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Who Really Pays for Health Care?



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.
Who Really Pays for Health Care?
The M yth of Shared Responsibility
Ezekiel J. Emanuel, MD, PhD
Victor R. Fuchs, PhD
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
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.”
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.
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.”
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.”
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 (
©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.
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.
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.
Similarly, using the Con-
sumer Expenditure Survey, Miller
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
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.
In a review of studies on the link between higher health
care costs and wages, Gruber
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.
2000 and 2004, health care expenditures increased sub-
stantially, more than 34%, with Medicaid and SCHIP
increasing more than 44%.
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.”
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
1982 1984 1986 1988 1992 1994 1996 1998 2000 2002 20041990 2006
% 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
and Catlin et al.
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
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.
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
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... Yet, as Emanuel and Fuchs (2008) have argued, such claims are misperceptions that distort important policy discussions (Emanuel & Fuchs, 2008). Governments pay for increases in healthcare costs by taxing, borrowing, or, most commonly, reducing services from other sectors (Emanuel & Fuchs, 2008;Fossett & Burke, 2004). ...
... Yet, as Emanuel and Fuchs (2008) have argued, such claims are misperceptions that distort important policy discussions (Emanuel & Fuchs, 2008). Governments pay for increases in healthcare costs by taxing, borrowing, or, most commonly, reducing services from other sectors (Emanuel & Fuchs, 2008;Fossett & Burke, 2004). This analysis shows that in California, public health and other non-medical social spending declined as healthcare spending increased, and no surprise: a persistent reluctance to raise taxes, even in a state government controlled entirely by Democrats, imposes a firm cap on total expenditures. ...
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OBJECTIVE Given rising scrutiny of healthcare expenditures, understanding intervention costs is increasingly important. This study aimed to compare and characterize costs for vestibular schwannoma (VS) management with microsurgery and radiosurgery to inform practice decisions and appraise cost reduction strategies. METHODS In conjunction with medical records, internal hospital financial data were used to evaluate costs. Total cost was divided into index costs (costs from arrival through discharge for initial intervention) and follow-up costs (through 36 months) for 317 patients with unilateral VSs undergoing initial management between June 2011 and December 2015. A retrospective matched cohort based on tumor size with 176 patients (88 undergoing each intervention) was created to objectively compare costs between microsurgery and radiosurgery. The full sample of 203 patients treated with resection and 114 patients who underwent radiosurgery was used to evaluate a broad range of outcomes and identify cost contributors within each intervention group. RESULTS Within the matched cohort, average index costs were significantly higher for microsurgery (100% by definition, because costs are presented as a percentage of the average index cost for the matched microsurgery group; 95% CI 93–107) compared to radiosurgery (38%, 95% CI 38–39). Microsurgery had higher average follow-up costs (1.6% per month, 95% CI 0.8%–2.4%) compared to radiosurgery (0.5% per month, 95% CI 0.4%–0.7%), largely due to costs incurred in the initial months after resection. A major contributor to total cost and cost variability for both resection and radiosurgery was the need for additional interventions in the follow-up period, which were necessary due to complications or persistent functional deficits. Although tumor size was not associated with increased total costs for radiosurgery, linear regression analysis demonstrated that, for patients who underwent microsurgery, each centimeter increase in tumor maximum diameter resulted in an estimated increase in total cost of 50.2% of the average index cost of microsurgery (95% CI 34.6%–65.7%) (p < 0.001, R ² = 0.17). There were no cost differences associated with the proportion of inpatient days in the ICU or with specific surgical approach for patients who underwent resection. CONCLUSIONS This study is the largest assessment to date based on internal cost data comparing VS management with microsurgery and radiosurgery. Both index and follow-up costs are significantly higher when tumors were managed with resection compared to radiosurgery. Larger tumors were associated with increased resection costs, highlighting the incremental costs associated with observation as the initial management.
This paper assesses the evolution of public policy affecting small business in the United States both in terms of content and process since the 1979 publication of David Birch’s Job generation process. It focuses on four major trends – a change in the prevailing policy agenda, the increasing use and importance of carve-outs, the failure to distinguish between small and entrepreneurial business for policy purposes, and the rise and subsequent ebb in small business’s political influence. The paper concludes that the small-business agenda and policy affecting it will continue to evolve with a divide in the priorities among small business and technology-oriented business as one major political party will tend to champion the former and the other will tend to champion the latter.
Consumer-driven health care (CDHC) plans are a new health insurance paradigm that lets consumers control some of their own health care dollars. It also provides financial incentives to manage medical spending wisely while affording consumers greater choice and control over the types of medical services received. The premise of CDHC is coupling a tax-preferred, personal health account, used to fund day-to-day medical expenses, with a high-deductible health plan to fund care of a catastrophic nature. When individuals enter the medical marketplace, they will spend first from their health savings accounts, health reimbursement arrangements, or flexible spending accounts. Once they reach their deductible, insurance pays all remaining costs. CDHC plans are relatively new to the market, and the market share is still quite small compared to traditional forms of health insurance. CDHC is not for everyone—and not everyone wants to take greater control of health care spending. However, early evidence is encouraging. Virtually all the studies have found that people treat their own money with more care than funds belonging to someone else. Many individuals will appreciate the flexibility in benefits and the added convenience that controlling health care dollars allows.
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Objective Cephalosporins are recommended for antibiotic prophylaxis to prevent cardiothoracic surgical site infections (SSIs) except in patients with β -lactam allergy or in settings with a “high” prevalence of methicillin-resistant Staphylococcus aureus (MRSA) among S. aureus isolates (hereafter, “MRSA prevalence”); however, “high” remains undefined. We sought to identify the MRSA prevalence at which glycopeptide prophylaxis would minimize SSIs relative to β -lactam prophylaxis. Methods We developed a decision analysis model to estimate SSI likelihood when either glycopeptides or β -lactams were used for prophylaxis in cardiothoracic surgery. Event probabilities were derived from a systematic literature review. A similar cost-minimization model was also developed. Results At 0% MRSA prevalence, SSI probability was 3.64% with glycopeptide prophylaxis and 3.49% with β -lactam prophylaxis. At MRSA prevalences of 10%, 20%, 30%, or 40%, SSI probabilities with glycopeptide prophylaxis did not change, but they were 3.98%, 4.48%, 4.97%, and 5.47% with β -lactam prophylaxis. The threshold of MRSA prevalence at which glycopeptide prophylaxis minimized SSI probability and cost was 3%. In sensitivity analyses, variations in most model estimates only modestly affected the threshold. Conclusion Glycopeptide prophylaxis minimizes the risk of SSIs and cost when MRSA prevalence exceeds 3%. At very low MRSA prevalence (between 3% and 10%), the SSI minimization provided by glycopeptide prophylaxis is small and may be within the error of the model. Given the current MRSA prevalence in most community and healthcare settings, clinicians should consider routine prophylaxis with vancomycin. Our findings may have important policy implications, as benefits in cardiothoracic surgery antibiotic prophylaxis must be weighed against the limitations of increased glycopeptide use.
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May 1998 (Revised May 2000) This paper offers a new way of estimating workers' valuation of fringe benefits using data on workers' choices among fringe benefits packages offered by the employer. This approach overcomes both the omitted variable problem and the identification problem that bias estimates of compensating differentials and supply and demand parameters for fringe benefits from the traditional hedonic model most frequently used to analyze this problem. With this approach, the observed choice among offered fringe benefits packages which require different employee contributions and receive different employer subsidies conveys information about how much in wages workers are willing to give up to obtain additional firm dollars in the form of fringe benefits. That is the valuation of fringe benefits that we want to estimate. The comparison among alternatives implicit in the discrete choice method differences away fixed unobservable individual productivity differences that are believed to be the main problem in estimating compensating differentials and lessens the endogeneity problems that arise in estimating hedonic demand parameters. Variation in the offered wage-fringe price across firms identifies workers' valuation of fringe dollars, serving the same function as the sometimes arbitrary market boundaries that must be imposed in the hedonic model to achieve identification. Exploratory empirical results using grouped firm data on choices of alternative health insurance plans provide support for the proposed approach. Unlike most estimates of compensating differentials for fringe benefits, the estimates are of the correct sign. The results suggest that families value health benefits substantially more than singles and that that valuation of fringe benefits dollars is substantially less than one-for-one with wage dollars.
While economists generally agree that workers pay for their health insurance costs through reduced wages, there has been little thought devoted to the level at which these costs are passed on: Is each employee's wage reduced by the amount of his or her own health costs, by the average health costs of employees in the firm, or by some amount in between? This paper analyzes one dimension of the question of how firms pass health costs to workers. Using cross-city variation in health costs, I test whether older workers pay for their higher health costs in the form of lower wages. I find that in cities where health insurance costs are high, the age/wage profile is flatter, indicating that older workers do pay for their higher health costs in the form of reduced wages. This finding is robust to the inclusion of several other city-specific variables that might also affect age/wage profiles and that could be correlated with health insurance costs. I also find that workers who choose family health insurance coverage pay for the added employer costs through reduced wages.
We estimate the effect of rising health insurance premiums on wages, employment, and the distribution of part-time and full-time work using variation in medical malpractice payments driven by the recent "medical malpractice crisis." We estimate that a 10% increase in health insurance premiums reduces the aggregate probability of being employed by 1.2 percentage points, reduces hours worked by 2.4%, and increases the likelihood that a worker is employed only part time by 1.9 percentage points. For workers covered by employer provided health insurance, this increase in premiums results in an offsetting decrease in wages of 2.3%.
I consider the labor-market effects of mandates which raise the costs of employing a demographically identifiable group. The efficiency of these policies will be largely dependent on the extent to which their costs are shifted to group-specific wages. I study several state and federal mandates which stipulated that childbirth be covered comprehensively in health insurance plans, raising the relative cost of insuring women of childbearing age. I find substantial shifting of the costs of these mandates to the wages of the targeted group. Correspondingly, I find little effect on total labor input for that group.
The author reviews the history of employer-sponsored health insurance in the United States and outlines how it became the cornerstone of the nation's health care system. He discusses the implications of employer-based insurance for access to and the affordability and quality of health care.
Large and mid-size employers are "between a rock and hard place" when it comes to health benefits: They are both unable to manage their health care costs effectively or simply get out of offering these benefits entirely. Although there is considerable diversity in how employers approach health care, several goals underlie most of their decisions. It is unlikely that the current round of employer-based health initiatives will succeed at managing rising costs. As a result, employers are likely to become more interested than at any time in the past decade in exiting their roles as providers of health benefits.
In 2006, U.S. health care spending increased 6.7 percent to $2.1 trillion, or $7,026 per person. The health care portion of gross domestic product (GDP) was 16.0 percent, slightly higher than in 2005. Prescription drug spending growth accelerated in 2006 to 8.5 percent, partly as a result of Medicare Part D's impact. Most of the other major health care services and public payers experienced slower growth in 2006 than in prior years. The implementation of Medicare Part D caused a major shift in the distribution of payers for prescription drugs, as Medicare played a larger role in drug purchases than it had before.
A distinctive feature of the health insurance market in the U.S. is the restriction of group insurance availability to the workplace. This has a number of important implications for the functioning of the labor market, through mobility from job-to-job or in and out of the labor force, wage determination, and hiring decisions. This paper reviews the large literature that has emerged in recent years to assess the impact of health insurance on the labor market. I begin with an overview of the institutional details relevant to assessing the interaction of health insurance and the labor market. I then present a theoretical overview of the effects of health insurance on mobility and wage/employment determination. I critically review the empirical literature on these topics, focusing in particular on the methodological issues that have been raised, and highlighting the unanswered questions which can be the focus of future work in this area.