Paying More, Getting Less: Just Where Do America's Health Care Dollars Go?

By Joel A. Harrison, Dollars and Sense. Posted June 23, 2008.

By any measure, the United States spends an enormous amount of money on health care. Here are a few of those measures. In 2006, U.S. health care spending exceeded 16 percent of the nation’s GDP. To put U.S. spending into perspective: the United States spent 15.3 percent of GDP on health care in 2004, while Canada spent 9.9 percent, France 10.7 percent, Germany 10.9 percent, Sweden 9.1 percent, and the United Kingdom 8.7 percent. Or consider per capita spending: the United States spent $6,037 per person in 2004, compared to Canada at $3,161, France at $3,191, Germany at $3,169, and the U.K. at $2,560.

By now the high overall cost of health care in the United States is broadly recognized. And many Americans are acutely aware of how much they pay for their own care. Those without health insurance face sky-high doctor and hospital bills and ever more aggressive collection tactics -- when they receive care at all. Those who are fortunate enough to have insurance experience steep annual premium hikes along with rising deductibles and co-pays, and, all too often, a well-founded fear of losing their coverage should they lose a job or have a serious illness in the family.

Still, Americans may well underestimate the degree to which they subsidize the current U.S. health care system out of their own pockets. And almost no one recognizes that even people without health insurance pay substantial sums into the system today. If more people understood the full size of the health care bill that they as individuals are already paying -- and for a system that provides seriously inadequate care to millions of Americans -- then the corporate opponents of a universal single-payer system might find it far more difficult to frighten the public about the costs of that system. In other words, to recognize the advantages of a single-payer system, we have to understand how the United States funds health care and health research and how much it actually costs us today.

Paying through the Taxman

The U.S. health care system is typically characterized as a largely private-sector system, so it may come as a surprise that more than 60 percent of the $2 trillion annual U.S. health care bill is paid through taxes, according to a 2002 analysis published in Health Affairs by Harvard Medical School associate professors Steffie Woolhandler and David Himmelstein. Tax dollars pay for Medicare and Medicaid, for the Veterans Administration and the Indian Health Service. Tax dollars pay for health coverage for federal, state, and municipal government employees and their families, as well as for many employees of private companies working on government contracts. Less visible but no less important, the tax deduction for employer-paid health insurance, along with other health care-related tax deductions, also represents a form of government spending on health care. It makes little difference whether the government gives taxpayers (or their employers) a deduction for their health care spending, on the one hand, or collects their taxes then pays for their health care, either directly or via a voucher, on the other. Moreover, tax dollars also pay for critical elements of the health care system apart from direct care -- Medicare funds much of the expensive equipment hospitals use, for instance, along with all medical residencies.

All told, then, tax dollars already pay for at least $1.2 trillion in annual U.S. health care expenses. Since federal, state, and local governments collected approximately $3.5 trillion in taxes of all kinds -- income, sales, property, corporate -- in 2006, that means that more than one third of the aggregate tax revenues collected in the United States that year went to pay for health care. (See Addendum below for information about how this estimate was calculated.)

Beyond their direct payments to health care providers and health insurance companies, then, Americans already make a sizeable annual payment into the health care system via taxes. How much does a typical household contribute to the country’s health care system altogether? Of course, households pay varying amounts in taxes depending on income and many other factors. Moreover, some households have no health insurance coverage; others do have coverage for which they may pay some or all of the premium cost. What I aim to do here is to estimate the average size of the health care cost burden for households at different income levels, both those with job-based health coverage and those with no coverage.

Note that the estimates in the table below do not include out-of-pocket expenses. For those with health insurance, these include co-pays, deductibles, and uncovered expenses (consider, for example, that even my high-end policy does not cover commonly used home medical equipment such as oxygen). For those without insurance, of course, out-of-pocket expenses include their full hospital, doctor, and pharmacy bills.

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Joel A. Harrison, PhD, MPH, lives in San Diego, where he does consulting in epidemiology and research design.