Title:American Health Economy Illustrated
Hardcover Dimensions:7" x 10"
- 332 Hardcover pages
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Last month, the Centers for Medicare and Medicaid Services released its latest report showing how the burden of health spending is divided between government, private business, and households. What may surprise some readers is just how little of health spending is paid directly by households: 28 percent of the total in 2009 (the latest year available).
In this so-called “sponsor” view of health spending, government is responsible (i.e., directly pays) for Medicare, Medicaid, military and VA health, a panoply of taxpayer-financed health programs (e.g., local health departments), and employer premium contributions on behalf of federal, state, and local workers. Private business is responsible (i.e., directly pays) for employer contributions to group health coverage, the employer share of payroll taxes (euphemistically termed “contributions”) related to Medicare’s Hospital Insurance Trust Fund (Part A), workers’ compensation, temporary disability insurance, and worksite healthcare.
All of the rest is borne by households in the form of a) the worker share of group health premiums and Medicare Part A payroll taxes, b) voluntary premiums paid for non-group health insurance, Medicare Parts B and D, and c) out-of-pocket medical expenses not covered by insurance. Yet when we add up all these components, they amount to only six cents of every dollar of family income. Households devote a far larger share of their family budgets to food, housing, and transportation than to healthcare.
Thus, even though healthcare now accounts for more than 20 percent of personal consumption spending as measured in the national income and product accounts, this greatly exaggerates the visibility of health expenditures in a typical family’s budget. What’s equally remarkable is how little this “burden” has changed over time since 1987, when it amounted to five cents per dollar of family income.
In reality, all health spending is ultimately borne by households. For example, careful studies have demonstrated that most or all of the cost of employer-paid health premiums is actually borne by workers in the form of lower wages or other forms of fringe benefits. And whatever small amount might appear to be borne by business is really passed along to households either as consumers, business owners, or stockholders. The same logic applies to the 1.45 percent payroll tax paid directly by employers for Medicare Part A (separate from the matching “employee share” that workers see deducted from paychecks). Many (possibly most) workers might not realize this insofar as health costs that appear to be employer-paid—including workers’ compensation or employer-funded on-site health clinics—generally are invisible to them. While the worker share of health insurance premiums and Medicare taxes shows up in worker paychecks, the employer contribution too often does not.
Likewise, not a penny is spent from government coffers that did not first start out in the pocket of a taxpayer. But no one gets an itemized bill showing how much of their income, sales, property, and other taxes actually go to finance health spending of various types. So many might be shocked to learn that according to these official government figures, healthcare spending amounts to 54 cents of every dollar they paid in federal taxes, along with 27 cents of every dollar in state and local tax revenues.*
When all is said and done, nearly three-quarters of health spending is invisible to the average American. Regrettably, if the Patient Protection and Affordable Care Act is fully implemented, this invisible share will become even larger. Such a lack of transparency is not a recipe for responsible management of this rapidly growing share of the U.S. economy. It should surprise no one that even official government figures demonstrate that (in contrast to what was promised), the new health law will bend the cost curve up rather than down.
*This is what the official figures say. In reality, the government share is roughly one-quarter greater than these figures suggest.
Christopher J. Conover is a research scholar at Duke University’s Center for Health Policy and Inequalities Research and an adjunct scholar at AEI. The chart shown is from his new book American Health Economy Illustrated, to be released in January 2012 by AEI Press. See PowerPoint version of Figure 6.2a.