Who Really Pays for Health Care?

Abstract

When asked who pays for health care in the United States, the usual answer is “employers, government, and individuals.”
Most Americans believe that employers pay the bulk of workers' premiums and that governments pay for Medicare, Medicaid, the State Children's Health Insurance Program (SCHIP), and other programs.However, this is incorrect. Employers do not bear the cost of employment-based insurance; workers and households pay for health insurance through lower wages and higher prices. Moreover, government has no source of funds other than taxes or borrowing to pay for health care.

Full text

COMMENTARY
Who Really Pays for Health Care?
The M yth of “Shared Responsibility”
Ezekiel J. Emanuel, MD, PhD
Victor R. Fuchs, PhD
W
HEN ASKED WHO PAYS FOR HEALTH CARE IN THE
United States, the usual answer is “employ-
ers, government, and individuals.” Most
Americans believe that employers pay the
bulk of workers’ premiums and that governments pay for
Medicare, Medicaid, the State Children’s Health Insurance
Program (SCHIP), and other programs.
However, this is incorrect. Employers do not bear the cost
of employment-based insurance; workers and households
pay for health insurance through lower wages and higher
prices. Moreover, government has no source of funds other
than taxes or borrowing to pay for health care.
Failure to understand that individuals and households ac-
tually foot the entire health care bill perpetuates the idea
that people can get great health benefits paid for by some-
one else. It leads to perverse and counterproductive ideas
regarding health care reform.
The Myth of Shared Responsibility
Many sources contribute to the misperception that employ-
ers and government bear significant shares of health care
costs. For example, a report of the Centers for Medicare &
Medicaid Services states that “the financial burden of health
care costs resides with businesses, households, and govern-
ments that pay insurance premiums, out-of-pocket costs,
or finance health care through dedicated taxes or general
revenues.”
1
A New America Foundation report claims, “There
is growing bipartisan support for a health system based on
shared responsibility—with the individual, employers, and
government all doing their fair share.”
2
The notion of shared responsibility serves many inter-
ests. “Responsibility” is a popular catchword for those who
believe everyone should pull their own weight, while “shar-
ing” appeals to those who believe everyone should contrib-
ute to meeting common social goals. Politicians welcome
the opportunity to boast that they are “giving” the people
health benefits. Employers and union leaders alike want
workers to believe that the employer is “giving” them health
insurance. For example, Steve Burd, president and chief ex-
ecutive officer of Safeway, argued that decreasing health care
costs is critical to his company’s bottom line—as if costs come
out of profits.
3
A highly touted alliance between Wal-Mart
and the Service Employees International Union for univer-
sal coverage pledged that “businesses, governments, and in-
dividuals all [must] contribute to managing and financing
a new American health care system.”
4
The Massachusetts health care reform plan is con-
structed around “shared responsibility.” The rhetoric of
health reform proposals offered by several presidential can-
didates helps propagate this idea. Hillary Clinton, for in-
stance, claims that her American Health Choices plan “is
based on the principle of shared responsibility. This plan
ensures that all who benefit from the system contribute to
its financing and management.”
5
It then lists how insur-
ance and drug companies, individuals, clinicians, employ-
ers, and government must each contribute to the provision
of improved health care.
With prominent politicians, business leaders, and ex-
perts supporting shared responsibility, it is hardly surpris-
ing that most Americans believe that employers really bear
most of the cost of health insurance.
The Health Care Cost–Wage Trade-off
Shared responsibility is a myth. While employers do pro-
vide health insurance for the majority of Americans, that
does not mean that they are paying the cost. Wages, health
insurance, and other fringe benefits are simply compo-
nents of overall worker compensation. When employers pro-
vide health insurance to their workers, they may define the
benefits, select the health plan to manage the benefits, and
collect the funds to pay the health plan, but they do not bear
the ultimate cost. Employers’ contribution to the health in-
surance premium is really workers’ compensation in an-
other form.
This is not a point merely of economic theory but of his-
torical fact. Consider changes in health insurance premi-
ums, wages, and corporate profits over the last 30 years. Pre-
miums have increased by about 300% after adjustment for
inflation. Corporate profits per employee have flourished, with
inflation-adjusted increases of 150% before taxes and 200%
after taxes. By contrast, average hourly earnings of workers
Author Affiliations: Department of Bioethics, Clinical Center, National Institutes
of Health, Bethesda, Maryland (Dr Emanuel); Department of Economics, Stan-
ford University, Stanford, California (Dr Fuchs).
Corresponding Author: Ezekiel J. Emanuel, MD, PhD, Department of Bioethics,
National Institutes of Health, 10 Center Dr, Bldg 10, Room 1C118, Bethesda, MD
20892 (eemanuel@nih.gov).
©2008 American Medical Association. All rights reserved. (Reprinted) JAMA, March 5, 2008—Vol 299, No. 9 1057
at University of Toronto, on March 30, 2008 www.jama.comDownloaded from

in private nonagricultural industries have been stagnant, ac-
tually decreasing by 4% after adjustment for inflation. Rather
than coming out of corporate profits, the increasing cost of
health care has resulted in relatively flat real wages for 30 years.
That is the health care cost–wage trade-off.
6
Even over shorter periods, workers’ average hourly earn-
ings fluctuate with changes in health care expenditures (ad-
justed for inflation) (F
IGURE). During periods when the real
annual increases in health care costs are significant, as be-
tween 1987 and 1992 and again between 2001 and 2004,
inflation-adjusted hourly earnings are flat or even declin-
ing in real value. For a variety of reasons, the decline in wages
may lag a few years behind health care cost increases. In-
surance premiums increase after costs increase. Employers
may be in binding multiyear wage contracts that restrict their
ability to change wages immediately. Conversely, when in-
creases in health care costs are moderate, as between 1994
and 1999, increases in productivity and other factors trans-
late into higher wages rather than health care premiums.
The health care cost–wage trade-off is confirmed by many
economic studies.
8-11
State mandates for inclusion of cer-
tain health benefits in insurance packages resulted in es-
sentially all the cost of the added services being borne by
workers in terms of lower wages.
12
Similarly, using the Con-
sumer Expenditure Survey, Miller
13
found that “the amount
of earnings a worker must give up for gaining health insur-
ance is roughly equal to the amount an employer must pay
for such coverage.” Baicker and Chandra
14
reported that a
10% increase in state health insurance premiums gener-
ated a 2.3% decline in wages, “so that [workers] bear the
full cost of the premium increase.” Importantly, several stud-
ies show that when workers lose employer-provided health
insurance, they actually receive pay increases equivalent to
the insurance premium.
8,12
In a review of studies on the link between higher health
care costs and wages, Gruber
15
concluded, “The results [of
studies] that attempt to control for worker selection, firm
selection, or (ideally) both have produced a fairly uniform
result: the costs of health insurance are fully shifted to wages.”
The Cost–Public Service Trade-off
A large portion of health care coverage in the United States
is provided by the government. But where does govern-
ment’s money for health care come from? Just as the ulti-
mate cost of employer-provided health insurance falls to
workers, the burden of government-provided health cov-
erage falls on the average citizen. When government pays
for increases in health care costs, it taxes current citizens,
borrows from future taxpayers, or reduces other state ser-
vices that benefit citizens: the health care cost–public ser-
vice trade-off.
Health care costs are now the single largest part of state
budgets, exceeding education. According to the National
Governors Association, in 2006, health care expenditures
accounted for an average of 32% of state budgets, while
Medicaid alone accounted for 22% of spending.
16
Between
2000 and 2004, health care expenditures increased sub-
stantially, more than 34%, with Medicaid and SCHIP
increasing more than 44%.
7
These increases far exceeded
the increase in state tax receipts. In response, some states
raised taxes, others changed eligibility requirements for
Medicaid and other programs, and still others reduced the
fees and payments to physicians, hospitals, and other pro-
viders of health care services.
However, according to a Rockefeller Institute of Govern-
ment study of how 10 representative states responded, prob-
ably the most common policy change was to cut other state
programs, and “the program area that was most affected by
state budget difficulties in 2004 was public higher educa-
tion....Onaverage, the sample states projected spending
4.5% less on higher education in FY 2004 than in FY 2003,
and raised tuition and fees by almost 14% on average.”
17
In
other words, the increasing cost of Medicaid and other gov-
ernment health care programs are a primary reason for the
substantial increase in tuition and fees for state colleges and
universities. Middle-class families finding it more difficult
to pay for their children’s college are unwittingly falling vic-
tim to increasing state health care costs. Not an easy—but
a necessary—connection to make.
Policy Implications
The widespread failure to acknowledge these effects of in-
creasing health care costs on wages and on government ser-
vices such as education has important policy implications.
The myth of shared responsibility perpetuates the belief that
workers are getting something while paying little or noth-
ing. This undercuts the public’s willingness to tax itself for
the benefits it wants.
Figure. Changes in Per Capita Health Expenditures and Average
Hourly Earnings (Adjusted for Inflation), 1982-2005
8
1
4
3
2
5
6
7
0
–1
–2
1982 1984 1986 1988 1992 1994 1996 1998 2000 2002 20041990 2006
Year
% Annual Change
Trend of Heath Care Costs and Wages
Net per capita increase in medical expenditures
Annual change in average hourly earnings
Data are from the Council of Economic Advisers
6
and Catlin et al.
7
COMMENTARY
1058 JAMA, March 5, 2008—Vol 299, No. 9 (Reprinted) ©2008 American Medical Association. All rights reserved.
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This myth of shared responsibility makes any reform that
removes employers from health care much more difficult to
enact. If workers and their families continue to believe that
they can get a substantial fringe benefit like health insur-
ance at no cost to themselves, they are less likely to con-
sider alternatives. Unless this myth is dispelled, the center-
piece of reform is likely to be an employer mandate. This is
regrettable and perpetuates the widely recognized historical
mistake of tying health care coverage to employment. Fur-
thermore, an employer mandate is an economically ineffi-
cient mechanism to finance health care. Keeping employers
in health care, with their varied interests and competencies,
impedes major changes necessary for insurance portability,
cost control, efficient insurance exchanges, value-based
coverage, delivery system reform, and many other essential
reforms.
18,19
Employers should be removed from health care
except for enacting wellness programs that directly help
maintain productivity and reduce absenteeism. Politicians’
rhetoric about shared responsibility reinforces rather than
rejects this misconception and inhibits rather than facili-
tates true health care reform.
Not only does third-party payment attenuate the incen-
tive to compare costs and value, but the notion that some-
one else is paying for the insurance further reduces the in-
centive for cost control. Getting Americans invested in cost
control will require that they realize they pay the price, not
just for the deductibles and co-payments, but for the full
insurance premiums too.
Sustainable increases in wages require less explosive
growth in health care costs. Only then will increases in pro-
ductivity show up in higher wages and lower prices, giving
a boost to real incomes. Similarly, the only way for states to
provide more support for education, environment, and in-
frastructure is for health care costs to be restrained. Unless
the growth in Medicaid and SCHIP are limited to—or close
to—revenue increases, they will continue to siphon money
that could be spent elsewhere.
Conclusion
Discussions of health care financing in the United States are
distorted by the widely embraced myth of shared respon-
sibility. The common claim that employers, government, and
households all pay for health care is false. Employers do not
share fiscal responsibility and employers do not pay for health
care—they pass it on in the form of lower wages or higher
prices. It is essential for Americans to understand that while
it looks like they can have a free lunch—having someone
else pay for their health insurance—they cannot. The money
comes from their own pockets. Understanding this is es-
sential for any sustainable health care reform.
Financial Disclosures: None reported.
Funding/Support: This research was supported by the Blue Shield Foundation of
California, the Robert Wood Johnson Foundation, and the Department of Bioeth-
ics at the National Institutes of Health.
Role of the Sponsors: The funders had no role in the preparation, review, or ap-
proval of the manuscript.
Disclaimer: The opinions expressed are the authors’ own. They do not represent
any position or policy of the National Institutes of Health, Public Health Service,
or Department of Health and Human Services.
Additional Contributions: Colleen Denny, BS, Brigette Madrian, PhD, and Ros-
sannah Reeves assisted with data and analyses. No financial compensation was
received.
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COMMENTARY
©2008 American Medical Association. All rights reserved. (Reprinted) JAMA, March 5, 2008—Vol 299, No. 9 1059
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