Health Care Funding in the United States

Health care funding in the United States consists of a complex mix of payments sourced from both the public and private sectors. Figure 1 illustrates the funding continuum across all major types of health care programs. Starting from the top, funding sources range from those which are public (on the left), to those which comprise a mix of public and private (towards the center), and to those which are private (on the right).

The current major health care programs (from left to right) range from those which are essentially social welfare provisions (such as Medicaid), to those which are social insurance programs (such as high risk state pools), and to those which are private insurance arrangements (such as group insurance and individual insurance plans).

Figure 1: Health Care Funding in the United States

Diagram of health care funding in the United States

However, even programs which are the most ‘public’ can contain an element of private funding. For example, Medicaid (which is a social welfare provision) can include cost sharing in some states through partial premiums and co-pays. Similarly, plans which are the most ‘private’ can contain an element of public funding. For example, health savings accounts (which are private sector products) are government-subsidized to the extent that they permit a tax exemption on qualifying health care expenses paid from those accounts. It can be seen therefore that public and private sources of funding are intermingled for major types of health care programs.

Types of Health Care Plans Funded

The funding which is provided to each health care program is then allocated to a particular type of health care plan. As shown in Figure 1, major public programs including Medicaid, CHIP and Medicare tend to fund managed care plans such as health maintenance organizations and preferred provider organizations. However, programs which are privately funded use plans right across the board, including point of service plans and indemnity plans.

The essential difference between managed care and indemnity insurance is choice—managed care plans provide a more restricted set of choices in return for lower costs, while indemnity plans, and plans which incorporate indemnity-type features, provide the widest range of options but for greater cost. This is represented in the bottom row of Figure 1. The broadest group of health care providers is accessed through indemnity plans, and this narrows as one moves (left) towards the hybrid managed indemnity arrangement and finally to the narrowest group represented by health maintenance organizations.

Comparison of U.S. Health Care Costs

The Centers for Medicare and Medicaid Services compiles information on total health care expenditure, and expresses this expenditure as a percentage of total GDP in order to facilitate comparisons with health care expenditures in other countries. Current U.S. expenditure on health care is nearly 16% of GDP, and this is compared with a range of other countries in Chart 1. It can be seen that health care expenditure in the U.S. is significantly higher than any other country compared.

Chart 1: Health Care Expenditure as a Percentage of GDP1

Graph of health care expenditure as a percentage of GDP

Combined public and private expenditure on health care in the United States totaled approximately $2.5 trillion in 2009, or $8,050 per person. This is expected to increase at the rate of 6.7% per annum for at least the next five years.

  1. Organization for Economic Cooperation and Development, OECD Health Data, 2008 (Paris: OECD, 2008).
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