The Economics of Health Care

Who Paid for U.S. Health Care in 2012? In the United States in 2012, insurance paid for 77% of health care consumption costs: the sum of 34% (private insurance), 23% (Medicare), 16% (Medicaid), and 4% (other public). The percentage paid for by private insurance, 34%, was a uniquely high number among advanced countries. Even so, substantially more U.S. health care was paid for by Medicare, Medicaid, and other government programs than by other means.
Source: Department of Health and Human Services Centers for Medicare and Medicaid Services.

A large part of the welfare state, in both the United States and other wealthy countries, is devoted to paying for health care. In most wealthy countries, the government pays between 70% and 80% of all medical costs. The private sector plays a larger role in the U.S. health care system. Yet even in America, as of 2013 the government pays almost half of all health care costs; furthermore, it indirectly subsidizes private health insurance through the federal tax code.

Figure 18-5 shows who paid for U.S. health care in 2012. Only 14% of health care consumption spending (that is, all spending on health care except investment in health care buildings and facilities) was expenses “out of pocket”—that is, paid directly by individuals. Most health care spending, 77%, was paid for by some kind of insurance. Of this 77%, considerably less than half was private insurance; the rest was some kind of government insurance, mainly Medicare and Medicaid. To understand why, we need to examine the special economics of health care.