The Central Challenge in U.S. Health Policy

Uwe E. Reinhardt is an economics professor at Princeton. He has some financial interests in the health care field.

“Health Care Costs Climb Moderately, Survey Says” read the headline in The New York Times last week. It appears that health insurance premiums for job-based family coverage rose “only” 4 percent between 2012 and 2013, although still twice as fast as did wages.

The survey in question is the Kaiser Family Foundation’s annual survey of employment-based health insurance, widely viewed as a gold mine for anyone seeking information on that part of the American health system. The full report is easily accessible, or readers may prefer to read just the summary or browse through the fine group of charts the foundation provides. Here is a telling chart from that pack.

Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 1999-2013.

The premiums shown in this chart are in current dollars, meaning they are not adjusted for inflation. They do not reflect a common benefit package. Furthermore, they are only averages that differ substantially from the experiences of individual companies.

For example, as is shown in Figure 2 (which is a slightly different format of Exhibit 1.7 in Kaiser’s full report), 21 percent of the companies in the Kaiser survey paid premiums in excess of $19,387 for families and in excess of $7,062 for singles in 2013 â€" a hefty amount. At the other end, about a fifth of the companies in the sample paid less than $13,225 for family coverage and less than $4,708 for single coverage. The other bars in the chart can be similarly interpreted.

There is also apt to be considerable intercompany variance not only in the level of premiums but also in the year-to-year growth of premiums. That will be especially so among small companies that are experience-rated - which means their premiums are based on the average health status of only their few employees. Many of these companies experienced premium growth in the double digits last year, as has happened every year in the past.

At the moment, there is great uncertainty about the premium increase between 2013 and 2014 that these small companies may experience as a result of the onset of community rating, beginning in 2014.

The Kaiser surveys include detailed data on the contributions that employees make out of their paychecks toward the premiums for their coverage, but they do not include data on the out-of-pocket spending for health care by employees and their families through deductibles, co-insurance and exclusions of health care services from coverage.

The benefit consulting firm Milliman annually publishes its Milliman Medical Index on the average total cost of health care for a typical American family of four under age 65, covered by a preferred provider plan, or P.P.O. That index includes not only the employment-based health insurance premium paid by employer and employee but also an estimate of the family’s out-of-pocket spending. In other words, if estimates total annual health spending for the hypothetical family. A time series of the index is shown in Figure 3, below. These figures, too, are in current dollars, not adjusted for inflation.

The Milliman index is not directly comparable to the Kaiser data, because it is a composite actuarial estimate for a particular hypothetical family of four and a particular form of insurance policy and benefit package whose estimated average premium is higher than the Kaiser average. These actuarial estimates (again, in non-inflation-adjusted dollars) are based on the large database of coverage of the firm’s clients.

According to Milliman’s report, the total cost of $22,030 in 2013 is composed of a total premium for insurance coverage of $18,430, of which the employer is estimated to contribute $12,886 and the employee $5,544. The rest represents out-of-pocket spending of $3,600.

Although not directly comparable, taken together these two data series raise the question of how many American families could afford this kind of health spending strictly with their own financial resources, if one took the extreme position that health care is a private consumption good for which American households themselves should be financially responsible. I hasten to add that I do not know anyone who actually holds that extreme position; the argument is and always has been only over how extensive such support should be.

But the numbers are daunting just the same, if one contrasts them with data on the distribution of household money income (after taxes and transfers) by income group, as is done in Figure 4.

The data in Figure 4 comes from Table A-2 (Page 39) of the Census Bureau’s report “Income, Poverty, and Health Insurance Coverage in the United States: 2011.” It is seen that in 2011, 20 percent of American households had incomes below $20,262. Although the figure includes households of various sizes, including singles, it is nevertheless a small sum to absorb even Kaiser’s premium numbers for single coverage. Median household income in 2011 was $50,054, meaning that close to 50 percent of households had an income below that number.

The data in Figure 4 is for 2011 only (in current dollars, not adjusted for inflation). While the nominal median household income in the United States has increased substantially since 1975, in constant-dollar terms of 2011 it has been remarkably and disappointingly flat, as is shown by the line for “real income” in Figure 5 below. That chart is based on Table H-6 in the Census Bureau report “Historical Income Tables: Households.”

As Figure 5 indicates, after 2008 nominal median household income in the United States has been flat, while real income has fallen somewhat, by about 8 percent (see Figure 1 in this report). It is not clear when real median income will return again to its previous high. Most of the growth in real gross domestic product in the last several decades has actually accrued to households in the top quintile of the income distribution and, within that quintile, to the top 1 percent (see Table 1 in this paper and also this abstract of another paper).

The gist of the preceding array of data is that even under what we now call “moderate” growth in health care costs, stagnating incomes for millions of American households will put American health care as we have come to know it out of their financial reach, unless they receive substantial help from households in the upper third or so of the household income distribution.

This central political dilemma in American health policy â€" leave health care to those who can afford it or increase tax revenues to broaden coverage â€" will continue as far as the eye can see. A good part of the current shouting match over the Affordable Care Act expresses anger over this dilemma, and it will not subside even after the act has been fully put in place.