Health Economics Information Resources: A Self-Study Course

Module 2 - Sources and Characteristics of Information Relating to Health Care Financing in the US  

Sources of Health Care Funds

“Ultimately, the people pay all health care costs. Thus, when we say health care monies come from different sources, we really mean that dollars take different routes on the way from consumers to providers through government (taxes), private insurance companies (premiums), and independent plans, in addition to out-of-pocket payments.”

The nation’s health dollar comes from the taxes and insurance premiums we pay, as well as from our co-payments and out-of-pocket expenditures. And perhaps this is one of the most compelling reasons that health care reform is of such vital interest to researchers and the general public alike.

Let us continue and look at routes those health care dollars taken from consumers to providers. As we do so, we will address three basic questions:

1. What funders are included in this category?
2. How does this funding scenario work?
3. What are the trends?

The Nation’s Health Dollar: 2000

What Funders are Included?

Source: Centers for Medicare & Medicaid Services, Office of the Actuary, National Health Statistics Group

What is the largest slice of the health care dollar pie? It is clear from this slide that monies from private insurance comprised the largest category of funds in 2000 - 34%.

Think about Medicaid and Medicare costs at 33%. Who pays for those receiving health care through those programs? All of us do through the taxes we pay. This is indirect out-of-pocket expenditures.

Where does the 15% out-of-pocket costs come from? Again, the money comes directly from our checkbooks or pockets. Out-of-pocket costs include paying for services not covered by your health plan or insurer. Examples include paying for services from a chiropractor not on the approved provider list of your health plan and co-payments.

In fact, 60% of the total health care dollar comes directly or indirectly from our pockets, directly from our pockets or indirectly paid for through taxes.

How does this scenario work?

Insurance is like a club.

This is the analogy Sherman Folland uses in his book The Economics of Health and Health Care:

“Consider a club with 100 members. The members are about the same age and they have the same lifestyle. It seems that about once a year one of the 100 members gets sick and incurs health care costs of $2,000.00 The incidence of illness seems to be random, not necessarily striking men, women, the elderly or the young in any systematic fashion. The club members, worried about potential losses due to illness, decide to collect $20.00 from each member and put the $2,000.00 in the bank for safe keeping and to earn a little interest. If a member becomes ill, the fund is used to pay for the treatment. This in a nutshell, is insurance. The members have paid $20.00 to avoid the risk or uncertainty, however small, of having to pay $2,000.00. The ‘firm’ collects the money, tries to maintain and/or increase its value through investment and pays claims when asked.”

From the inception of health insurance (in 1847, when the first commercial plan was organized) to the 1930’s, the purpose of such insurance was to offset income losses resulting from disability, usually due to accidents. Since that time, however, health insurance has evolved greatly and is now a mechanism for defraying costs of illness, not just accidents, and for financing routine and preventative health care.

Whether private insurance is an employee compensatory benefit and thus purchased for individuals by companies and organizations or purchased directly by the individual, it operates in similar fashion. A premium is paid by employers or individuals to an insurance company, which pays the doctors, hospitals and other health care providers for care and services administered to the eligible patient.

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