Private Business

Private businesses contribute approximately one-fifth of health care spending in the form of employer-sponsored health insurance, contributions to Medicare, workers’ compensation, temporary disability insurance, and worksite health care.3 Employers are the leading source of health coverage. The majority of employers (56% in 2020) offer contributions to health insurance as a benefit to cover their employees as well as their employees’ dependents.⁴ As employers, federal, state, and local governments also make contributions to private health insurance programs to insure public employees. For example, the Federal Employees Health Benefits Program is the largest employer-sponsored group health insurance program in the world, covering over 8 million federal employees, retirees, former employees, family members, and former spouses.⁵

Employer-sponsored health insurance has been designed predominantly as managed care plans of various kinds in recent decades. Managed care plans are lower-cost alternatives to conventional indemnity insurance that incorporate a wide range of organizational and financial arrangements to deliver, reimburse, and monitor services. The most common type of managed care plan is the preferred provider organization (PPO). A PPO selectively contracts with hospitals and other providers to form a network and then creates financial incentives for members to use in-network providers. The incentives can include lower deductibles, lower copayments, and/or coinsurance. The advantage to the PPO is that network providers trade 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 except for a medical emergency 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 see an out-of-network provider at the point of a particular service although paying more than they would to see a provider within the plan’s network. Some employers also offer a high-deductible health plan (HDHP) which can be combined with a health savings account (HSA). For 2021, the Internal Revenue Service (IRS) defines an HDHP as any plan with a deductible of at least $1400 for an individual or $2800 for a family. The employer and employee can contribute a total of $3600 to the HSA for an individual plan and $7200 for a family plan.⁶ Most (74%) employers offering health benefits offer only one type of health plan, whereas large employers are more likely than small employers to offer more than one plan type (58% vs. 25% in 2020).⁴ In 2020, 47% of covered employees were enrolled in PPOs, followed by HDHPs (31%), HMOs (13%), and POS plans (8%). Less than 1% were covered by conventional indemnity plans.⁴

Both private and public sector employers have slightly reduced their contributions to employment-based health insurance over the years. From 2000 to 2019, the share of premiums paid by private sector employers dropped from 74.7% to 71.5%. During the same time period, the share paid by the federal government decreased from 73.0% to 70.2%, whereas state and local governments’ contributions decreased from 79.2% to 78.4%.⁷

Not all employers provide health benefits to their employees. Some employers have ceased to offer health insurance to their employees in the face of soaring health benefit costs. Others have reduced their coverage for retirees and dependents. Those not offering insurance benefits tend to be small firms, with 37% of them citing high cost as the most important reason for not doing so in 2020.⁴ Even if employers offer insurance, employees can choose not to participate if the premium share is too high, the value of the benefits is too low, or if employees are covered by another health plan (including a spouse’s plan or a plan purchased through the health insurance exchanges). Employer-sponsored health insurance coverage is contingent on the continuous employment of the primary policyholder. During the COVID-19 pandemic, as many as 7.7 million workers were estimated to have lost jobs with employer-sponsored health insurance as of June 2020 due to the pandemic-induced recession and state lockdown orders that closed many businesses. Taking their 6.9 million dependents into consideration, a total of 14.6 million individuals may have been affected.⁸

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 not covered by insurance), and the mandatory Medicare payroll tax. Employees covered by employment-based health insurance contribute to the premium together with their employers. Employees covered by employer-sponsored health insurance on average shouldered 17% of the total premium for single coverage and 27% for family coverage in 2020, or approximately $1243 for single coverage and $5588 for family coverage per year.4 In 2019, households contributed $288.2 billion as premium payments for employer-sponsored health insurance (26.8% of all household health expenditure).⁹

In addition to premiums, when receiving health care, households need to pay deductibles (an amount that must be paid before the health insurance plan 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 spending has increased as employers have tried to control the cost of providing health benefits. In 2019, households shouldered $406.5 billion out-of-pocket health spending (37.8% of all household health expenditure).⁹ Overall, households contributed to 28.4% of national health spending in 2019, or $1076.4 billion in total.⁹

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 premium payments made by both employers and employees to be excluded from income and payroll taxes. This subsidy is estimated to be $300 billion in 2018.10

Medicare is the nation’s largest health insurer. It covers people aged 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. Part A is financed primarily through the Federal Insurance Contributions Act (FICA) tax, which funds Social Security and Medicare. Currently, the Medicare payroll tax is 2.9%, with the employee and the employer each paying 1.45%. Self-employed individuals must pay the entire 2.9% tax.

Medicare Part B (Medical Insurance) covers physicians’ 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 normally set to cover approximately 25% of the per capita Part B program costs for the year.¹¹ In 2021, the standard Part B premium amount was $148.50 per month with an annual deductible of $203.00 and a co-insurance of 20% of the Medicare-approved amount for eligible services.¹² Beneficiaries with modified adjusted gross income (MAGI) from two years ago (2019) exceeding a certain limit pay an extra charge each month. For example, a beneficiary who filed joint tax return with MAGI above $330,000 and less than $750,000 pay $475.20 per month.¹² You may incur a late enrollment penalty if you do not sign up for Part B when you are first eligible (10% increase in premium for each missed 12-month period). Parts A and B together are known as original or traditional Medicare.

Medicare Part C (Medicare Advantage) is an alternative to original Medicare (Part A and Part B). Medicare-approved private insurance companies administer Medicare Advantage plans. Medicare Advantage plans provide all benefits covered by original Medicare plus some extra benefits such as vision, hearing, dental, prescription drug coverage, and health and wellness programs at additional costs. Medicare pays a fixed monthly fee for each enrolled beneficiary to the private insurance companies. Enrollment in Medicare Part C is voluntary. In 2010, only 17% of Medicare beneficiaries (6.8 million) were enrolled in a Medicare Advantage plan.¹³ By 2020, 39% out of 62.0 million Medicare beneficiaries (24.1 million) were enrolled in Medicare Advantage plans. Medicare Advantage penetration varies widely geographically. In 19 states (e.g., Florida, California, New York, and Texas) and Puerto Rico, more than 40% of Medicare beneficiaries are enrolled in Medicare Advantage plans.¹³

Medicare Part D (Medicare Prescription Drug Coverage) helps pay for outpatient prescription drugs. People eligible for Medicare can voluntarily enroll in either a stand-alone prescription drug plan to supplement traditional Medicare or a Medicare Advantage prescription drug plan (MA-PDP) if they are already enrolled in Medicare Part C. Medicare-approved private insurance companies administer all PDPs. The premium, cost sharing, and drugs covered vary from plan to plan. Beneficiaries with MAGI from 2 years ago exceeding a certain amount pay an extra amount in addition to the plan premium each month. As of 2020, 46 million out of 62 million Medicare beneficiaries were enrolled in Part D plans.¹⁴

Medicaid is a joint federal and state program that provides comprehensive medical and long-term care coverage for certain individuals with limited income and resources and for those with major disabilities. The program plays a key role in ensuring access to care for the low-income population. Although the federal government provides broad guidelines, states have a wide degree of flexibility to stipulate the eligibility criteria and benefit package. As of January 2020, 36 states have implemented the 2010 Patient Protection and Affordable Care Act (ACA) Medicaid expansion and extended Medicaid eligibility to low-income adults with incomes up to at least 138% of the federal poverty level (FPL, $29,974 for a family of three).¹⁵ Parents need to have much lower income to qualify and childless adults are outright disqualified in the 15 states that have not implemented the ACA Medicaid expansion. For example, in Texas, a single parent with a family size of three needs to have income no higher than 17% of the FPL to qualify for Medicaid. Childless adults are not eligible for Medicaid regardless of their income level.¹⁶ The impact of the ACA has changed the Medicaid program in a number of ways for participating states. These changes will be discussed later in this chapter.

CHIP represents another joint effort on the part of the federal and state governments. This program provides free or low-cost health insurance coverage to children aged 18 years and below in families with incomes exceeding income limits for Medicaid. Uninsured children in families with incomes up to 200% of the FPL are eligible for CHIP in many states. The program generally covers doctor visits, hospitalizations, prescription drugs, and vision and dental care. The program may also cover pregnant women and other adults. Similar to Medicaid, CHIP is administered by each state under broad federal requirements; therefore, eligibility, benefits, premiums, and cost sharing vary from state to state. As of September 2020, 77.3 million were enrolled in Medicaid/CHIP programs around the country, among whom 37.4 million were children.¹⁶

Health care spending by federal, state, and local governments amounted to 45.1% of national health expenditures in 2019, with the federal government accounting for approximately 29.0% and state and local governments accounting for 16.1%.³

The U.S. health care system is the most expensive one in the world. National health spending was $3.8 trillion in total, or $11,582 per capita in 2019.³ In that year, the ratio of health spending to the gross domestic product (GDP) reached 17.7% in the United Stated, whereas the comparable figure was 10.8% in Canada, 11.2% in France, 11.7% in Germany, and 10.3% in the United Kingdom.^3,17 The United States spent more than twice as much as relatively rich European countries on health care per capita ($11,071.7 in the United States vs. $5418.4 in Canada, $5375.7 in France, $6645.8 in Germany, and $4653.1 in the United Kingdom, in purchasing power–adjusted dollars).¹⁷ National health care expenditures of the United States are projected to grow at an average annual rate of 5.4% (1.1% points faster than the GDP) and reach 19.7% of the GDP or $6.2 trillion by 2028.¹⁸