Is the Price Right?
SOURCE: istockphoto
With health care costs escalating four times faster than wages, it’s no surprise that both ends of the political spectrum concur that affordable health care is an important goal. Here politicians’ concerns mirror those of ordinary citizens. Health care costs continue to grow at a rate faster than the rest of the economy, and the financial burden on Americans continues to escalate. In 2003, almost one-fifth of American families were spending more than 10 percent of their disposable income on health care. The cumulative cost of premiums increased 91 percent from 2000 to 2007. And more than one-quarter of adults reported not obtaining treatment or prescription drugs because of cost. The system is broken and unaffordable.
There is broad agreement that we need affordable health care, but how to define and achieve affordability are less clear. Conservatives believe that affordability can be achieved with a flat tax credit given to individuals who purchase insurance on the private market. The most generous of such proposals would give a refundable credit of up to $2,500 for individuals and $5,000 for families. Conservatives claim that this would "level the playing field" and finally make health care affordable for all.
This concept, however, has several problems. The proposed tax credit is simply not enough money to make care affordable. The average family premium is $12,000, more than twice the amount covered by a tax credit. The credit appears even less adequate when the recipient lives in a high-cost market, with expensive basic necessities, health care, and insurance costs.
Low-income individuals and families would also suffer. They already allocate a much higher proportion of their income for health care costs. As such, a fixed tax credit, rather than one that rises as income falls, doesn’t level the playing field.
Finally, any consideration of affordability must include the cost of both premiums and out-of-pocket expenditures. The two aspects go hand in hand, since lower premiums often result in higher out-of-pocket costs.
Policymakers have already agreed that future health care reforms must make health care more affordable. The remaining challenge is to define a truly "level playing field" and make health care affordable for all Americans.
Background Basics
Why is it important to define affordability?
Affordability refers to a family’s or an individual’s ability to purchase health care at a reasonable cost. What constitutes a reasonable cost, however, varies by income level. If insurance is not adequately subsidized for low-income individuals, then they would continue to suffer excessive financial burdens. Yet, the greater the generosity of financial assistance, the higher the costs that fall to the government. Defining affordability is thus an important decision for policymakers.
Today, unaffordable health care poses an undeniable burden on families. A recent Kaiser Family Foundation survey found that 28 percent of Americans list paying for health care and health insurance as a "serious problem." This shouldn’t come as a surprise. Forty-five million people spent over 10 percent of their income on health care in 2004. To cope with these financial difficulties many opt to delay or refuse important medical care, creating future problems and more costs.
Differing interpretations of affordability
Economists use two competing approaches to understand how much households can pay for health care. The first approach considers household budgets, measuring the dollar amount each household spends on necessities and then treating health care expenditures as an extra expense. This approach considers any remaining money after the purchase of necessities in the household budget to be available for the purchase of health care.
This approach does not treat health care as an essential good, but rather as a luxury item. Also, it does not consider health care spending as a proportion of one’s income. Naturally, those with larger disposable incomes can afford to spend a much higher dollar amount on health care than can those with lower incomes.
The second common approach considers the share of income Americans can actually spend on health care. The costs of premiums and out-of-pocket expenses are measured as a share of income, and analysts use a sliding scale to compare this amount to a family’s or individual’s expected contribution for health care.
These different ways of understanding affordability have important implications for health reforms that seek to ensure access to affordable health coverageófor example, how affordability is defined will determine who receives help with health care costs, and how much help they may receive. The state of Massachusetts uses the second approach to determine the maximum amount families can afford to pay for health insurance, measured as a proportion of their income. The scale is updated annually based on the Federal Poverty Guidelines. Those with the lowest incomes are not expected to pay any of their own money toward their monthly premiums. Those who earn more money can afford to spend a greater proportion of their income on health care, and the scale reflects this difference.
Can greater individual responsibility lead to affordability?
The conservative approach to achieving affordability relies on individuals taking on more financial risk. The basic concept is that if individuals are more responsible for cost, then they will find low-cost, high-quality coverage. In reality, the consumer’s ability to influence premium levels is questionable. A recent analysis concluded that even large employers are at the mercy of insurance company pricing strategies.
Furthermore, a market focused on individual and not group coverage can lead to premiums that rise with need. An individual with a medical history that includes something as simple as a Caesarean section can be priced out of the individual market. This makes the individual market simply not an affordable option for many Americans. A Commonwealth Fund study found that almost 90 percent of adults who sought insurance on the private market never actually ended up purchasing a plan. The majority of these individuals cited unaffordable plans or inadequate coverage as the reason preventing their enrollment.
Can premiums be affordable with care still out of reach?
Yes. As recently highlighted in congressional testimony, simply making health insurance premiums affordable is not enough to protect Americans from financial instability. Attempts intended to constrain insurance premiums have lead to higher co-pays and deductibles, as well as limited benefits offered. Health savings accounts and high-deductible health plans rely on greater cost sharing but result in low satisfaction, high out-of-pocket costs, and cost-related access problems. Put simply, low-cost premiums can result in health services that remain unaffordable for consumers because of high deductibles and co-paymentsóleaving individuals with the equivalent of phantom insurance.
According to a Health Affairs report, uninsured and underinsured Americans make up a combined 42 percent of the population. The consequences of this inadequate coverage are staggering. A Harvard University study found that 2 million Americans face medical bankruptcy every year, even though 75 percent of these individuals actually had health insurance.
Who is at risk for unaffordable care?
The affordability challenge is particularly acute for individuals with chronic illnesses and other conditions. Adequate treatment of these conditions often requires lengthy and more expensive medical care and increased use of the health care system. In 2003, persons with either poor or fair health had over a 30 percent chance of facing medical costs that exceeded 10 percent of their income. The following chart details the risk of high financial burden for various conditions and demographic categories.
For additional reading:
The Commonwealth Fund, The Affordability Crisis in U.S. Health Care: Findings From the Commonwealth Fund Biennial Health Insurance Survey, March 2004.
Sharon K. Long, On The Road To Universal Coverage: Impacts Of Reform In Massachusetts After One Year, Health Affairs, June 3, 2008.
The Kaiser Family Foundation, Health Savings Accounts and High Deductible Health Plans: Are They an Option for Low-Income Families? October 2006.
M. Kate Bundorf and Mark V. Pauly, Is Health Insurance Affordable for the Uninsured? October 2002.
In the News
How Many Are Underinsured?
A recent Commonwealth Fund study discovered that in 2007, 25 million American adults were underinsured, meaning they did not have adequate health insurance coverage to finance their medical costs. Read the full report here or watch a News Hour interview with author Cathy Schoen here.
Health Insurance Gains Detailed
The Boston Globe reports that the number of uninsured adults in Massachusetts fell by almost 50 percent last year. The state’s health care reform plan guarantees affordable, universal coverage for its citizens. Read more class here.
Cash Before Chemo: Hospitals Get Tough
The Wall Street Journal reported the story of Lisa Kelly, a Texas woman asked to pay $45,000 before she could begin chemotherapy treatment despite having a health insurance plan. Ms. Kelly testified before the Senate Finance Committee about her experiences with inadequate health insurance. Read her story here.
Fed Chief Addresses Health Care and Its Costs
Ben Bernanke, chairman of the Federal Reserve, addressed a bipartisan congressional summit on health care and declared that health care costs will continue to rise. According to Bernanke, spending on health care will rise relentlessly, challenging many Americans’ ability to purchase affordable care. Read a New York Times article about his speech here or read his full comments here.