The Increasing Progressivity of Healthcare Financing in the United States: 2004 to 2015

The United States has a complex system for financing healthcare, combining an array of public and private components. In addition to out-of-pocket amounts paid directly to providers, healthcare financing includes: the payment of premiums directly to insurers, employer contributions for workers’ health plans, and public programs that provide health coverage and draw on state and federal tax revenues. Given the growth of health care spending and the fact that individuals ultimately bear these costs in some form, there is substantial value in developing a thorough understanding of how much individuals and families pay for healthcare, how these payments are distributed, and how the incidence of financing evolved over time.

Previous attempts to understand how much individuals pay for health care typically focus on particular types of healthcare payments in isolation, such as out-of-pocket medical costs (Banthin et al, 2008) or premiums for private insurance (Gruber and McKnight, 2003). Little comprehensive analysis of equity in the finance of U.S. healthcare has been conducted, with two notable exceptions being Wagstaff et al. (1999), which examined data from 1987, and Ketsche et al. (2015), reflecting financing in 2004.

We develop an updated analysis of healthcare finance equity using the nationally-representative Medical Expenditure Panel Survey (MEPS) combined with a variety of supplementary datasets to benchmark and to enhance our estimates. We align the MEPS distribution of income to Internal Revenue Service data, simulate a full array of federal and state income tax expenditures and state sales taxes, and report sources of financing for healthcare by quintiles of equivalent income. Our preliminary assessments cover the 2004 to 2013 time period, but our final analysis will be extended to 2015 to include the early years of the main Affordable Care Act reforms.

Our systematic analysis of all major components of health spending reveals that the financing of healthcare in the United States – notwithstanding a relatively progressive structure for income taxes – is regressive. The bottom quintile of households in the United States paid 11.7 percent of their income in health payments in 2013 compared with 8.1 percent for the top 1 percent of households. However, our estimates also show that the U.S. system for financing healthcare has become more progressive over time with the share of income devoted to health spending for the bottom quintile falling 6.1 percentage points from 17.7% in 2005 to 11.7% in 2013 and the share paid by the top 1 percent of households increasing 1.9 percentage points from 6.2% to 8.1% over that same period.

Our preliminary study period encompasses the introduction of several significant changes to healthcare and tax policy, which are consistent with our findings of increased progressivity in the healthcare sector, including the beginning of the Part D prescription drug program in Medicare (2006), the introduction of income-related premiums in Medicare (2007), and the Additional Medicare Tax for higher-income households (2013). Although we do not yet have complete data for 2014 and 2015, the increased insurance coverage in those years likely led to further increases in progressivity.