High healthcare costs and the prospect of unexpected medical bills are leading worries for adults and their families. Lowering out-of-pocket costs is the public’s top healthcare priority, according to KFF, an independent source for health policy research, polling, and news.
I wrote a year ago about how our hugely expensive healthcare system is harming American society: “In addition to fueling the deficit and adding hundreds of billions to our national debt each year, the high cost of healthcare is crowding out other state budget priorities, undermining the competitiveness of American businesses and hurting American families.”
The problem is not new, but it is growing every day.
Few Americans Realize How Much They Pay
Years ago, while at RAND, I worked with Dr. David Auerbach, a health economist with prior experience in the Congressional Budget Office, to analyze the impact that a decade of healthcare cost growth had on the earnings of middle-class families. We found that between 1999 and 2009, the gross income of a typical middle-class family of four with employer-sponsored health insurance rose from $76,000 to $99,000 (adjusted to 2009 dollars). However, healthcare costs almost entirely wiped out this gain.
‘Out-of-Pocket Spending’ Is the Tip of the Iceberg
The healthcare spending most readily perceived by individuals and families is the money they pay at the reception desk of their doctor, dentist or optometrists and the counter of their local drugstore or medical supply company.
Once this “copayment” is made (and often, only after an annual deductible is satisfied) their private health insurance covers the rest. Sometimes, health plans waive copayments for cheap generic drugs and high-value preventive services, but they require larger copayments for costly brand-name medications or treatment from a specialist. When patients are hospitalized or require expensive tests or treatment, copayments can be in the hundreds of dollars. In some cases, patients must pay 20% of the bill, if not more, before their insurance kicks in.
Dr. Auerbach and I estimated that in 1999, a typical middle-class family of four paid an average of $135 monthly out-of-pocket for healthcare. Over the next 10 years, their out-of-pocket spending nearly doubled to $235 monthly. Although this is a substantial increase, it was only a small part of the family’s total spending on healthcare. That’s because families don’t pay out of one pocket—they pay out of four.
The Second Pocket—The Cost of Employee Premiums for Health insurance—Has Grown Dramatically
The second source of healthcare spending is the money employees pay toward their employer-sponsored health insurance. Because premium costs have tended to rise faster than inflation, they generally outpace growth of workers’ wages. Dr. Auerbach and I calculated that the family’s monthly premium rose from $85 in 1999 to $135 per month in 2009, an $600 annual increase.
The Final Two Pockets Of Spending Are Hidden From View
Economists have long asserted that soaring premiums suppress wage growth. That’s because employers generally cover their health insurance costs out of the same pool of dollars they use to pay their employees. Dr. Auerbach and I calculated that in 1999, the employer’s share of the family’s employer-sponsored health insurance premium cost them $240 per month in foregone pay. By 2009, ESI more than doubled to $550 per month, an increase of $3,720 annually.
The final source of healthcare spending is the portion of individual or family federal and state taxes devoted to funding Medicare, Medicaid, VA healthcare, our military health system, and the Indian Health Service. Some communities allocate a portion of local tax revenue to healthcare, but we did not include this in our analysis. We estimated that the size of the family’s tax payments going to healthcare grew from $345 in 1999 to $440 in 2009. It would have been larger, but the balance was added to the federal budget deficit and ultimately, our national debt.
Had healthcare costs grown at the same rate as the prices for other goods and services, the family would have had $5,400 in additional earnings to spend in 2009. Instead, healthcare cost growth devoured nearly all of it, leaving them with only $95.
The Picture Is Even Darker Today
Since our study was published, the problem has grown worse. In 2009, the United States spent $2.5 trillion on healthcare. By the end of 2024, spending will reach or exceed $5 trillion. This has pushed the cost of health insurance higher. In 2024, average premiums for ESI increased 6% for single coverage and 7% for family coverage, according to the 2024 KFF Employee Benefits Survey. Similar rate increases were noted in 2023.
A recent analysis in JAMA Open determined that between 1988 and 2019, rising premiums for employer-sponsored health insurance cost a median U.S. family $125,340 in lost earnings. The full impact was undoubtedly larger because the researchers did not consider growth in copays, deductibles and other out-of-pocket healthcare expenses.
Today, many working-age adults struggle to afford healthcare, including 43% of those with employer coverage, 57% with marketplace or individual plans, and 45% with Medicaid, according to a 2023 survey by the Commonwealth Fund. Many respondents reported that in the last 12 months, they or a family member had to delay or skip needed health care or prescription drugs because they could not afford them.
What’s Next?
According to exit polls, inflation played a major role in determining the outcome of the recent election. Rising prices for groceries and gasoline prices are easy to spot; rising healthcare costs are not. If Americans knew how much of their hard-won earnings is consumed by healthcare, they’d demand action.
This problem won’t be solved by raising deductibles, pushing chronically ill patients into high-risk pools or boosting government payments. Healthcare already consumes a larger share of the federal budget than Social Security or defense.
The only way we can meet this challenge is by reducing costs and improving care. I’ll explore ideas to achieve both goals in the coming weeks.