003, offers prescription drug coverage and is paid for by federal taxes and monthly premiums from beneficiaries. Medicaid (Table 2–4) is a program run by the states that is funded by federal and state taxes, which pays for the care of certain low-income groups. In 2009, Medicare and Medicaid expenditures totaled $502 and $374 billion, respectively (Martin et al, 2011).
Table 2–2. Summary of Medicare Part A, 2011
Table 2–3. Summary of Medicare Part B, 2011
Table 2–4. Summary of Medicaid, 2011
With its large deductibles, copayments, and gaps in coverage, Medicare paid for only 48% of the average beneficiary’s health care expenses in 2006 (Kaiser Family Foundation, 2010a). Most of the 47 million Medicare beneficiaries (2010) have supplemental coverage. In 2010, nearly 30% of beneficiaries had additional coverage from their previous employment, about 20% purchased supplemental private insurance (called “Medigap” plans), 24% were enrolled in the Medicare Advantage program, and 19% were enrolled in both Medicare and Medicaid (Kaiser Family Foundation, 2010b).
The Medicare Modernization Act (MMA) of 2003 made two major changes in the Medicare program: the expansion of the role of private health plans (the Medicare Advantage program, Part C) and the establishment of a prescription drug benefit (Part D). Under the Medicare Advantage program, a beneficiary can elect to enroll in a private health plan contracting with Medicare, with Medicare subsidizing the premium for that private health plan rather than paying hospitals, physicians, and other providers directly as under Medicare Parts A and B. Beneficiaries joining a Medicare Advantage plan sacrifice some degree of freedom of choice of physician and hospital in return for lower out-of-pocket payments and are only allowed to receive care from health care providers who are connected with that plan. Two-thirds of Medicare Advantage plans are health maintenance organizations (HMOs) (see Chapter 6). In order to channel more patients into Medicare Advantage plans, the MMA provided generous payments to those plans, with the result that they cost the federal government 14% more than the government paid for health care services for similar Medicare beneficiaries in the traditional Part A and Part B programs. The 2010 health care reform law passed by the Obama Administration (the Accountable Care Act) reduced payments to Medicare Advantage plans with the goal of saving the Medicare program $136 billion over the following 10 years (Kaiser Family Foundation, 2010c).
Medicare Part D provides partial coverage for prescription drugs. In 2010, 82% of Part D was financed through tax revenues, with 10% coming from beneficiary premiums (Kaiser Family Foundation, 2010a). As of 2010, 59% of Medicare beneficiaries had enrolled in the voluntary Medicare Part D program. Part D has been criticized because (1) there are major gaps in coverage, (2) coverage has been farmed out to private insurance companies rather than administered by the federal Medicare program, and (3) the government is not allowed to negotiate with pharmaceutical companies for lower drug prices. These 3 features of the program have caused confusion for beneficiaries, physicians, and pharmacists and a high cost for the program. Beneficiaries desiring Medicare Part D can enroll in one of 1500 stand-alone private prescription drug plans or receive their Part D coverage through a Medicare Advantage plan. Different plans cover different medications and require different premiums, deductibles, and coinsurance payments. The standard plan in 2010 had a $310 yearly deductible and 25% coinsurance up to an initial coverage limit of $2830 in total drug costs, after which coverage stops until the beneficiary has spent $4550 out of pocket (excluding premiums) for prescription drugs. Above $4550, coverage resumes with 5% coinsurance. The coverage gap, called the “donut hole,” becomes a major problem for patients with chronic illness needing several medications. The Accountable Care Act of 2010 gradually reduces the amounts beneficiaries must pay in the donut hole.
In 2009, the trustees of the Medicare program estimated that the Part A trust fund would be depleted by 2017. The Accountable Care Act, by raising social security payments and reducing expenditures, has extended Medicare’s solvency through 2029.
The Medicaid program (Table 2–4) is jointly administered by the federal and state governments. Although designed for low-income Americans, not all poor people are eligible for Medicaid. In addition to being poor, Medicaid has required that people also meet “categorical” eligibility criteria such as being a young child, pregnant, elderly, or disabled. Medicaid enrollment is growing dramatically, increasing from 32 million to 58 million people between 2000 and 2010 (9 million of whom are “dual eligibles” receiving both Medicare and Medicaid). The Accountable Care Act includes a huge expansion of Medicaid starting in 2014, eliminating the categorical eligibility criteria and offering the program to all citizens and legal residents with family income below 133% of the federal poverty line. The additional 16 million people on Medicaid will be financed largely by the federal government at a cost of over $40 billion per year in new dollars (see Chapter 15).
From 2000 to 2010, Medicaid expenditures rose from $200 billion to $374 billion. To slow down this expenditure growth, the federal government ceded to states enhanced control over Medicaid programs through Medicaid waivers, which allow states to reduce the number of people eligible for Medicaid, make alterations in the scope of covered services, require Medicaid recipients to pay part of their costs, and obligate Medicaid recipients to enroll in managed care plans (see Chapter 4). In 2010, over half of Medicaid recipients were enrolled in managed care plans. Because Medicaid pays physicians an average of 72% of Medicare fees, the majority of adult primary care physicians limit the number of Medicaid patients they will see; these patients are increasingly concentrated in academic health centers and community health centers.
In 1997, the federal government created the State Children’s Health Insurance Program (SCHIP), a companion program to Medicaid. SCHIP covers children in families with incomes at or below 200% of the federal poverty level, but above the Medicaid income eligibility level. States legislating a SCHIP program receive generous federal matching funds and can administer SCHIP through Medicaid or by creating a separate program. In 2009, almost 8 million children were enrolled in the program.
Government health insurance for the poor and the elderly added a new factor to the health care financing equation: the taxpayer (Figure 2–4). With government-financed health plans, the taxpayer can interact with the health care consumer in two distinct ways:
Figure 2–4. Government-financed insurance. Under the social insurance model (eg, Medicare Part A), only individuals paying taxes into the public plan are eligible for benefits. In other models (eg, Medicaid), an individual’s eligibility for benefits may not be directly linked to payment of taxes into the plan.
1. The social insurance model, exemplified by Medicare, allows only those who have paid a certain amount of social security taxes to be eligible for Part A and only those who pay a monthly premium to receive benefits from Part B. As with private insurance, social insurance requires people to make a contribution in order to receive benefits.
2. The contrasting model is the Medicaid public assistance model, in which those who contribute (taxpayers) may not be eligible for benefits (Bodenheimer and Grumbach, 1992).
It must be remembered that private insurance contains a subsidy: redistribution of funds from the healthy to the sick. Tax-funded insurance has the same subsidy and usually adds another: redistribution of funds from upper- to lower-income groups. Under this double subsidy, exemplified by Medicare and Medicaid, healthy middle-income employees generally pay more in social security payments and other taxes than they receive in health services, whereas unemployed, disabled, and lower-income elderly persons tend to receive more in health services than they contribute in taxes.
The advent of government financing improved financial access to care for some people, but, in turn, aggravated the problem of rising costs. The federal government and state governments have responded by attempting to limit Medicare and Medicaid payments to physicians and hospitals. At the same time, the rising costs of private insurance continue to place employment-based coverage out of the fiscal reach of many employers and employees.
Different methods of financing health care place different burdens on the various income levels of society. Payments are classified as progressive if they take a rising percentage of income as income increases, regressive if they take a falling percentage of income as income increases, and proportional if the ratio of payment to income is the same for all income classes (Pechman, 1985).
What principle should underlie the choice of revenue source for health care? A central purpose of the health care system is to maintain and improve the health of the nation’s population. As discussed in Chapter 3, rates of mortality and disability are far higher for low-income people than for the wealthy. Burdening low-income families with high levels of payments for health care (ie, regressive payments) reduces their disposable income, amplifies the ill effects of poverty, and thereby worsens their health. It makes little sense to finance a health care system—whose purpose is to improve health—with payments that worsen health. Thus, regressive payments could be considered “unhealthy.”
Rita Blue earns $10,000 per year for her family of 4. She develops pneumonia, and her out-of-pocket health costs come to $1000, 10% of her family income.
Cathy White earns $100,000 per year for her family of 4. She develops pneumonia, and her out-of-pocket health costs come to $1000, 1% of her family income.
Out-of-pocket payments are a regressive mode of financing. According to the 1987 National Medical Care Expenditure Survey, out-of-pocket payments took 12% of the income of families in the nation’s lowest-income quintile, compared with 1.2% for families in the wealthiest 5% of the population (Bodenheimer and Sullivan, 1997). This pattern is confirmed by the 2000 Medical Expenditure Panel Survey (MEPS, 2003). Many economists and health policy experts would consider this regressive burden of payment as unfair. Aggravating the regressivity of out-of-pocket payments is the fact that lower-income people tend to be sicker and thus have more out-of-pocket payments than the wealthier and healthier.
Jim Hale is a young, healthy, self-employed accountant whose monthly income is $6000, with a health insurance premium of $200, or 3% of his income.
Jack Hurt is a disabled mine worker with black lung disease. His income is $1800 per month, of which $400 (22%) goes for his health insurance.
Experience-rated private health insurance is a regressive method of financing health care because increased risk of illness tends to correlate with reduced income. If Jim Hale and Jack Hurt were enrolled in a community-rated plan, each with a premium of $300, they would respectively pay 5% and 17% of their incomes for health insurance. With community rating, the burden of payment is regressive, but less so than with experience rating.
Most private insurance is not individually purchased but rather obtained through employment. How is the burden of employment-linked health insurance premiums distributed?
Jill is an assistant hospital administrator. To attract her to the job, the hospital offered her a package of salary plus health insurance of $6500 per month. She chose to take $6200 in salary, leaving the hospital to pay $300 for her health insurance.
Bill is a nurse’s aide, whose union negotiated with the hospital for a total package of $2800 per month; of this amount $2500 is salary and $300 pays his health insurance premium.
Do Jill and Bill pay nothing for their health insurance? Not exactly. Employers generally agree on a total package of wages and fringe benefits; if Jill and Bill did not receive health insurance, their pay would probably go up by nearly $300 per month. That is why employer-paid health insurance premiums are generally considered deductions from wages or salary, and thus paid by the employee (Blumberg et al, 2007). For Jill, health insurance amounts to only 5% of her income, but for Bill it is 12%. The MEPS corroborates the regressivity of employment-based health insurance; in 2001–2003, premiums took an average of 10.9% of the income of families in between 100% and 200% of the federal poverty line compared with 2.3% for those above 500% of poverty (Blumberg et al, 2007).
Larry Lowe earns $10,000 and pays $410 in federal and state income taxes, or 4.1% of his income.
Harold High earns $100,000 and pays $12,900 in income taxes, or 12.9% of his income.
The progressive income tax is the largest tax providing money for government-financed health care. Most other taxes are regressive (eg, sales and property taxes), and the combined burden of all taxes that finance health care is roughly proportional (Pechman, 1985).
In 2009, 46% of health care expenditures were financed through out-of-pocket payments and premiums, which are regressive, while 47% was funded through government revenues (Martin et al, 2011), which are proportional. The sum total of health care financing is regressive. In 1999, the poorest quintile of households spent 18% of income on health care, while the highest-income quintile spent only 3% (Cowan et al, 2002). Overall, the US health care system is financed in a manner that is unhealthy.
Neither Fred Farmer nor his great-grandson Ted had health insurance, but the modern-day Mr. Farmer’s predicament differs drastically from that of his ancestor. Third-party financing of health care has fueled an expansive health care system that offers treatments unimaginable a century ago, but at tremendous expense.
Each of the four modes of financing health care developed historically as a solution to the inadequacy of the previous modes. Private insurance provided protection to patients against the unpredictable costs of medical care, as well as protection to providers of care against the unpredictable ability of patients to pay. But the private insurance solution created three new, interrelated problems:
1. The opportunity for health care providers to increase fees to insurers caused health services to become increasingly unaffordable for those with inadequate insurance or no insurance.
2. The employment-based nature of group insurance placed people who were unemployed, retired, or working part-time at a disadvantage for the purchase of insurance, and partially masked the true costs of insurance for employees who did receive health benefits at the workplace.
3. Competition inherent in a deregulated private insurance market gave rise to the practice of experience rating, which made insurance premiums unaffordable for many elderly people and other medically needy groups.
To solve these problems, government financing was required, but government financing fueled an even greater inflation in health care costs.
As each “solution” was introduced, health care financing improved for a time. But rising costs have jeopardized private and public coverage for many people and made services unaffordable for those without a source of third-party payment. The problems of each financing mode, and the problems created by each successive solution, have accumulated into a complex crisis characterized by inadequate access for some and high costs for everyone.
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