1/22/98

Hidden from View: The Growing Burden of Health Care Costs.

by Gail Shearer, Consumers Union Washington D.C. Office

Executive Summary

For years, the heath care policy debate has been framed as an either/or proposition: either you have insurance or you don't. This report identifies a new framework for the debate. Consumers today face a continuum of risk. Millions of people with private insurance are at risk of crushing financial burdens from health care costs. Despite piecemeal legislative steps to expand and improve health care coverage, researchers are measuring growing numbers of both uninsured and underinsured Americans. Hidden behind the 41 million uninsured Americans are a startling 31 million people who have health insurance but are underinsured, meaning that if they should have a catastrophic illness, they would be at risk of having to spend more than 10 percent of their income on their health care bills.

The key finding of this report is that neither the piecemeal reforms that have been implemented to date in the public policy arena nor marketplace changes have been able to bring the health care finance system closer to delivering reliable, quality health care to those who get sick. Even under the best of economic circumstances, it is now clear that market forces have not and cannot stop the rising per capita health care costs, increasing numbers of inadequately insured people, and mounting burdens on low-income consumers, the working poor, the near-elderly, the elderly, and sick people of all ages and income continue to confound the system.

The health finance burden is often hidden from view. When friends and neighbors get sick with serious illness such as a serious accident or cancer, we may be aware of their struggle for recovery, but hidden from view is the financial burden felt by their family. The vast majority of people are healthy in most years, but hidden from view are the exorbitant costs they will cope with if they do get seriously ill. Also hidden from public awareness is the reality that most employees ultimately pay most of the cost of health insurance premiums initially paid by their employer in the form of lower wages. The huge variation in health care costs and the disproportionate share that is paid by the sick is not even on the radar screen for most consumers. In the health care marketplace of the 1990's, the underinsured are facing economic hardship and distress with devastating, and even ruinous, consequences.

The 1993 to 1994 effort by the Administration and some in Congress to reform the health care system ended in failure. Congress rejected a standard comprehensive benefit package, universal coverage, and consumer choice of health plan, in favor of leaving health care coverage (other than that of seniors, the poorest of the poor, and the disabled) to the marketplace. Americans were told to put their faith not in government, but in the marketplace.

It is difficult to imagine a more auspicious economic environment in which to see what kind of job the marketplace would do to deliver quality health care to those who get sick: unemployment has been at a record low; inflation (including health care inflation) has been low for a sustained period of time; the stock market has had an unprecedented consecutive three years of annual growth over 20 percent; even health insurance premiums have been relatively stable. The marketplace emphasis since 1994 has been on voluntary coverage, private policies, employer/insurer freedom to make decisions about health care coverage, and managed care (which for many people means restricted choice of doctor).

In 1996, Congress began to enact legislation that builds on the private marketplace approach to health care with piecemeal steps that are designed to increase health insurance coverage when people switch (or leave) jobs, to expand coverage for children, and discourage health care spending by making coverage less comprehensive (e.g., through medical savings accounts coupled with high deductible insurance policies).

This report assesses how well the health care marketplace is serving American families by examining health care costs that are incurred by different segments of society, with emphasis on the burden shouldered by the sick and people of moderate income. The report, based primarily on detailed data prepared for Consumers Union by The Lewin Group (see attachment), explores how Americans pay for health care today.

• Specifically, we found:

  (1) Millions of American families suffer devastating financial burdens at the same time that they face serious illness or injury.
   

  • An estimated 11 million nonelderly American families, one out of eight, spent more than 10 percent of their income on premiums (not paid by their employers) plus out-of-pocket costs in 1996. Four out of five of these families had health insurance for every member of the family.
     
  • Families with income below poverty have direct premium payments plus out-of-pocket costs, on average that are about 16 percent of family income.
     
  • Over 20 percent of families headed by people 55 to 64 and more than half of the families headed by people over 65 pay over 10 percent of their income on health care, when out-of-pocket costs and premiums they pay directly are included.
     
  • About 27 million families, one out of every three nonelderly families, spent more than 10 percent of their income on health care when using the most inclusive definition of health care costs, including out-of-pocket costs, premiums they pay directly, and premiums they pay indirectly as lower wages when their employer pays the insurance premium.
     
  • Families with income between $30,000 and $40,000 (families at median income) spend on average about $1,500 (4.5 percent of their income) on premiums (themselves) and out-of-pocket payments. This is in addition to what their employers spend on premiums, which costs these families, on average, an additional $1,900 (5.5 percent of their income) as reduced wages.

  (2) Every American is at risk of facing a serious illness or accident during his/her lifetime that results in staggering bills, which can cripple a family budget.
   

  • The 10 percent of people who spend the most to deal with severe health care problems spend about $21,000 in a year, seven times what the average person spends. People in the top percentile (1%) of health spending have total health care costs of over $81,000.
     
  • The people in the highest spending decile (10%) face out-of-pocket costs that are four times higher than average. This large disparity in out-of-pocket spending between the sick and the well exists regardless of insurance status or income level.

  (3) Certain groups of consumers are hit particularly hard and would benefit from targeted subsidies or other programs to address their health coverage needs.

  • Even though children are relatively inexpensive to insure, about 11 million children were uninsured in 1996. Even with the Balanced Budget Act of 1996, 5 to 9 million children will remain uninsured.
     
  • About 14 percent of people age 55- 64 (potential early retirees) were uninsured in 1994; on average, this group of people had total health care costs that are about 60 percent higher than average.
     
  • Inability to afford premiums (even when employers offer coverage) has left 36 percent of working age adults (with income below 200 percent of poverty) uninsured.

Today's health care financing system has shifted what it means to have insurance. Instead of a clear-cut question -- "Do you have insurance?" -- consumers instead are faced with a confusing continuum of risk that leaves too many underinsured. Consumers Union urges policy makers to take into account the heavy price paid by the sick as it takes steps to address these issues. Because the marketplace hasn't adequately protected consumers, we believe that Congress should:

• Alter the tax code to better target relief for families in crisis due to health care costs. For example, Congress should consider creating a new refundable tax credit targeted to the middle class and poor with the highest health care costs (e.g., out-of-pocket costs plus consumer-paid premiums exceeding 7.5 percent of income).
   
• Work to close the gaps in health care coverage to reduce, and eventually eliminate, the high number of uninsured Americans. For example, Congress should enact a carefully designed Medicare buy-in program to extend coverage to many early retirees who are uninsured, and ensure that all children have affordable health insurance.
   
• Help make insurance affordable to more people by spreading risks more broadly. Policy options that separate the sick from the healthy should be discouraged.
   
• Assure that people who have health insurance have quality protection. For example, lifetime caps on benefits should be eliminated to protect the very sickest and national consumer protections for managed care enrollees should be established.
   
• Instruct the Medicare Commission to work to develop options to not only ensure the long-term financial stability of the Medicare program, but also to explore ways to soften the financial hardship endured by many seniors.
  

Copies of the full report are available to the public for $20.00 plus $5.00 shipping and handling.  Please make checks payable to "Consumers Union."