If you ask people who pays for healthcare, most will respond that it’s a shared responsibility between government, business and households. But that’s a myth. It’s households that ultimately pay the entire cost. The notion of shared responsibility is supported by the Centers for Medicare & Medicaid Services’ (CMS) annual report on national health expenditures by type of sponsor:
2000 2015 Change
National Health Expenditures ($ bill.) $1,369.7 $3205.6
Federal Government 19.0% 28.7% 9.7%
State & Local Government 16.5% 17.1% 0.6%
Private Business 24.5% 19.9% (4.6%)
Households 32.4% 27.7% (4.7%)
Other Private Sources 7.6% 6.6%
Total 100.0% 100.0%
Over the past fifteen years, the relative share borne by the federal government has risen by over nine percentage points, while the share borne by business and households has fallen by an approximately equal amount. This suits the purpose of politicians, who like to take credit for providing their constituents with valued benefits. But the truth is that healthcare spending by the federal government is really paid for by households through higher taxes and/or a reduction in other services, or shifted to future generations through increased borrowing.
The same dynamic is true for healthcare spending by state and local governments; households really pay for it through higher taxes and a rising debt burden. Healthcare is the largest single item in most state budgets, and it is crowding out funds available for transportation and education. Middle-class families who find it increasingly difficult to pay for their children’s college education and drivers frustrated with the deteriorating conditions of state highways and infrastructure are unwitting victims of this healthcare cost–public service trade-off.
Likewise, employers and union leaders want employees to believe that businesses are voluntarily giving them health benefits that otherwise would have to be paid for by the workers themselves. Employees are only too happy to accept the fiction that employers are financing their “fair share” of healthcare costs out of profits. But the economic reality is that wages, health insurance and other fringe benefits are all components of total worker compensation. Whenever one component rises, one or more of the others has to fall.
When employers provide health insurance to their workers, they may select the plan and collect the funds to pay the benefits, but they do not bear the ultimate costs. Between 2000 and 2015, the average annual employer contribution to family health insurance rose over 160%, while over the same period, inflation-adjusted median earnings for wage and salary workers rose slightly less than 4%. Funds that otherwise would have been available to increase workers’ incomes were absorbed by the rising cost of health benefits. Employer contributions to health benefits are simply compensation in another form.
The widespread failure to acknowledge the effects of increasing healthcare costs on wages, taxes, government services and government debt helps perpetuate the belief that workers and households are receiving a benefit paid for by someone else. And the perpetuation of this myth of shared responsibility is what allows Congress to avoid dealing with the real issue—the unsustainable rate of healthcare inflation.
Congress’s Failure to Focus on the Real Issue
For over five decades, the annual growth in the cost of healthcare has outstripped the growth rate of the overall economy. As a result, healthcare presently consumes almost 18% of the total GDP, costing an annual average of more than $10,400 per capita. The U.S. healthcare sector, at $3.35 trillion in 2016, is bigger than the entire economies of all but three other nations in the world. American healthcare is hugely complex and costly, and growing more so every year.
Instead of dealing with cost, the 2010 Affordable Care Act and the 2017 Republican alternative, the American Health Care Act, are both focused on who nominally pays—government, business or households. Congress is able to get away with this because the public mistakenly believes that who ostensibly pays is a more important issue than the escalating total cost.
The only group aggressively addressing unsustainable cost has been CMS through approximately 76 different active pilot programs to promote value-based purchasing. CMS’s experimentation with bundled payments and population-based reimbursement represents a concerted effort to both improve the quality of healthcare and restrain its cost. Commercial payers will likely eventually follow suit, though to date their uptake has been relatively slow.
As long as the public continues to accept the myth of shared responsibility, Congress is likely to continue to focus its attention on who nominally pays, i.e., the sponsor, rather than on the more pressing issue of rising cost.
John McCracken, PhD