40%: Share of health care expenditures from public funds in 2007

Published in the Spring 2010 issue of SSA Magazine

Public Debate: Why health care reform is historic, significant and more of the same

-By Colleen Grogan

WHEN PRESIDENT BARACK OBAMA signed the health care reform bill in March, guaranteeing coverage for 32 million currently uninsured Americans, he touted the bill's historic significance. However, he also was quick to assuage fears that the bill meant we were moving away from a private insurance model. Conservatives disagreed, saying the bill is a massive government takeover of American medicine, while many liberals took the opposite view, arguing that the administration capitulated to private insurance by not ultimately allowing the public option.

So what are we to make of this seeming contradiction? Is this health care reform legislation as significant as the creation of Medicare or the New Deal? Is it fundamentally in line with the current American health care system? Yes and no. Understanding why those questions aren't the right ones is crucial to making health care reform effective.

Like many proposed plans since 1965, the health care reform bill is typically explained as expanding access to private health insurance. Our political preferences to call our system "private" does not make that label true, though. In truth, Americans created a mixed public-private system a long time ago and health care reform further embeds this mix.

The myth of an American private health care system is based on two "facts" consistently presented to the American people. First, private health insurance is the primary way Americans receive their health care coverage. In 2007, 53 percent of Americans received private health insurance coverage through their place of employment and another 5 percent purchased private health insurance on their own, according to estimates from the Urban Institute and Kaiser Commission on Medicaid and the Uninsured. In comparison, public insurance (Medicare, Medicaid and other) covered just over one in four Americans. Second, the private sector has consistently been shown to fund the majority of total U.S. national health expenditures, at 54 percent.

These figures are seriously misleading. Private insurance has been eroding since the mid-1980s and private funding relative to public has been significantly declining over time. Moreover, even those facts are deceptive because reports of private funding typically include out-of-pocket payments from individuals. Conflating individuals payments for health care with private health insurance is not accurate—to understand the extent to which government versus private insurance companies pay for services, it is important to keep individual's payments distinct.

When we separate out out-of pocket payments, the picture of our American health care system changes drastically. In 1960, nearly half of the national health expenditure was out of- pocket; by 2007 that figure had dropped to just over 10 percent. As our out-of-pocket expenditures have declined over time, government has picked up a greater share of the health care tab. Both private insurance and public health insurance/health treatment shares stood at 20 percent in 1960. By 2007, private funds paid for 35 percent of expenditures; public funds paid for 40 percent.

How can private insurance account for only about a third of expenditures when the number of individuals covered by private health insurance stood at 70 percent in the mid-2000s? This seeming contradiction is easily explained by limitations in what private health insurance covers. For private health insurance to be financially viable, anyone with chronic disease, pre-existing illness or a profile that puts them at higher risk for illness (e.g., minorities or women), will have to pay higher premiums on average for limited benefits. As a result, low- to middle-income people meeting any of these conditions are often priced out of the private insurance market and end up receiving health services from public insurance or publicly funded health care facilities. This latter form of health care funding is the most hidden aspect of our health care system.

The reliance of private players on public funding is so paramount—and will become even more so after the creation of health insurance exchanges—that public-private distinctions become meaningless. Under the new health care reform, the government (state and federal) will (1) determine the basic benefit package that all health insurance plans must provide to participate in the insurance exchange; (2) more heavily regulate private insurance companies, including barring actuarial risk rating when setting premiums; (3) provide public subsidies for some families to purchase health insurance on the exchange; and (4) provide public health insurance (Medicaid) for individuals below 133 percent of poverty. Can one clearly label the new health insurance arrangements predominantly private? Of course not.

The danger of believing in the "predominantly private" myth is that it prevents Americans from understanding the significance of the health care reform bill and from seeing what is still possible as we move forward. If private actions occur with public funding, then we have a right to demand accountability. It is crucially important that the American people claim a voice under this predominantly publicly funded health care system.

Colleen Grogan is a professor at SSA and co-chair of the Center for Health Administration Studies.