What are some of the main problems and issues pertaining to health care financing?

Health care finance includes overall funding for health care, allocations for specific regions, groups or types of health care and payment mechanisms. This webpage provides an overview of health care spending and dives into four modes of paying for health care: public insurance, state employee health plans, private insurance and out-of-pocket costs. Additionally, this webpage includes links to NCSL resources on various state policy options for curbing growing health care costs.

Health Care Spending Overview

Health care spending in the United States grew 4.6% to reach $3.6 trillion—or $11,172 per person in 2018— according to the National Health Expenditures Accounts from the Centers for Medicare & Medicaid Services (CMS). As a share of the nation's gross domestic product, health spending accounted for 17.7%.

The majority of health care spending in 2018 by service and/or product was on hospital care (33%), reaching $1.2 trillion, followed by physician and clinical services (20%), and retail prescription drugs (9%). Private health insurance accounts for the most spending by funding source at 33%, followed by Medicaid (21%), Medicare (16%), and out-of-pocket costs (10%).

Among the entities responsible for financing the health care bill, the federal government and households each accounted 28% of health care spending (the largest shares) followed by private businesses (20%), state and local governments (17%), and other private revenues (7%) in 2018.

Health Care Payers

The federal government and households account for the largest share of health care spending (28% each), followed by private businesses (20%), state and local governments (17%) and other private revenues (7%). In the U.S., there are four basic modes of paying for health care:

• Public health insurance programs, including Medicaid and Medicare
• State employee health plans
• Private health insurance plans (both individual and employer-provided group)
• Out-of-pocket costs for consumers

Public Health Insurance

The largest public health insurance programs include Medicaid, Medicare and the Children’s Health Insurance Program (CHIP). Collectively, these programs cover over 100 million low-income, elderly and disabled adults and children at a cost of over a trillion dollars a year or approximately 35% of the population.

Medicaid is a health insurance program for low-income individuals, children, their parents, the elderly and people with disabilities. The program is a federal/state partnership with shared authority and financing.  Although participation is optional, all 50 states participate in the Medicaid program with significant variation across states in spending, eligibility, covered services and other program features. Once certain minimum federal standards are met, each state determines how its program is administered, who to cover, what services to cover, and how providers are paid. For more research and information, visit NCSL’s Medicaid webpage.

Children’s Health Insurance Program (CHIP) is a federal and state program that provides coverage for uninsured children whose family's income is below average but too high to qualify for Medicaid. The federal government provides matching funds to states for health insurance for these families.

Medicare is a federal health insurance program for people who are 65 or older, certain younger people with disabilities, and people with End Stage Renal Disease requiring dialysis or transplant. In 2018, Medicare covered nearly 60 million people.

Other public insurance programs or agencies providing and covering various health care services for targeted populations include Tricare, the Veteran's Health Administration, the Indian Health Service, the Substance Abuse and Mental Health Services Administration (SAMHSA) and the Refugee Health Promotion Program (RHP).

State Employee Health Plans

State employee health plans are employer-provided, but publicly funded. State and local governments employed over 14.8 million full-time workers throughout the U.S. in 2019. All 50 states provide health insurance coverage for their state employees but the extent of coverage, who is eligible to enroll and employer versus employee premium contributions vary from state-to-state.

According to a comprehensive report published by The Pew Charitable Trust in 2014, states and their employees spent $30.7 billion on insurance premiums in 2013; states paid $25.1 billion (nearly 82%) of this total. While health insurance premiums varied greatly across the states, the average per-employee per-month premium was $959 and states paid an average of $805 (nearly 84%) toward premium contributions.

For additional information on how states choose to operate and finance their state employee health plans, visit NCSL’s state employee health benefits webpage.

Private Health Insurance

Private health insurance encompasses plans purchased on the exchanges or directly from an insurer, either as individual or group plans. More than 67% of Americans are covered by private plans. A majority of individuals with private insurance receive coverage through employer-sponsored health plans. Other small business and employees and individuals purchase health plans on the individual and small group markets established by the Affordable Care Act (ACA).

They have defined open enrollment periods, as well as special enrollment periods triggered by qualifying life events such as marriage or the birth of a child. For research and information on policy strategies to achieve high-quality, affordable coverage options, visit NCSL’s Health Insurance Resources website.

Employer-Sponsored Health Insurance Plans. Approximately 164 million people under age 65 in the United States were covered through employer-sponsored health insurance plans in 2019. The most common plan type continues to be preferred provider organizations (PPOs) at 44% of covered workers in 2019, followed by high deductible health plans at 30% and health maintenance organizations (HMOs) at 19%.

Premium costs and average deductibles both recently outpaced growth in median income. Average health premiums for employer-sponsored health insurance in 2019 were $7,188 for single person coverage (increasing 4% since 2018) and $20,576 for family coverage (increasing 5% since 2018). Premiums on family coverage increased 22% from 2014 to 2019. Average deductibles for single person policies grew faster than median household income between 2008 and 2018.

Employer size typically affects the ratio of employer and employee contributions to premium costs. Small businesses are more likely to pay the entire premium for covered workers than large businesses. Small businesses are defined as those that have no more than 100 employees, and states have the option of limiting state-based health insurance purchasing pools to companies with 50 or fewer employees. Covered employees of small businesses contribute a lower percentage of the premium for single coverage (16%) compared to employees of larger businesses (19%). Over one-third of small firm employees are in a plan where they contribute more than half of the premium for family coverage, compared to just 6% of large firm employees.

The Employee Retirement Income Security Act (ERISA) limits the ability of state legislators to regulate many types of private health insurance (specifically, self-funded health insurance plans).

Individual Health Insurance Plans. Individuals who are not connected to employer-sponsored or public coverage may purchase individual health insurance policies. Two types of health insurance subsidies are available through the ACA marketplace: premium tax credits and cost-sharing subsidies.

Premium tax credits lower monthly expenses for any tier of a metal level plan (gold, silver, bronze) while cost-sharing subsidies lower costs for only mid-level silver plans. Individuals and families that do not fall between 100% to 400% of the federal poverty level are not eligible for subsidies and can face steep prices for health care coverage. For example, a family of four living in certain regions in Georgia that does not qualify for subsidies could be asked to pay over $1,700 per month for a silver plan in 2019.

Individual market enrollment decreased 13.7 million (5%) in 2019, the first year that the repeal of the ACA’s individual mandate penalty went into effect. Some states seek to stabilize the market through various mechanisms, including:

• 14 states have established reinsurance programs through federal Section 1332 waivers to curb rising premiums and maintain insurer participation in the individual health insurance marketplace. At least seven additional states have passed legislation to initiate a reinsurance program. For example, CMS approved Montana’s waiver application in 2019 to waive the requirement for the single risk pool to implement a reinsurance program in 2020-2024.
• Beyond Section 1332 waivers, some states have pursued various other policy options aiming to stabilize their individual markets, including requirements individuals maintain adequate health coverage, state insurance subsidies and extending open enrollment periods.

Out-of-Pocket Costs for Consumers

Out-of-pocket costs encompass the health expenses patients must cover that health insurers do not reimburse for. These include deductibles, coinsurance and copayments plus all costs for health services not covered by insurance. This also includes the costs uninsured patients must cover when seeking health care services.

For those with private insurance coverage, the 2020 Millman Medical Index projects that in 2020, employers cover 60% of costs, employee contributions cover 24% and employee out-of-pocket costs cover 16% of medical costs. Out-of-pocket costs for 2020 are estimated at $1,048 for the average person and $4,582 for a family of four.

Health Savings Accounts (HSAs). HSAs can also be used to pay out-of-pocket expenses. These accounts earn interest, and any unused money is not lost. However, to be eligible to use a health savings account, people must have a health insurance plan that has lower premiums (the fee paid to have insurance) and higher deductibles (the fee paid each time a health service is used) than a traditional health plan. Such plans are called high-deductible health plans. In 2020, the IRS limited annual contributions to HSAs to $3,550 for individuals and $7,100 for families with a HDHP plan.

Flexible Spending Accounts (FSAs). FSAs are offered by some employers. Through these accounts, employees can choose to have a limited amount of money deducted from their paychecks to pay for out-of-pocket health care expenses. The money deducted is not subject to federal income taxes. However, the account does not earn interest, and if any money is unused at the end of the year, the employee does not get it back.

Additional Resources

NCSL Resources:

• Health Innovations State Law Database
• Health Innovations Toolkit (NCSL, 2019)

Additional Resources:

• National Health Expenditures 2018 Highlights (CMS, December 2019)
• National Health Care Spending in 2018: Growth Driven By Accelerations In Medicare and Private Insurance (Health Affairs, December 2019)
• Medicaid’s Role in Health Care Financing (Kaiser Family Foundation, May 2015)
• National Health Care Spending In 2018: Growth Driven By Accelerations In Medicare And Private Insurance Spending

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