Health Care Financing Health Article

FUNDING SOURCES IN THE UNITED STATES

In 1998, expenditures on personal health care services totaled $1 trillion with 19.6 percent paid directly by patients (out-of-pocket payments) and 80 percent paid by third parties (Health Care Financing Administration, http://www.hcfa.gov/stats/nheoact/tables). Third parties paid for 97 percent of hospital care but only 55 percent for drugs and other services. This discrepancy reflects the nature of insurance coverage. While almost all insurance plans provide some level of payment for hospital services, payments for drugs is less universal. The amount of cost-sharing varies by type of covered services, but patients typically pay a larger share of outpatient clinic costs and inpatient hospital costs.

FINANCIAL BURDEN OF ILLNESS

The total payments made for health care are sometimes referred to as the "cost" of personal health care. Two aspects of the distribution of the cost of care are frequently examined: the distribution among individuals with respect to their income and among individuals with respect to their health.

Analysts classify funding sources with respect to income as progressive, regressive, or proportional. A funding system is considered progressive if the fraction of a person's income paid to the system (for example, in taxes or premiums) rises as income rises; a funding system is considered regressive if the fraction of a person's income paid to the funding system declines as income rises; and a funding system is proportional if this fraction of income paid to the funding system remains constant regardless of income—every person pays the same proportion of his or her income.

As indicated by Figure 1, all health care is funded either directly or indirectly by individuals. Individuals ultimately pay for the premiums to insurance companies and the taxes to governments that in turn pay for health care services. Aid in the employers often pay for a large share of insurance premiums and/or taxes, the amounts paid by employers are passed on to individuals and households through lower wages for the employees, higher prices to consumers for the employers' goods or services, or lower returns to investors on capital.

In general, health insurance programs funded predominantly through income taxes are the most progressive with respect to income. People with the highest incomes pay proportionately more than people with the lowest incomes, regardless of their use of medical services. On the other hand, insurance funded mainly by premiums is the most regressive because people with lowest incomes pay a higher proportion of their total income than people with high incomes. In general, payroll taxes are moderately regressive because the percentage of an individual's income that comes from wages (as opposed to personal investments or other sources of income) tends to decline as total income rises. Insurance programs funded by lotteries are also considered regressive because most lottery tickets are purchased by those with low incomes.

The broader the segment of society that forms the funding base for health insurance programs, the more the financial cost of illness is shifted from the sick to the healthy. If all health care is paid for only by patients, then the financial cost of illness is born exclusively by the sick (or users of health care). On the other hand, if a broad segment of society (healthy and sick) is supplying funds for health insurance programs, then the financial cost of illness is shared among those individuals and less financial burden is borne by the sick. Likewise, the more out-of-pocket payments (direct patient payments) that serve as the source of funds for health care, the more the financial burden of illness is borne by the sick. When experience rating is used to set premiums, the sick bear a higher financial burden of illness then when community rating is used. Thus financing methods greatly influence the financial burden of illness in a society. For example, under national health insurance systems such as those of Great Britain, Germany, and Canada, the financial burden of illness is broadly spread across society and the actual expenditures made by the sick (in the form of out-of-pocket payments and disproportionately high premiums) are much less than the actual cost of their medical care. By contrast, in the United States a higher proportion of medical expenditures is paid directly by the sick and many insurance plans are experience rated, thus the financial burden of illness is more concentrated on the sick.