National Health Insurance: How to Pay For It

Last month I briefly sketched out the principles and mechanics of a universal, single-payer health care system, as proposed by the Physicians’ Working Group for Single‑Payer National Health Insurance. This month I will describe who currently pays for health care in the United States, and summarize a couple of different proposals for how a single-payer system might be financed.

How We Pay for Health Care Now

The United States already spends more per person on health care than any other country in the world—more, even, than those that have national, universal health care systems. We spend two-and-a-half times as much as England, Sweden, or Japan, and 43 percent more than Switzerland, the second- largest spender.

It’s clear that we already spend more than enough in this country to provide health care to everyone—and yet 43 million Americans remain without health insurance, and the U.S. fares poorly on some of the major health indicators, such as infant mortality and life expectancy.

The problem, then, appears to be not how much we spend, but how we spend it. How do we spend our health care dollars in the United States? The Government (federal, state, and local) currently accounts for 45 percent of health care spending, mostly through Medicare and Medicaid, which take up about 33 percent. The other 12 percent is accounted for by workers’ compensation, public health spending, veterans’ health benefits, and so forth.

One quarter of the remaining 55 percent of health care costs currently paid for by “private” sources is paid by businesses that provide insurance for their employees. Seven percent is paid by individuals buying insurance for themselves. Nineteen percent is paid for “out-of-pocket” by individuals, including spending that is not covered by insurance, like prescriptions, nursing home costs, eyeglasses, co-pays, and any health care that uninsured people have to get and end up paying for out of their own pockets. The remaining four percent is covered by revenue from hospital gift shops, private donations, etc.

Who Would Pay for Universal Health Care?

A technical paper published in 1998 by the Economic Policy Institute, a non-partisan think tank, titled, “Universal Coverage: How Do We Pay For It?” did the numbers on a switch to a universal, single-payer system. The author of the paper was Edith Rasell, formerly a family physician and now an economist with EPI. The data is a few years old, but the basic picture hasn’t changed much.

Rasell’s paper describes a way to finance universal coverage that preserves much of the current financing system, but attempts to be more equitable by replacing funds obtained from regressive taxation sources with revenue from progressive taxes. A tax is “progressive” when the rate of taxation goes up as income goes up. When lower-income people pay the same tax rates, or higher tax rates, as higher-income people, that funding system is said to be “regressive.” For example, premiums under the EPI proposal would be eliminated, since their cost is the same to everyone regardless of income. Cost-sharing and out-of-pocket spending for medical services would also be abolished, for the same reason. Such regressive sources currently make up about 24 percent of health expenditures in the U.S.

In a more equitably-financed system, employers would pay a new payroll tax that raised the same amount of money they currently spend for employee health insurance premiums; this would require a payroll tax of about 7 percent, Rasell says. Revenue from an increase in the federal personal income tax would replace household out-of-pocket expenditures for medical services and payments for insurance premiums, assuming that these regressive funds would be replaced with revenue from the federal personal income tax, the most progressive source of funding. For the average, middle-income family, the tax increase would total $731 (1998). In exchange for the tax increase, no resident of the United States or U.S. employer would need to buy health insurance or face out-of-pocket charges for any health care.

In addition, if funding were reduced for other federal programs, then the amount of replacement funding needed would be reduced.

Single-Payer Tax Changes

Looked at by income groups, here are the changes in taxes that would be required to fund universal, high-quality health care under a single-payer system.  The following examples are approximates:

The lowest 20 percent of households, with an average income of $8,860 per year, currently get a tax credit of $611, due largely to the Earned Income Tax Credit program. This would not change under a universal system.

The second-lowest-earning 20 percent of households, with an average income of $22,530/year, currently pay a tax of $315, or 1.4 percent of their income. Under a universal system, they would pay $426, or 1.9 percent, an increase of $110.

The middle 20 percent of households, with an average income of $37,290/year, currently pay a tax of $2,088, or 5.6 percent of their income. Under a universal system, they would pay $2,819, or 7.6 percent, an increase of $731. (Point of comparison: This same family paid almost 12 percent in federal income taxes in 1980.)

The second-highest-earning 20 percent of households, with an average income of $56,170/year, currently pay a tax of $4,550, or 8.1 percent of their income. Under a universal system, they would pay $6,142, or 10.9 percent, an increase of $1,592.

The top 20 percent of households, with an average income of $130,577/year, currently pay a tax of $20,351, or 15.6 percent of their income. Under a universal system, they would pay $27,473, or 21.0 percent, an increase of $7,123.

Just in case these tax increases ranging from $110 to $7,123 seem excessive, consider that a typical family health insurance premium goes for about $8,000 per year, and these premiums would be completely replaced by the taxes above.

Next month, in Part 3, we’ll take a look at a different proposal for financing universal, single-payer health care. In Part 4 we’ll look at some specific implications of a National Health Insurance system for people with disabilities.