How Does the US Healthcare System Get Funded?

TL;DR

US healthcare costs about $4 trillion a year, roughly 17 to 18% of a $28 trillion economy, or about $12,000 per person. Consumers pay about $1 trillion, employers about $1 trillion, and federal and state government about $2 trillion. Saum Sutaria argues that insurance now works more like a discount card, because most spending goes to chronic illness rather than rare, unpredictable events.

Transcript

I think that you know if you look at the concept of insurance I mean insurance is for random infrequent and unpredictable events okay and when the primary role of insurance was to prevent catastrophic loss if you had a heart attack or you had an accident or you an appendicitis or yes or you had a cancer which back in those days was less of a chroni... Read More

Key Insights

• Insurance is meant for random, infrequent and unpredictable events. It made sense when its main job was preventing catastrophic loss from a heart attack, an accident, appendicitis or cancer, back when cancer was less often a chronic disease.
• Chronic illness now drives most US healthcare spending, often several conditions at once, such as obesity, diabetes, heart disease and lung disease. Better care has also made HIV/AIDS a chronic disease, and cancer is moving the same way.
• Saum Sutaria says health insurance today works like a discount card. Nobody uses car insurance to pay for an oil change, yet people expect health insurance to cover routine checkups and lifelong prescription refills.
• US healthcare spending is about $4 trillion a year, roughly 17 to 18% of a GDP of about $28 trillion. Per person, that is about $12,000 in healthcare spending against about $90,000 of economic output.
• US healthcare spending is larger than all US exports across every industry, which come to about $3 trillion. It is also close to total post-tax US corporate profits, which are just under $4 trillion.
• The $4 trillion comes from three sources: about $1 trillion from consumers, about $1 trillion from employers, mostly through employer-sponsored insurance, and about $2 trillion from federal and state government, counting direct spending and tax subsidies.
• Employer-sponsored insurance is the main form of coverage outside government in the US, and this is unusual among countries. A law in 1954 made employer-provided health coverage a pre-tax benefit, which gave employers a reason to offer group insurance.
• Large employers often self-insure. They carry the financial risk themselves, and the insurer named on the employee's card, such as Blue Shield, Aetna or United, provides only administrative services. Some companies with fewer than 500 employees self-insure, and it becomes more common above that size.

Questions & Answers

Q: How much does the United States spend on healthcare each year?

The United States spends about $4 trillion a year on healthcare. That is roughly 17 to 18% of a US economy of about $28 trillion. Per person, healthcare spending is about $12,000, compared with about $90,000 of economic output per person. The sector is so large that any discussion of inflation, jobs or the wider economy is in many ways a discussion about healthcare too.

Q: Who pays for US healthcare spending?

The roughly $4 trillion comes from three sources. Consumers pay about $1 trillion, partly through premiums for the insurance they buy and partly out of pocket. Employers pay about another $1 trillion, mostly through employer-sponsored insurance. Federal and state governments pay the remaining $2 trillion or so, through direct spending plus tax subsidies for employer-sponsored coverage.

Q: Why is health insurance described as a discount card rather than real insurance?

Insurance is meant to cover random, infrequent and unpredictable events, like a heart attack or an accident. Today most healthcare spending goes to chronic illnesses that people manage for life, such as diabetes. People do not use car insurance to pay for an oil change, yet they use health insurance for routine checkups and ongoing prescriptions. For that predictable care, insurance acts more like a discount card than true risk protection.

Q: Why is employer-sponsored health insurance so common in the US?

Employer-sponsored insurance became the main form of private coverage because of a tax incentive. In 1954, the tax benefits of employer-provided health coverage were written into law, which made group insurance bought by an employer a pre-tax benefit for employees rather than a post-tax one. That incentive let employer coverage grow until it became the main way Americans get insurance outside of government programs, which is unusual among countries.

Q: What does it mean when an employer self-insures health coverage?

When an employer self-insures, the company carries the financial risk of its employees' healthcare claims itself. The insurer whose name is on the card, such as Blue Shield, Aetna, Cigna or United, usually provides only administrative services. Employees may think the insurer is paying their claims, but the money actually comes from the employer, which is why employer spending is such a large part of US healthcare.

Q: At what company size does it make sense to self-insure health benefits?

Self-insurance is mostly done by larger companies, but the threshold for "large" is not very high. Some companies with fewer than 500 employees self-insure, although that is not common. Above that size it makes more sense, and companies that self-insure usually hire a well-known insurer to run benefits administration while they keep the claims risk themselves.

Q: How does US healthcare spending compare with exports and corporate profits?

US healthcare spending of about $4 trillion is larger than the total value of US exports across all industries, which is about $3 trillion. Total post-tax US corporate profits are just under $4 trillion, so the roughly $1 trillion employers spend on healthcare is a very large amount next to their profits. For consumers, about $1 of every $20 they spend, roughly 5%, goes directly to healthcare.

Q: Why does chronic disease change how healthcare should be financed?

Chronic diseases such as obesity, diabetes, heart disease and lung disease now drive most healthcare spending, and many patients have more than one. HIV/AIDS has become a chronic disease thanks to medical progress, and cancer is moving the same way. Long-term conditions like these are predictable and ongoing, not random events, so traditional insurance is a poor fit for paying for them, according to Saum Sutaria.

Summary & Key Takeaways

• Healthcare makes up about 17 to 18% of the US economy, roughly $4 trillion of a $28 trillion GDP, or about $12,000 per person. Saum Sutaria points out that any talk about the economy, inflation or jobs is also about healthcare, because the sector is so large and pays higher than average wages.

• US healthcare funding splits into about $1 trillion from consumers, about $1 trillion from employers through employer-sponsored insurance, and about $2 trillion from government. The government share includes direct federal and state spending plus tax subsidies that make employer coverage a pre-tax benefit, a rule written into law in 1954.

• Sutaria argues that health insurance was built to protect against rare, catastrophic events, but most spending now goes to chronic illnesses such as diabetes, heart disease, HIV and, more and more, cancer. As a result, insurance often works like a discount card for predictable care rather than true insurance against risk.