Spending for Private Health Insurance in the United States
Key Points From This Brief:
- Total national spending on premiums for private health insurance was almost $850 billion in 2010, or one-third of all U.S. health spending. Approximately 89 percent of non-elderly people with private health insurance were covered through the employer-based group market, and premiums in this market accounted for 95 percent of all private premium spending. The remaining spending was from people who purchased coverage directly from insurers in the non-group market.
- Nationally, aggregate spending on private premiums increased by about 15 percent between 2006 and 2010 despite declining enrollment. Over the same period, the average premium paid for a policy in the group market increased by around 20 percent.
- Employees have been required to shoulder an increasing portion of rising premiums through their explicit contributions, hitting 27 percent in 2011. They are also increasingly likely to face a deductible, and average deductible levels have been rising quickly. Increases in premiums and out-of-pocket cost sharing have dramatically outpaced general inflation and growth in earnings and median incomes.
- Average premiums in the non-group market are lower than in the employer-based market and have been increasing a little less rapidly. Deductibles, on the other hand, are considerably higher in the non-group market, consistent with a growing prevalence of plans eligible for health savings accounts.
- In 2010 private health insurance companies spent an average of 88 cents of every premium dollar purchasing health care services for their enrollees, with most of this spending paying for inpatient care and for physician and other clinical services. The remaining 12 cents of the premium dollar was used to cover plan administrative expenses, rate credits and dividends, taxes, contributions to reserves, and profits.
- Increases in the amount spent by insurers to purchase inpatient services accounted for 45 percent of the total increase in premium revenue between 2006 and 2010. Another 25 percent of the premium increase was due to higher spending for physician and clinical services. Only 3 percent of the premium increase was attributable to factors such as administrative costs, taxes, additions to reserves and profits.
- Numerous studies have shown that it is the higher prices being paid to providers for a unit of service – rather than an increase in utilization or a shift to a more complex mix of services – that has been the main factor behind the escalating spending for health care services in recent years.
Overview of Private Health Insurance
In 2010 one-third of all health-related spending in the United States – totaling nearly $849 billion – was for premiums to purchase private health insurance (Figure 1). Private health insurance in the U.S. is predominantly employer-sponsored, that is, arranged and at least partially financed by employers for their workers, dependents and, in some cases, retirees. Because these policies are obtained for groups of enrollees, employer-sponsored insurance (ESI) is referred to as being part of the group market.
Employers providing health benefits may elect to self-insure, bearing the risk of incurred claims (generally with some protection through separately purchased stop-loss insurance) and contracting with insurers or other third-party administrators only for administrative services. Or they may transfer all risk to the insurer by opting to be fully insured. The percent of workers with employer-based coverage who were in self-insured plans has grown steadily over the past decade, and stood at 60 percent in 2011. Large firms have a much higher likelihood of self-insuring due to their greater ability to bear risk; 82 percent of employees in firms with more than 200 workers were in self-insured health plans in that year, compared to only 13 percent of workers in firms having fewer than 200 employees.1
Under the current U.S. tax code, employers can deduct the cost of health insurance as a business expense, and their contributions to premiums are not treated as taxable income for employees.i Employee contributions to their premiums are also typically collected on a pre-tax basis so that no income or payroll tax is due on this portion of earnings. These provisions result in a sizeable implicit subsidy that not only strongly encourages the purchase of employment-based insurance but may also fuel demand for richer benefit packages than would otherwise be purchased. The Joint Tax Committee of the U.S. Congress estimates that these tax exclusions cost the federal government some $145 billion in lost revenue in 2011,2 and recent estimates from the Congressional Budget Office indicate that the exclusions will amount to 1.8 percent of GDP over the next ten years.3