The Impact of Health Care Financing on Family Budgets

Abstract

Although businesses, federal and state governments, and insurance companies are major funding sources for health care, they are just intermediate sources. Ultimately, individuals and families pay all health care costs through out-of-pocket spending, insurance premiums, or federal, state, and local taxes. Using a microsimulation model with data from the 1987 National Medical Expenditure Survey, the Internal Revenue Service's Individual Tax Model, and the Consumer Expenditure Survey, the authors examine the distribution of health care spending, by decile, among families and individuals. They find that the distribution of health expenditures is very regressive, with low-income families paying twice the share of income paid by high-income families. The distribution of out-of-pocket expenditures, which comprise 24 percent of total spending, is the most regressive, with low-income families paying 8.5 times the share of income paid by high-income families. Spending on premiums is also regressive, and the regressivity would increase if everyone had private insurance. Expenditures through the public sector are progressive. Regressivity is greater among the elderly than the nonelderly. Out-of-pocket expenditures account for 41 percent of all health care spending by the elderly. A more equitably financed health care system would increase the share of funding raised through progressive taxes, and decrease reliance on expenditures made out of pocket and on premiums.