Private business

Private businesses contribute to approximately one fifth of health care spending, in the form of employer-sponsored health insurance, contribution to Medicare, workers compensation, disability insurance, and worksite health care.³ Employers are the leading source of health coverage. The majority of employers (69% in 2010) offer health insurance as a fringe benefit to cover their employees as well as their employees’ dependents.⁴ Federal, state, and local governments, as employers, also make contributions to private health insurance programs to insure public employees. For example, in 2009, the federal government contributed $26.8 billion to the Federal Employees Health Benefits Program to cover more than 8 million federal employees, retirees, and their dependents, including members of the U.S. Congress.⁵

Employer-sponsored health insurance has been designed predominantly through managed care plans of various kinds in recent decades. Managed care plans are lower cost alternatives to conventional indemnity insurance by incorporating a wide range of organizational and financial arrangements to organize, reimburse, and monitor services. The most common type of managed care plans is the preferred provider organization (PPO). A PPO selectively contracts with hospitals and other providers to form a network and creates financial incentives for members to use network providers. The incentives can include lower deductibles, lower copayment, and coinsurance. The advantage to the PPO is that network providers negotiate lower reimbursement rates in exchange for higher anticipated volume. Another type of managed care plan, the health maintenance organization (HMO), is more restrictive. Members are required to use in-network providers and must be authorized by their primary care physician to see a specialist. HMO plans usually have lower out-of-pocket payments than PPO plans. Point-of-service (POS) plans are hybrids of PPO and HMO plans in which enrollees can choose to pay extra at the point of a particular service to see a non-network provider. Some employers also offer a high-deductible health plan with savings option (HDHP/SO). The annual deductible of a typical HDHP plan can be $2000 or higher for single coverage. Health reimbursement arrangements and health savings accounts are linked with such plans, allowing employees to save for medical expenses on a tax-free basis. In 2010, 58% of covered employees were enrolled in PPOs, followed by HMOs (19%), HDHP/SOs (13%), and POS plans (8%). Approximately 1% were covered by conventional indemnity plans.⁴

Employers and employees both contribute to the cost of employment-based health insurance. Covered employees on average shouldered 19% of the total premium for single coverage and 30% for family coverage in 2009%,⁴ approximately $75 monthly for single coverage and $333 monthly for family coverage. Private and public sector employers often vary as to the relative role of health benefits in the total compensation package. From 2000 to 2009, the share of premiums paid by private sector employers dropped from 74.7% to 69.7%. During the same time period, the share paid by the federal government remained at 72% to 73%, whereas state and local governments’ contributions increased from 79.2% to 83%.³

In addition to premiums, covered employees must also pay deductibles (an amount that must be paid before the health insurance begins to pay), copayments (a set amount paid per visit or service), or coinsurance (a percentage of the cost for services or drugs). In the past few decades, the out-of-pocket liabilities for employees have increased as employers have tried to control the cost of providing health benefits. Some small businesses have ceased to offer health insurance to their employees in the face of soaring health benefit costs.

Not all employers provide health benefits to their employees. Those offering insurance benefits tend to be large firms with well-paid workers.⁴ Even if employers offer insurance, employees can choose not to participate if the premium share is too high, the value of the benefits too low, or if the employee has higher value options for coverage elsewhere (e.g., through a spouse). Employer-based insurance coverage is clearly tied to employment. In the economic downturn near the end of the first decade of the twenty-first century, millions of workers lost their jobs and their insurance coverage. Nearly three of five adults who lost a job with health benefits in 2010 became uninsured.⁶ Private business health spending decreased 0.5% in 2009, the first decline since 1987, resulting from a 3.2% decrease in employer-sponsored health insurance coverage.³

Households

The financial burden of health care on households consists of three parts: health insurance premiums, out-of-pocket payments (deductibles, copayments, and coinsurance), payments for services that are not covered by insurance, and the mandatory Medicare payroll tax for employed individuals. Households contributed to 28% of national health spending in 2009, or 6.2% of personal income.³ This average, however, conceals the larger burden on low-income families. In 2010, half of adults from families with incomes less than 100% of the federal poverty level (FPL, $22,050 for a family of four) spent 10% or more of their income on health care.⁶

Direct household spending on health care can be strongly influenced by economic conditions. The growth rate of out-of-pocket payments dropped from 3.1% in 2008 to 0.4% in 2009 as consumers postponed medical services during the economic recession.³

Governments

Federal and state governments are charged with funding public health-related programs, including Medicare, Medicaid, and the Children’s Health Insurance Program (CHIP).The Centers for Medicare and Medicaid Services (CMS) is the federal agency that administers these three programs (Medicaid and CHIP are administered jointly with the states.) The federal government also subsidizes employment-based health insurance through tax laws that allow recipients of employer-based insurance to receive these benefits tax free. This subsidy is estimated to be $177 billion in the year 2011.⁷

Medicare is the nation’s largest health insurer. It covers people age 65 or older, those with certain disabilities, and those with end-stage renal disease. The program is organized into four parts. Medicare Part A (Hospital Insurance) pays for inpatient care in hospitals, skilled nursing services, hospice, and home health care. The Part A program is financed primarily through the Federal Insurance Contributions Act tax, which funds Social Security and Medicare. Currently, the Medicare payroll tax is 2.9%, with the worker and the employer each paying 1.45%. Self-employed individuals must pay the entire 2.9% tax.

Medicare Part B (Medical Insurance) covers doctors’ services and tests, outpatient care, some home health services, durable medical equipment, and certain preventive services. Part B is financed through premiums paid by enrollees and contributions from general revenues of the U.S. Treasury. Beneficiary premiums are currently set to cover approximately 25% of the per capita cost of Part B. In 2011, the Part B premium is $96.40 for those enrolled before 2010, $110.50 for those enrolled in 2010, and $115.40 for all others. Individuals with yearly incomes higher than $85,000, or couples with income above $170,000, pay premiums that range from $161.50 to $369.10 per month.⁸

Medicare Part C (Medicare Advantage Plan) is an alternative to original Medicare (Part A and Part B). Medicare Advantage Plans are administered by Medicare-approved private insurance companies. Medicare Advantage Plans provide all benefits covered by original Medicare plus some extra coverage, such as vision, hearing, dental, prescription drug coverage, and health and wellness programs at added costs. Medicare pays a fixed monthly fee for each beneficiary to the private insurance companies. Enrollment in Medicare Part C is voluntary; approximately 20% of Medicare beneficiaries sign up for Medicare Advantage Plans.

Medicare Part D (Medicare Prescription Drug Coverage) helps to pay for prescription drugs. People eligible for Medicare participate on a voluntary basis and pay a monthly premium. All prescription drug plans are administered by Medicare-approved private insurance companies. The premium, cost sharing, and drugs covered vary from plan to plan. As of January 2008, more than 25 million Medicare beneficiaries (57%) were enrolled in Part D plans.⁹

Medicaid is a joint federal and state program that provides comprehensive medical and long-term care coverage for individuals with limited income and resources and for those with major disabilities. Although the federal government provides broad guidelines, states have a wide degree of flexibility to design the eligibility criteria and benefit package. For example, California’s Medicaid program (Medi-Cal) covered 29% of its total population in 2007, while the Medicaid program in Nevada covered 10% of its population in the same year.¹⁰ Income limits for program eligibility for single adults varied from 17% of the FPL in Arkansas to 215% of the FPL in Minnesota.¹¹ In general, eligibility rules for children are more generous than for adults in all states. Medicaid plays a key role in ensuring access to care for the low-income population.

CHIP represents another joint effort on the part of federal and state governments. This program provides free or low-cost health insurance coverage to children up to 19 years old in families with incomes exceeding eligibility limits for Medicaid who cannot afford private health insurance. Uninsured children in families with incomes up to $44,100 a year (200% of the FPL for a family of four) are eligible for the CHIP in many states. The program generally covers doctor visits, hospitalizations, prescription drugs, and vision and dental care. Pregnant women and other adults may also be covered by the program. Similar to Medicaid, CHIP is administered by each state under broad federal requirements; therefore eligibility, benefits, premiums, and cost sharing are different from state to state. For the federal fiscal year 2010, a total of 7.7 million children were enrolled in CHIP at some point during the year.¹²

Health care spending by governments amounted to 44% of national health expenditures in 2009, with the federal government accounting for approximately 27% and state and local governments accounting for 16%.³ Government health care spending is projected to account for more than half of total health care spending by 2012.¹³

The U.S. health care system is the most expensive one in the world. National health spending was $2.5 trillion in total, or $8086 per capita in 2009.¹⁴ The ratio of health spending to the gross domestic product (GDP) reached 17.6%.¹⁴ Health care spending in the United States is significantly higher than in other industrialized countries. For example, France, Switzerland, and Germany devoted 11.2%, 10.7%, and 10.5%, respectively, of their GDP to health care in 2008.¹⁵ The United States spent more than twice as much as relatively rich European countries on health care per capita. Adjusted for purchasing power parity, France spent $3696 per capita on health care in 2008, Germany spent $3737 per capita, and the United Kingdom spent $3129 per capita.¹⁵ National health care expenditures are projected to grow at an average annual rate of 6.1% (1.7 percentage points faster than GDP), climbing to $4.5 trillion, or 19.3% of GDP by 2019.¹³