Fueling the Health Care Debate: Rising Health Care Costs, and the Burden on Employers and the Insured

By Andrew Small

The rising cost of health care in the United States is a topic of great concern to families, employers, health care providers, and politicians alike. In 2006, the United States spent $2.1 trillion on health care—more than double the expenditure in 1996, and yet only half as much as the projected cost in 2017.

Rising costs have a great impact on many sectors of the economy and have profound effects on how people manage their own health care decisions. As a smaller number of employers provide health benefits, and with few affordable alternatives, access to quality health care has become restricted and people losing employer coverage often go uninsured. In 2006, 47 million Americans were uninsured—almost 16 percent of the population—and up eight million from 2000. Challenges in regard not only to costs, but also to access and quality, have fostered broad-based agreement on the need to reform our health care system. Capitol

For much of recent memory, many Americans have received health care benefits in the form of private insurance accounts provided by their employers. Today, health benefit costs average 10.7% of total payroll. However—amid increased costs—many employers are finding it more difficult to invest and expand their businesses, maintain competitive compensation for their employees or hire new employees, and meet their long-term commitments concerning retiree health benefits.

The 2008 Towers Perrin Health Care Cost Survey, a survey of 500 Fortune 1000 companies providing total medical benefits in excess of $46 billion to more than 10 million employees and retirees, concludes that health care costs for U.S. employers will increase by 6% in 2008—an average of $526 per employee. In the face of a difficult environment of rising and shifting costs, companies that the survey identifies as “high-performing” are the ones that are aggressive in managing the underlying causes of health care cost increases and have strategies in place to drive improvements in their employees’ overall health and wellness.

However, the survey also recognizes that businesses are taking different views on their commitments to retirees. Fewer and fewer employers are playing a role in subsidizing post-retirement health care needs. Currently, only 47% of those surveyed subsidize retiree medical coverage, and among those that are continuing a subsidy, the share that they ask retirees to provide is rapidly increasing. Rising costs have had a profound impact on older adults—one study claims that the typical couple may have to save nearly $300,000 to pay for health costs not covered by Medicare.

Employers are not alone in recognizing the importance of supporting individual engagement in health care decisions and health-related behaviors. More and more, policy makers support expanding disease prevention and wellness promotion programs. Similarly, there is increasing agreement that public assistance is needed to make health insurance affordable for low-income and high-risk individuals who comprise the bulk of the nation’s uninsured.

Health care costs are as great a burden on the government as they are to private employers. Of the total amount spent on health care, the largest source of funding after private insurance was Medicare with $401 billion. The director of the Congressional Budget Office has named health care cost growth as “the single most important factor determining the nation’s long-term fiscal condition.”

According to a study by the Leaders’ Project entitled Financing the U.S. Health System, even if there is no change in Federal law, the proportion of spending attributable to Medicare and Medicaid in the health system is expected to rise from 4% of GDP in 2007 to 19% of GDP in 2082—making health spending the main force behind increased federal spending in the decades to come.

While there is emerging bipartisan policy support for health reform—and the presidential candidates of both major parties support legislative action—key differences persist. The central question is whether individualized market competition or group purchasing (e.g., Single Payer Insurance) can best achieve cost containment while promoting access to valuable innovations in care.

Much effort has been spent examining the feasibility and consequences of each strategy. It is often argued that an expansion of public insurance would be more costly than expanding private insurance because Medicaid covers a wider range of benefits than those typically covered by private health insurance, and requires less patient cost sharing.

However, a recent study by Leighton Ku and Matthew Broaddus entitled, “Public and Private Health Insurance: Stacking up the Costs," shows that Medicaid provider payments are typically lower than those offered by private insurers, and that total per person medical spending is lower under Medicaid than under private insurance. They claim that expanding coverage for low-income populations in a system based on public insurance programs like Medicaid or SCHIP—rather than through direct tax subsidies—is the best way to improve the value, sustainability, quality, and coverage of health care for all Americans.

It is clear from the above studies that health care financing is of primary importance to all stakeholders involved. Employers and individual consumers both face added financial burdens in the face of rising health care costs, placing added pressure on policy makers to pursue efficient health care finance reforms.

Sources: Meena Seshamani, Jeaanne M. Lambrew, Joseph R. Antos.( 2008). Financing the U.S. Health System: Issues and Options for Change. The Leader’s Project on the State of American Health Care. Retrieved at http://www.bipartisanpolicy.org.

Leighton Ku and Matthew Broaddus. 2008. Public and private health insurance: Stacking up the Costs. Health Affairs 27(4): 318-327.

Institutional Author. 2008. 2008 Health Care Cost Survey. Towers Perrin. Retrieved at http://www.towersperrin.com.

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