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March 5, 2003

Government Share of Health Care Expenditures

JAMA. 2003;289(9):1165. doi:10.1001/jama.289.9.1165

It is only partially true to say that the United States does not currently have a national health care system. The Centers for Medicare & Medicaid Services (CMS) estimated the 1999 government share of total US health spending as 45.2% ($548 billion).1 This estimate includes funding for Medicare, Medicaid, workers' compensation, the Department of Veterans Affairs, public hospitals, and government public health activities. Thus, public funds directly pay for the health care of many people in the United States.

Beyond these payments made directly to providers or institutions by the government, there are also other public funds spent on health care that are not included in the CMS estimate. These funds include the premiums paid to private insurance companies to cover government employee benefits, as well as government income that is lost to tax subsidies for health insurance premiums. Such subsidies are tax-exempt when provided by an employer, but nonexempt if paid for directly by an individual.2 Furthermore, this tax subsidy is unequally distributed, averaging $2357 for families with annual incomes above $100 000 but only $71 for families with annual incomes below $15 000.2 Thus, for example, the CMS classifies benefits for veterans as government health expenditures, since the government directly funds Veterans Affairs hospitals for their services, while health services for government employees paid for by a private insurer (but funded by the government through premiums) are not listed as public expenditures.

Sheils and Hogan consider tax-exempt health benefits to be a seriously underreported cost to the government ($111 billion in 1998).2 Woolhandler and Himmelstein recently recalculated the government share of health expenditure by including these tax subsidies and public employee private health benefits,3 and concluded that the government-financed share of total health spending in 1999 was 59.8%, equal to $723.8 billion or $2604 per capita. This figure is 25% higher than the CMS estimates for the same year. A 2000 study by Fox and Fronstin also concluded that the government share of expenditures on health care in 1998 was about 60%.4

These data indicate that, in addition to spending more and more on health care in absolute terms, the US government has also paid for a progressively larger share of national health expenditures during the last 35 years. Between 1965 and 1999, the government share of tax-financed health expenditures rose more than 5700%, while overall health costs increased 2900%.3 In 1965, US government tax-financed health expenditures per capita were less than most other industrialized nations. By 1999, the per capita government proportion of health expenditures in the United States exceeded total health spending per capita in every industrialized nation except Switzerland.3 Additionally, tax subsidies and public employee benefits, which, again, are usually excluded from the calculation of public health care spending, rose as a proportion of overall government-financed health expenditures between 1965 and 1999, even in the face of large increases in direct federal spending on other programs such as Medicare and Medicaid.3

Overall, then, the US government is paying for the majority of US health expenditures while a large segment of the population remains uninsured or underinsured. Many of these funds go directly to private insurers who cover government employees. Many go to tax breaks that benefit both employers who purchase private insurance and, disproportionately, the wealthiest, best-insured families in the United States.

Another significant component of government (and non-government) expenditure goes to redundant and often unnecessary overhead costs. In part because many of the government funds spent on health care go through an extensive, multipayer private system (at least 755 insurance plans exist in Seattle alone), bureaucracy and administration now consume 20% to 30% of the total US health care budget.7

While part of this spending is necessary for medical system management, the wide variety of insurance plans and payer options inflicts huge amounts of extra paperwork and billing burdens on providers and institutions. The average US hospital spends 25% of its budget on billing and administration without evidence that this improves patient care.5 In fact, there is evidence that health plans with higher administrative costs deliver worse quality care.6 By contrast, Canada's single-payer system has 1% administrative overhead costs, and even its Medicare program only consumes 4% of this total budget.7 Reducing spending on redundant bureaucracy and complicated insurance billing to Canadian levels could save as much as $140 billion annually7 without reducing the funds spent on care.

Centers for Medicare & Medicaid Services.  National Health Care Trends in Public versus Private Funding, Selected Calendar Years 1965-2000. Available at: http://www.cms.hhs.gov/researchers/pubs/datacompendium/2002/02pg14.pdf. Accessed January 23, 2003.
Sheils J, Hogan P. Cost of tax-exempt health benefits in 1998.  Health Aff (Millwood).1999;18:176-181.Google Scholar
Woolhandler S, Himmelstein DU. Paying for national health insurance and not getting it.  Health Aff (Millwood).2002;21:88-98.Google Scholar
Fox DM, Fronstin P. Public spending for health care approaches 60 percent.  Health Aff (Millwood).2000;19:271-273.Google Scholar
Woolhandler S, Himmelstein DU. Costs of care and administration at for-profit and other hospitals in the United States.  N Engl J Med.1997;336:769-774.Google Scholar
Himmelstein DU, Woolhandler S. Taking care of business: HMOs that spend more on administration deliver lower-quality care.  Int J Health Serv.2002;32:657-667.Google Scholar
Himmelstein DU, Woolhandler S. National health insurance or incremental reform: aim high, or at our feet?  Am J Public Health.2003;93:102-105.Google Scholar