Chapter 13

Financing Health Care

13.1INTRODUCTION

3 major methods o f financing health care services—out of pocket payments by consumers, insurance premiums, and taxation—and within each category there are a number of different financing techniques (e.g., out of pocket payments include deductibles, copayments, full consumer payments, insurance premiums can be paid directly by consumer or employer or by government and taxes can be levied on income or on specific products or services).

 

13.2FINANCING MEANS AND BURDENS IN THE U.S.

In 1997, a total of $1,082 billion was spent on health care.  Roughly 17 percent of this was financed by out-of-pocket payments by consumers.  32 percent was spent through private insurance.  Roughly 82 percent of all private insurance premiums are paid through employment-provided health insurance.  Roughly one-half of premiums purchased directly by individuals are Medigap premiums.

About $472 billion of total financing for health care involved taxation.

 

13.3ECONOMIC ANALYSIS OF ALTERNATIVE PAYMENT SOURCES

13.3.1      Private Health Insurance

13.3.1.1 Insurance Premiums

When premiums are paid by employees or by individuals, the purchasers bear the cost of their insurance purchases.

When employer pays premiums, the economic burden of all health insurance benefits will fall on employee either directly (out of pocket) or indirectly (through lower wages).

13.3.1.2 Taxation and Insurance Premiums

13.3.1.3 Mandated benefits

Fig. 13-2, p. 297.

No benefits, D1 and Sv=0, equilibrium W = $8 and employment = 300 workers.

Mandated benefits of $2/worker, labor demand curve shifts down by $2 to D2. If employees fully value benefits, Sv = b, new W = $6

If employees do not value benefit at all, (Sv = 0), W = $7 and reduction in employment.  If benefits are partially valued (Sv < b) net result somewhere in between.

 

13.3.2      Taxation

Analyze burden of 2 types of taxes commonly used to finance health care: payroll taxes and sales taxes.

13.3.2.1 Payroll taxes

Burden of employee paid payroll tax is on worker.  Economic effects resulting from imposition of payroll tax paid by employer deserve closer attention

See Figure 13-1, p. 295 and the explanation included.

                                                                                                                                                                                                                                                                                                               

13.4 THE INCIDENCE OF ALTERNATIVE TYPES OF HEALTH CARE FINANCING

                Incidence = pattern of distribution of burdens of various financing methods.  4 income groups each with 100 families.  Table 13-2, p. 302. 

Each family incurs health care expenditures of $2,500 →Total medical expenditures for all groups = $1M ($2,500 × 400)

Group A (lowest income) spends all it earns on commodities

Group B                                               90%

Group C                                               80%

Group D                                               70%

What the members of a group do not spend will be saved.  If they have to pay for medical care, they will reduce other expenditures, but not their savings.

4 options: insurance premiums, sales tax, payroll tax, income tax.

Fig. 13-5, p. 303. 

Premiums. Same risk of health care expenses for all families → charge every family same premium → Premium = $1M/400 = $2,500.

Burden = Premium/Family income = 25% for group A, 12.5% for B, 8.3% for C and 6.25% for D → Burden ↓ as income ↑

Payroll Taxes. Fixed % of W, but cap of $30,000. →Members of group D only pay taxes on 1st $30,000 of their W.  → Total taxable W = 1M from group A ($10,000 × 100)

                                                        + 2M                        B ($20,000 × 100)

                                                        + 3M                        C (30,000 × 100)

                                                        + 3M                        D (30,000 × 100)                     

                                                           9M

In order to raise $1M medical expenses for all groups, tax rate of $1M/$9M = 11.1% is needed.

Burden = 11.1% for groups A, B, C whose members have incomes ≤ $30,000 but for members of group D, burden =

 

Sales Taxes. Assume sales taxes imposed on al consumption expenditures except on health care.

Total consumption expenditures = $1,000,000 (10,000.100) for group A

                                                                   + 1,800,000 (18,000.100) for group B

                                                                   + 2,400,000 (24,000.100) for group C

                                                                   + 2,800,000 (28,000.100) for group D

                                                                = 8,000,000

In order to raise $1M, tax rate on consumption expenditures must be $1M/$8M = 12.5%

Group A pays (12.5%) 1M = $125,000 in taxes.  Burden = 125,000/$1M = 12.5%

Group B pays (12.5%) (1.8M) = 225,000 in taxes.  Burden = 225,000/$2M = 11.25%

Group C pays (12.5%) (2.4M) = 300,000 in taxes. Burden = 300,000/$3M = 10.0%

Group D pays (12.5%) (2.8M) = 350,000 in taxes.  Burden = 350,000/$4M = 8.75%

→Burden ↓ as income ↑

 

Income taxation.  Burden will depend on actual tax rates.  Assume highest income group pays 4 times rate of lowest income group.  Assume that lowest income group pays 40% of overall, or average, rate.  Next group pays 80% of this rate, 3rd highest income group pays 120% of rate, and highest income group pays 160% of this rate.  Let X be this overall tax rate.

→.4(1M)X +.8(2M)X + 1.2(3M)X + 1.6(4M)X = $1M

(.4 + 1.6 + 3.6 + 6.4)MX = $1M

→ X = $1M/$12M = 8.33%

→Group A pays .4(8.33) = 3.33%

Group B pays .8(8.33) = 6.67%

Group C pays 1.2(8.33) = 10%

Group D pays 1.6(8.33) = 13.33%

→Burden ↑ as income ↑

Comparison: Premiums most “regressive” and income taxes most “progressive”.  The other 2 methods are mildly regressive.