In the United States, health care can be prohibitively expensive. A single doctor’s office visit can cost hundreds of dollars, while a three-day hospital stay can cost tens of thousands of dollars (or even more) depending on the sort of care delivered. Most of us cannot afford to pay such big sums if we become ill, especially since we have no idea when we will become ill or injured or how much care we would require. Health insurance is a way to bring such costs down to more manageable levels.

The way it typically works is that the consumer (you) pays an upfront premium to a health insurance company and that payment allows you to share “risk” with lots of other people (enrollees) who are making similar payments. Since most people are healthy most of the time, the premium dollars paid to the insurance company can be used to cover the expenses of the (relatively) small number of enrollees who get sick or are injured.

Insurance companies, as you can imagine, have studied risk extensively, and their goal is to collect enough premiums to cover the medical costs of the enrollees. There are many, many different types of health insurance plans in the U.S. and many different rules and arrangements regarding care.

The federal government spent nearly $1.2 trillion on health care in fiscal year 2019. Of that, Medicare claimed roughly $644 billion, Medicaid and the Children’s Health Insurance Pro-gram (CHIP) about $427 billion, and veterans’ medical care about $80 billion. In addition to these direct outlays, various tax provisions for health care reduced income tax revenue by about $234 billion.

Over $152 billion of that figure comes from the exclusion from taxable income of employers’ contributions for medical insurance premiums and medical care. The exclusion of employer contributions to medical care also substantially reduced payroll taxes, though that impact is not included in official tax expenditure estimates. Including its impact on both income and payroll taxes, the exclusion reduced government revenue by $273 billion in 2019.

In general, healthcare spending is a function of price (the amount of money spent for healthcare services) and utilization (the number of services used). There are various underlying variables that might raise prices and utilization, hence increasing healthcare costs.

The most significant of these problems are an aging population and rising healthcare costs.

An Aging Population

The share of the U.S. population age 65 and over has increased significantly over the past several years, rising from 13 percent in 2010 to 16 percent in 2021. Furthermore, that number is projected to continue climbing – reaching 20 percent by 2030. Since people age 65 and over, on average, spend more on healthcare than any other age group, growth in the number of older Americans is expected to increase total healthcare costs over time.

Furthermore, once people reach the age of 65, they will become eligible for Medicare, and the program’s enrollment — 65 million in 2022 — will skyrocket. The increased enrollment is likely to considerably boost Medicare costs over time. In reality, the Congressional Budget Office predicts that Medicare spending will more than double in relation to the size of the economy over the next 30 years, rising from 2.9 percent of GDP in 2022 to 5.9 percent in 2052.

The Increasing Cost of Healthcare Services

Prices are another key driver of healthcare spending in the United States; healthcare costs often rise faster than the cost of other products and services in the economy. The Consumer Price Index (CPI) – the average change in prices paid by urban consumers for various goods and services — has climbed at a rate of 2.4 percent per year during the last 20 years, while the CPI for medical care has grown at a rate of 3.4 percent per year.

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There are many possible reasons for that increase in healthcare prices:

• The introduction of new, innovative healthcare technology can lead to better, more expensive procedures and products.
• The complexity of the U.S. healthcare system can lead to administrative waste in the insurance and provider payment systems.
• The consolidation of hospitals can lead to a lack of competition or even a monopoly, granting providers the opportunity to increase prices.

More research needs to be done, though, to confirm the reasons that healthcare costs grow so quickly.

It would be one thing if our excessive healthcare spending resulted in improved health outcomes. In the United States, however, this is not the case. Despite spending more on such products and services, the United States trails behind other countries in conventional health indices.

High healthcare expenditures exacerbate an already precarious fiscal situation and are one of the key drivers of the country’s budget’s long-term structural imbalance between spending and receipts. High healthcare costs must be kept under control for our country’s long-term budgetary and economic well-being.

How Much are Medicaid and Medicare Costing Americans?

Medicare, and its means-tested sibling Medicaid, are the only forms of health coverage available to millions of Americans today. They represent some of the most successful social insurance programs ever, serving tens of millions of people including older adults, younger beneficiaries with disabilities, and those with low incomes or limited resources. Everyone in the workforce is required to pony up their share to fund these programs; either through payroll deductions or when they file taxes each year. 

In an unprecedented move, both programs received major additional funding in the wake of the coronavirus outbreak and following the enactment of the CARES Act in March 2020. So just how much are Americans paying for Medicare and Medicaid, and how big a bite from your paycheck should you expect?

Medicare and Medicaid Costs

Medicare is administered by the Centers for Medicare & Medicaid Services (CMS), a component of the Department of Health and Human Services. CMS works alongside the Department of Labor (DOL) and the U.S. Treasury to enact insurance reform. The Social Security Administration (SSA) determines eligibility and coverage levels.

Medicaid, on the other hand, is managed on a state-by-state basis. Although all states participate in the programme, it is not mandatory. By providing medical coverage to more Americans, the Affordable Care Act (ACA) increased the cost to taxpayers, particularly those in the highest tax brackets.

According to the latest recent CMS data, national healthcare expenditure (NHE) would increase 9.7% to $4.1 trillion in 2020. That works up to $12,530 per person. This statistic accounted for 19.7% of the year’s gross domestic product (GDP). Looking at each programme separately, Medicare spending increased by 3.5% to $829.5 billion in 2020, accounting for 20% of total NHE, while Medicaid spending increased by 9.2% to $671.2 billion in 2020, accounting for 16% of total NHE.

The CMS projects that healthcare spending is estimated to grow by 5.4% each year between 2019 and 2028. This means healthcare will cost an estimated $6.2 trillion by 2028. Projections indicate that health spending will grow 1.1% faster than the country’s GPD each year from 2019 to 2028. This projection in growth is primarily due to higher Medicare enrollments. The projected healthcare spending estimates by the CMS do not take into account costs related to the coronavirus pandemic.

President Joseph Biden’s American Rescue Plan provided incentives for states to expand their Medicaid programs to cover adults up to age 65 who have incomes at or below 138% of the federal poverty level ($30,305 for a family of three in 2021). Fourteen states—Alabama, Florida, Georgia, Kansas, Mississippi, Missouri, North Carolina, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Wisconsin, and Wyoming—had income limits well below that as of May 2021.

Under the plan, the states were offered additional federal funding if they expanded Medicaid for adults with eligible low-income adults. They could also earn an additional five-percentage-point federal match on their regular Medicaid expenditures for two years—not including costs for those newly eligible, disproportionate share hospital (DSH) payments, and some other expenses—to help defray state matching costs. More valuable, they would also gain the ACA’s 90% federal matching funds to pay for the costs of covering newly eligible adults.

On March 27, 2020, former President Donald Trump signed the CARES Act—a $2 trillion coronavirus emergency relief package—into law. A sizable chunk of those funds—$100 billion—was earmarked for healthcare providers and suppliers, including those that are Medicare and Medicaid enrolled for expenses related to COVID-19.5

Below are some examples of what the additional funding covers:

• A 20% increase in Medicare payments to hospitals for COVID-19 patients.
• A scheduled payment reduction was eliminated for hospitals treating Medicare patients from May 1, 2020, through Dec. 31, 2020.
• An increase in Medicaid funds for states.

Medicare Taxes

Taxpayers who receive wages, salaries, or self-employment income are required to pay Medicare tax on all of their wages. Once there was a limit on the amount of income on which Medicare tax was assessed, but this was eliminated in 1993. Now all earned income of any kind is assessed a 2.9% tax. Employers who pay their employees W-2 income cover half of this amount, 1.45%, and the employee pays the other half.

In most cases, the employer withholds the amount the employee owes so no balance is owed at tax time. Self-employed taxpayers must pay the entire amount themselves but are allowed to deduct half of this cost as a business expense. This amount is coded as a deduction for adjusted gross income (AGI), so it isn’t necessary for the taxpayer to itemize.

On Jan. 1, 2013, the ACA also imposed an additional Medicare tax of 0.9% on all income above a certain level for high-income taxpayers. Single filers have to pay this additional amount on all earned income they receive above $200,000 and married taxpayers filing jointly owe it on earned income in excess of $250,000. The threshold is $125,000 for married taxpayers who file separately.

Unearned Income Medicare Contribution Tax

There is also an additional tax on unearned income, such as investment income, for those with AGIs higher than the thresholds mentioned above. It is known as the unearned income Medicare contribution tax or the net investment income tax (NIIT). Taxpayers in this category owe an additional 3.8% Medicare tax on all taxable interest, dividends, capital gains, annuities, royalties, and rental properties that are paid outside of individual retirement accounts or employer-sponsored retirement plans. It also applies to passive income from taxable business activity and to income earned by day traders.

This tax is applied to the lower of the taxpayer’s net investment income (NII) or modified AGIexceeding the listed thresholds. This tax is also levied on income from estates and trusts with income exceeding the AGI threshold limits prescribed for estates and trusts. Deductions that can reduce the amount of taxable net investment income include early withdrawal penalties, investment interest and expenses, and the amount of state tax paid on this income.

Example of a Medicare Tax Bill for a High Earner

The total tax bill for Medicare that could be paid by a high-income taxpayer could look something like this:

Jerry is single and has inherited several pieces of land that produce oil and gas income at the wellhead. He also works as a salesman for a local technology company and earned $225,000 of 1099 income this year. His oil and gas royalties for the year total $50,000, and he also realized capital gains of about $20,000 from the sale of stock.

Jerry will owe 2.9% on his $225,000 of earned income, which equals $6,525. He also will owe another 0.9% on the amount of his earnings in excess of $200,000, which in this case is $25,000. This comes to $225. Finally, he must pay 3.8% of his $70,000 of combined investment income, which is an additional $2,660. The grand total he will pay to Medicare for the year is $9,410 ($6,525 + $225 + $2,660).

How Medicare Is Funded

Medicare is funded by two trust funds that can only be used for the program. The hospital insurance trust fund is funded by payroll taxes paid by employees, employers, and the self-employed. These funds are used to pay for Medicare Part A benefits.

Medicare’s supplementary medical insurance trust fund is funded by Congress, premiums from people enrolled in Medicare, and other avenues, such as investment income from the trust fund. These funds pay for Medicare Part B benefits, Medicare Part D benefits, and program administration expenses.

Benefit payments made by Medicare cover the following services:

• Home healthcare
• Skilled nursing facilities
• Hospital outpatient services
• Outpatient prescription drugs
• Physician payments
• Hospital inpatient services
• Medicare Advantage Plans, also known as Part C Plans, which are offered by Medicare-approved private companies
• Other services

The CARES Act expands Medicare’s ability to cover treatment and services for those affected by COVID-19 including:

• Providing more flexibility for Medicare to cover telehealth services
• Authorizing Medicare certification for home health services by physician assistants, nurse practitioners, and certified nurse specialists6

How Medicaid Is Funded

Medicaid is funded by the federal government and each state. The federal government pays states for a share of program expenditures, called the Federal Medical Assistance Percentage (FMAP). Each state has its own FMAP based on per capita income and other criteria. The average state FMAP is 57%, but FMAPs can range from 50% in wealthier states up to 75% for states with lower per capita incomes. FMAPs are adjusted for each state on a three-year cycle to account for fluctuations in the economy. The FMAP is published annually in the Federal Register.