Deep Dive: Basics of Health Care Financing in the US

MODULE 3 | Dive Deeper

Conclusion: Value-Based Health Care

THE BASIC PLAYERS

Health care financing in the United States has several distinct players, and each shares a role in the structure and perpetuation of the health care finance system. This section will review these entities.

PRIVATE INSURANCE

This diagram represents the typical flow of funds between individuals, insurance providers, and health care providers.

Individuals or employers can purchase health insurance from a private insurance company.

Currently, the majority of Americans under the age of 65 obtain health insurance from their employers, who in turn purchase insurance plans from insurance companies. Employers usually pay all or part of the premium for their employees as a benefit of employment. This is a tax-deductible business expense; thus, it is heavily subsidized by the government.

The insurance provider negotiates and pays reimbursements to the health care provider (e.g., individual physicians or hospitals).

A copayment:

A flat fee that a patient must pay each time they receive medical care. For example, a patient might pay a $10 copayment (“copay”) for every doctor visit, while the insurance plan covers the rest of the cost.

A deductible:

The amount the patient must pay each year before their health insurance coverage plan begins paying. For example, a patient may have a $1,500 deductible, so they would have to pay all expenses up to $1,500 before the insurance covers any of their costs.

Co-insurance:

A share of the costs of a health care service-usually a percentage of the full allowed amount of charged services. Co-insurance is usually paid after a patient has covered their full deductible.

It’s important to note that most individuals have a combination of the above in their insurance plans. Generally, patients will pay a copay for normal visits to their PCP and will be charged a deductible for hospital visits and procedures.

LET'S CHECK OUR UNDERSTANDING

Read the patient’s vignettes and then answer questions related to the patient’s medical costs.

Ms. Church has been feeling ill with a wheezing cough for three days. She decides to visit a local emergency room a couple of blocks away from her house because she is worried that she has not improved.

Ms. Church has a high deductible insurance plan with a low monthly premium of $55 per month. Her annual deductible is $3,000 and she is required to pay a 10% co-insurance for covered services once the annual deductible amount is met. This is the first time she has visited a health care provider this year.

In the emergency room, Ms. Church is found to have a fever, heart rate of 105, and is breathing faster than normal. The physician on call is concerned that Ms. Church may have pneumonia. She orders a chest x-ray and laboratory tests. The chest x-ray shows a left lower lobe infiltrate suggestive of community-acquired pneumonia and her labs showed an elevated white blood cell count. Since Ms. Church likely has pneumonia and has abnormal vitals, the physician decides to admit her for further evaluation. Ms. Church stays in the hospital for three nights and is then discharged home.

A week after being discharged, Ms. Church visits with her primary care provider for a follow-up visit. She explains to her doctor that she continues to experience shortness of breath. Her PCP decides to order a chest x-ray to ensure Ms. Church's lungs are clearing as expected.

GOVERNMENT INSURANCE

In a system where the majority of insurance is employment-based, as Americans age and retire they lose coverage. This leaves those who generally need health care the most-the elderly-without any insurance. In fact, in the late 1950s, less than 15% of the elderly had health insurance. In addition, those who are unemployed, and therefore often poor, are also left out of an employment-based market. In response to these significant gaps, President Lyndon B. Johnson enacted tax-financed government health insurance in 1965, aiming to provide affordable care for the elderly (Medicare) and the poor (Medicaid).

This diagram illustrates the typical flow of funds between taxpayers, government health insurance plans, and health care providers.

MEDICARE

Medicare is a federal health insurance program for all people aged 65 and older, regardless of income or medical history. It also provides coverage for those under 65 years if they have end-stage renal disease or are blind. Medicare covers approximately 50 million Americans, representing one-sixth of the total population.

If you want to learn more about what Medicare covers, and to understand Medicare Parts A, B, C, and D, click the icon.

MEDICAID

Medicaid is a federal program administered by individual states to provide health care for certain poor and low-income individuals and families. Medicaid is the largest public health insurance program in the United States, covering roughly 1 in 5 Americans, and 1 in 3 children. The federal Medicaid program is administered by individual states, with the federal government paying at least 50% of total state Medicaid costs, based on the financial status of the state.

Prior to the Affordable Care Act, and still in states that have not expanded Medicaid, to qualify for Medicaid a person must meet the financial criteria for low-income and also belong to one of Medicaid’s eligible groups:

It is important to clarify that not every poor adult or poor child in the United States is eligible for Medicaid coverage. Each person must meet certain income requirements, expressed as a percentage of the Federal Poverty Level (FPL). Qualifications for Medicaid coverage vary drastically from state to state. For example, as of December 2016, Texas does not provide coverage to low-income adults outside of the eligible groups listed above, but the state of Washington does cover low-income adults up to 133% of the FPL.

More than half of all Medicaid enrollees are children. Coverage for children also varies state to state; Texas covers children ages 1-5 at 144% of the FPL, whereas Louisiana covers them up to 212% of the FPL. This means that a family of four in 2016 in the state of Texas must have an annual income of $32,992 or less for their children aged 1-5 to be covered by Medicaid, versus an annual income of $51,516 or less for the same family in Louisiana.1

You can explore more of the state-to-state variation in eligibility criteria for Medicaid here.

The federal government requires that a broad set of services be covered under Medicaid, including hospital, physician, laboratory, x-ray, prenatal, preventive, nursing home and home health services. Medicaid improves access to care for a group of patients that generally would otherwise be uninsured.

US VETERANS HEALTH ADMINISTRATION AND TRICARE

The Veterans Health Administration (VHA) provides health care for over 8.76 million veterans each year and is America’s largest health care system, with over 1,700 sites of care including medical centers, outpatient clinics, community clinics, and nursing homes.2

Veterans are eligible for VHA coverage once they have completed 24 continuous months of active duty service or completed the full period for which they were called for active duty. Enrollment is based on priority groups as assigned by the VHA with veterans with severe disabilities given higher priority.

TRICARE is a health care program from the United States Department of Defense Military Health System that provides health benefits for US Armed Forces military personnel, military retirees, and some members of the Reserve Component. The TRICARE program includes coverage of the dependents of enrollees. TRICARE provides health care coverage to over 9 million military personnel and their dependents.3

UNINSURED

As of 2015, about 9.1% of the population, or around 28.6 million people,4 were uninsured in the US. This is the lowest percentage recorded in US history, yet this still represents a large number of people. Uninsured patients often avoid and/or have trouble accessing needed health care. When they do obtain health care, generally they are given a bill that is based on charges rather than actual costs or reimbursement rates. Uninsured adults report that cost is the number one reason they remain uninsured.5 The population of the uninsured varies from state to state within the US, from a high of 16% in Texas to a low of 4% in Massachusetts in 2015.6

It is estimated that there are 11 million undocumented immigrants residing within the United States, many of whom are uninsured. In California, where it is estimated that 25%, or 2.75 million, of US undocumented immigrants reside, over half (51%) are uninsured and are the least likely, when compared to lawful permanent residents, to have seen a doctor within the last year (28%).7 Most undocumented immigrants are concentrated within a few states of the US and disproportionately impact the percentage of the insured population.

Learn More

WEBSITE

Five Facts about Medicaid.

Explore data-driven facts about Medicaid to get a better understanding about how it works and who it covers.

Gunja MZ, Collins SR. Five facts about Medicaid. The Commonwealth Fund website. Published December 2, 2016.
Accessed March 27,
2017.

ARTICLE

Key Facts about the Uninsured Population.

Learn more about the uninsured population in the United States and how it has been affected by the Affordable Care Act with this resource from the Kaiser Family Foundation

Kaiser Family Foundation website. Published September 29, 2016.
Accessed March 27,
2017.