Government Share of Healthcare Is Far Bigger Than Advertised
Tuesday, August 2, 2011
The conventional ways of cataloguing and reporting health spending significantly understate the government share of health spending.
In announcing a new set of health spending projections from the Centers for Medicare and Medicaid Services, a recent email alert from the journal Health Affairs states: “New CMS Estimates Are That Nearly Half of Health Spending in the US in 2020 Will Come from Government Sources, up from 44 Percent in 2009.” That the government share of healthcare is rising is no news. We have known for decades that the share of health spending financed by federal, state, and local taxpayers has been rising. The truth hidden from view, however, is that government’s share of health spending already exceeded 50 percent in 2009.
Healthcare-related tax subsidies will this year amount to nearly $350 billion annually. The federal share of this total, $265 billion, is more than the federal government paid for its share of Medicaid in 2009. Thus, ironically, the federal government spent more that year to subsidize private health insurance than it spent on public health insurance for those who have low incomes (although this no longer is true).
Tax expenditures are the lost tax revenue associated with giving tax breaks for particular taxpayers or activities. There is no functional difference between the federal government sending someone a check for $1,000 to pay for their health insurance or giving them a $1,000 tax credit to achieve the same purpose. Indeed, the latter is arguably much more efficient from an administrative point of view. Unlike Medicare and Medicaid, such subsidies do not show up as a line item in the federal budget either as expenditures or as deductions from expected revenue. For this reason, tax expenditures are less visible to most Americans than are the direct expenditures financed by the national treasury.
All levels of government account for almost 60 percent of national health expenditures compared with less than half of national health expenditures when tax expenditures are ignored.
Health-related tax expenditures take many forms, but more than 90 percent of costs attributable to them relate to the tax exclusion for employer-provided health benefits. Because health benefits are not taxed the way they would be if the identical dollar amount were given to employees as income, this tax exclusion results not only in income tax revenue losses at the federal and state levels, but also payroll taxes for Medicare and Social Security. That is, in addition to not having to pay income taxes on compensation provided in the form of health benefits, employees also avoid having payroll taxes deducted on these same amounts. By comparison, other tax expenditures, such as the Schedule B deduction for households that have large health expenses relative to income, are minuscule.
The magnitude of health-related tax expenditures changes the picture of who is actually paying for healthcare. In the traditional payer view of health financing, expenditures are allocated based on who pays the bills at the time of service. In this view, households directly pay only for out-of-pocket costs not covered by public or private health insurance, while all private health insurance (even employer coverage purchased for government workers and non-group coverage purchased by individuals) gets counted as private business spending. In this view, all of Medicare gets counted under federal spending, along with military/Veterans Affairs health, the federal government’s share of Medicaid, the Children’s Health Insurance Program, and various other categorical programs such as maternal and child health. The rest is covered through state/local health programs. In this view, private business accounts for about 40 percent of spending, while the federal government accounts for just over one-third. However, with tax expenditures factored into national health expenditures (NHE), the federal government by far becomes the largest payer, accounting for 47 percent of spending (left columns in Figure 3.4b). Together, all levels of government account for almost 60 percent of NHE compared with less than half of NHE when tax expenditures are ignored.
The sponsor view of spending takes into account who is responsible for financing the larger aggregates just described. In the sponsor view, households are responsible not only for out-of-pocket costs, but also the employee share of employer-provided health coverage, premiums for non-group coverage (including Medigap plans), the employee and self-employed share of payroll taxes required for Medicare hospital insurance (Part A), and premiums paid to Medicare for Parts B and D. Private business pays for the employer share of premiums and payroll taxes for Medicare and workers’ compensation, temporary disability insurance, and worksite healthcare. The federal government is responsible for all the items included in the payer view except that Medicare costs financed through premiums and payroll taxes are excluded and the federal government share of premiums for federal workers and retirees is included. Under this sponsor view, the federal government pays for only 27.3 percent of NHE, with state and local governments accounting for another 16.3 percent. This is the basis for the news that government paid only 44 percent of spending in 2009. However, once tax expenditures are taken into account, the government share actually is 53 percent of spending.
In short, no matter which view we adopt, the conventional ways of cataloguing and reporting health spending understate the government share of health spending by about one-quarter. Some might view that as good enough for government work, but for those who want to better understand the role of government in the American health economy, the lesson is that the truth is not what it seems.
Christopher J. Conover is a research scholar at Duke University’s Center for Health Policy and Inequalities Research and an adjunct scholar at the American Enterprise Institute. The charts shown are from his upcoming book American Health Economy Illustrated, to be released in January 2012 by AEI Press. See PowerPoint version of Figure 3.4b and Excel spreadsheets on distribution of tax expenditures related to healthcare and distribution of national health expenditures by source of revenue for data, sources and methods.
FURTHER READING: Conover has recently written “Health Is the Health of the State.” He contributes to the Enterprise Blog and has co-authored the AEI working paper “Why a Public Plan Is Unnecessary to Stimulate Competition” with Thomas Miller.