By Katherine Grace Carman, Ph.D.; Jodi Liu, Ph.D.; Chapin White, Ph.D.
HSR, Health Services Research, January 27, 2020
What This Study Adds
- Health care financing arrangements are designed to redistribute funds for health care expenditures.
- Higher‐income households pay the most to finance health care in dollar amounts, but the burden of payments as a share of income is greater among lower‐income households.
- We also find significant redistribution across age groups and income groups.
Redistribution is at the heart of publicly financed health care and of health insurance. However, health care financing flows are complex. Understanding how different groups contribute to and benefit from health care spending is difficult for researchers and the general public. In this paper, we bring together data to unmask the flow of payments and spending to provide not only a better accounting of burden imposed by the high costs of health care but also to highlight the redistribution inherent in the system.
Much of the burden associated with health care financing is hidden. Those who receive insurance through their employers may not know how much their employer contributes to insurance premiums. Similarly, the tax burden of health care spending is similarly difficult for the general public to observe, as health care is only a portion of government spending.
Similar to previous work in this area, with the exception of Jacobs and Selden, we find that overall health care payments as a share of income are regressive. We find a greater degree of regressivity than found in previous research. This is driven in part by our inclusion of institutionalized populations. We find that including health care spending for institutionalized populations results in a larger burden on individuals in the lowest income quintile. Although the majority of people in the lowest income quintile are not in institutions, for those who are, out‐of‐pocket costs are substantial relative to income. This high cost borne by even on a small proportion of the population considerably increases the regressivity of the health care payments. While for many in this group, the costs may be temporary, being paid only for a short period of time before the individual qualifies for Medicaid, it nevertheless has a large impact on the total payments borne by individuals in the lowest income groups.
Several types of redistribution are built into the financing of health care in America, and indeed into any tax‐financed system or insurance market. First, there is redistribution across phases of life, with working age adults contributing more than older adults, in part because Medicare covers the vast majority of individuals over the age of 65. Second, there is redistribution from the rich to the poor, largely due to the progressive nature of the tax system in the United States. Finally, there is redistribution from the healthy to the sick; this redistribution is fundamentally always a part of health insurance that is designed to protect individuals from the financial shocks associated with illness. Our analysis takes the perspective of a single point in time; however, there may also be implications over the life cycle, as those who have more financial resources tend to live longer, and may not only make greater contributions, but also receive Medicare benefits for a longer period of time.
In order to have evidence‐based, productive discussions of health care reforms and health equity, it is important to have a baseline understanding of the current financing system and the inherent redistribution. Current interest in proposals for health care reform include financing changes that would alter who pays for care, potentially in small ways with incremental changes to the ACA or dramatic ways with expansive reforms such as Medicare for All. If the current patterns of progressivity of tax payments to health care and regressivity of premiums and out‐of‐pocket payments were maintained, moving toward more tax‐financed programs would shift the burden of health care payments from lower‐income to higher‐income households, whereas moving toward more privately paid health care would shift the burden from higher‐income to lower‐income households. A complete picture of the current financing system provides context to understand how these policy changes would impact the overall burden of health care costs, redistribution, and specific segments of the population.
Burden of Health Care Payments Is Greatest Among Americans with the Lowest Incomes
RAND, January 27, 2020
Higher-income American households pay the most to finance the nation’s health care system, but the burden of payments as a share of income is greatest among households with the lowest incomes, according to a new RAND Corporation study.
Households in the bottom fifth of income groups pay an average of 33.9% of their income toward health care, while families in the highest-income group pay 16% of their income toward health care.
The analysis finds that households in the middle three income tiers pay between 19.8% and 23.2% of their income toward health care. The analysis considered all payments made by households to support health care, including taxes and employer contributions.
“Our findings suggest that health care payments in the United States are even more regressive than suggested by earlier research,” said Katherine G. Carman, lead author of the study and a senior economist at RAND, a nonprofit research organization. “As national discussions continue about health reform and health equity, it’s important to understand how the current health care system distributes costs and payments.”
In 2015, health care spending accounted for nearly 18 percent of the U.S. gross domestic product, a measure of the total value of goods produced and services provided by the nation. Ultimately all health care costs are paid by households, either in obvious ways such as through insurance premiums or out-of-pocket costs, in addition to less-visible ways such as employer-paid premiums and taxes.
While out-of-pocket spending, including insurance premiums, is the most obvious payment most people make for health care, the RAND study found it accounted for just 9.1% of health care costs. The vast bulk of health care costs are paid through health insurance premiums and taxes.
The study found that payments to finance health care were $9,393 per person, or 18.7% of average household income.
Examining benefits by type of insurance, researchers found that Americans with Medicare receive the greatest dollar value of health care, a result of older people generally using more health care services.
Those with Medicaid have the largest dollar value of health care received as a percent of income, which corresponds to the lower income and generally poorer health among the group. People with employer-sponsored insurance received the lowest dollar value of health care.
Unsurprisingly, those with lower income are much more likely to benefit from redistribution of health care payments made by others toward health care services.
The study found that households in the three lowest-income groups receive more health care services than they pay for through all forms of payments. In the fourth income group, payments and the dollar value of care received are similar.
Households in the highest of the five income groups are paying much more into the system than they receive in health care services.
By Don McCanne, M.D.
The United States pays a lot for health care – twice the per capita average of other wealthy nations. Yet we have greater income and wealth inequality which makes it impossible for lower- and even middle-income individuals to pay their proportionate share of health care. So it is no wonder that methods have evolved to redistribute health care payments from the rich to the poor, and from the healthy to the sick. Premiums paid to insurance risk pools plus out-of-pocket expenses tend to be quite regressive, but fortunately some of this is offset by progressive taxes, otherwise lower-income individuals would not be able to afford most health care.
This study confirms the redistribution that is taking place, but it also confirms the regressivity that negatively impacts lower-income individuals. In the HSR article, the authors state, “prior work has considered the burden of health care costs on ‘typical’ families” but “‘typical’ families are surprisingly rare: based on our analyses, only 10 percent of people are part of four‐person households in which all are covered by ESI.”
Thus when policies are designed to cover the relatively rare typical families, a very large segment of our population will fall through the cracks in our fragmented financing system. That partially explains why, in the most expensive health care system on earth, tens of millions still suffer financial hardship and experience financial barriers to care, in spite of the progressive component of health care financing described in this study.
Also health care needs are not evenly distributed throughout the population. In a fragmented financing system that has both progressive and regressive features, the wealthy will continue to fare well, but those with lower incomes are at the mercy of various financing programs, with some faring fairly well but far too many others again facing financial hardship and financial barriers to care.
The authors note, “If the current patterns of progressivity of tax payments to health care and regressivity of premiums and out‐of‐pocket payments were maintained, moving toward more tax‐financed programs would shift the burden of health care payments from lower‐income to higher‐income households, whereas moving toward more privately paid health care would shift the burden from higher‐income to lower‐income households.”
What is the health policy lesson here? We can eliminate deleterious regressive financing by eliminating insurance premiums, including premiums for employer-sponsored plans paid for by wage reductions, and eliminate the regressive out-of-pocket payments of deductibles, copays and other out-of-pocket cost-sharing (i.e., eliminate private insurance). We can enhance beneficial progressive funding of health care by expanding equitable tax-financing of the health care system. That is precisely what the single payer model of an improved Medicare for All is designed to do. What are we waiting for?
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