Economics, Entitlements

The health spending 1 percent: Healthcare fact of the week

Ezekiel Emanuel reminded New York Times readers last week of something health economists have known for eight decades. Health expenditures are highly concentrated, with just 10 percent of the population accounting for nearly two-thirds of annual health spending. Wall Street protesters have sparked a fierce debate over trends in the share of income and wealth controlled by the top 1 percent. But no informed American aspires to be in the health spending 1 percent.

The 1 percent of the population that has the highest annual health expenses accounts for one-fifth of health spending (figure 12.1a). Their annual spending in 2011 likely exceeded $115,000. (These figures exclude those institutionalized in nursing homes and long-term mental hospitals; their inclusion would drive these figures even higher). Those in the top 5 percent account for just under half of all spending, with average annual expenditures that exceed $50,000. With the average U.S. worker earning less than $45,000 a year, these numbers demonstrate the desirability of some kind of health insurance coverage. Few but the wealthiest families are in a position to self-insure spending at these amounts. It would be only a slight exaggeration to observe that only the 1 percent could comfortably afford to be in the health spending 1 percent.

At the other end of the distribution, individuals in the bottom half of spending account for only 3 percent of annual health costs. Their average annual spending is less than $360. Leaving aside administrative costs, an actuarially fair premium to cover only the catastrophic expenses of the top 1 percent would be almost $1,161 a year. To cover the risk of being in the top 5 percent would require annual premiums of approximately $2,700. The challenge in a voluntary health insurance system is to convince a sizable share of those who have expected expenses of less than $360 to spend more than $2,700 to secure protection against risks that have only a 5 percent chance of occurring. The more low-risk individuals who opt out, the higher will be the premiums needed for those who remain.

However, this greatly exaggerates the challenge when people are separated into different age groups. In that case, the difference between the lowest and highest spenders shrinks considerably. Indeed, for decades the non-group insurance market has successfully provided voluntary coverage through a combination of medical underwriting and pre-existing condition exclusions—together the equivalent of a homeowners insurance company checking to ensure the house is not burning down before it agrees to insure that risk—and premiums that steadily rise with age.

How to deal with the health spending 1 percent has been a contentious issue among policymakers. Someone who already has crossed the 1 percent spending threshold is by definition uninsurable: at that point, such individuals arguably need healthcare, not health insurance. But we have become so accustomed to health coverage that functions as prepaid healthcare rather than as insurance against unknown risks that this distinction escapes many people (including policymakers). In a perfect world, we would have universal coverage against the risk of landing in the health spending 1 percent. Most people would gladly pay $1,161 to avoid facing bills of $116,000. But not everyone can afford to do so. And many recognize that even if they ran up bills that large, they would not necessarily have to pay them: uncompensated care write-offs, retroactive Medicaid, and other safety net programs result in nearly two-thirds of uninsured medical bills being paid by someone other than the uninsured patient’s family. Unfortunately, these well-intentioned efforts to dissipate the adverse effects of being without health insurance concomitantly diminish incentives to obtain health insurance in the first place. The foregoing demonstrates why one Republican presidential candidate observed, a half decade ago, that ”Health is about 30 times more difficult than national security.” Perhaps it’s worth having a Republican presidential candidate debate on this issue alone.

Christopher J. Conover is a research scholar at Duke University’s Center for Health Policy and Inequalities Research and an adjunct scholar at AEI. The charts shown are from his new book American Health Economy Illustrated, to be released in January 2012 by AEI Press. See PowerPoint version of Figure 12.1a, and Excel spreadsheet on the concentration of health spending in 2008 for data, sources, and methods.

6 thoughts on “The health spending 1 percent: Healthcare fact of the week

  1. I’m not sure what the point is here. That 1% is not a static group of people. $115,000 is the cost you might rack up with a serious medical problem. That’s why insurance exists, so that you can spread the costs of that one or two years you are in the top 1% over the many years when you are not in the 1%.

    • As I noted in my comment to Dave, you are correct that there is not a huge amount of persistence in the concentration of health spending from year to year. Insurance can help with this risk only if people opt to buy it. Many young people elect to gamble on not having health insurance. Fewer might do so if they were aware of the actual magnitude of the risk they faced. As I note in my reply to SomeGuy, it is not “obvious” that the top 1 percent would average $115K in annual spending. The chart was intended to help illuminate this point.

  2. Unless I’m missing something, this is entirely meaningless. It is very likely that in any one year that a small number of people have catastrophic healthcare issues leading to high cost care. But it is also likely that it will be someone else next year, not the same person. What this really says is procedures like quad bypass are very expensive, nothing more. And it points out the basic flaw in the whole market question: healthcare isn’t just a regular expense, but also a catastrophically high expense for a few random people at a random time, hence the need for insurance. If the point was to try to reduce the cost of the ‘high utilizers’, then you really only have one choice to reduce the cost of high cost procedures, e.g. heart bypass which runs about $150k and up. This is not something you shop for the best price on before having, no matter what your insurance situation is.

    The article makes the point that these people become uninsurable then, which is probably true, because they are likely to continue to need more care than average. But assuming it’s a new fraction of 1% every year, that leads to a population that is much larger than 1% in this category on average.

  3. I’m not sure what the point is either. I’d guess that only a small percentage of the population — maybe 1% — is actually in need of extensive critical care in a hospital or massively expensive drugs, and by definition those are the people who are spending the most on healthcare. This chart is like saying that the healthy people spend far less on healthcare than the sick people. Well, of course they do. So what?

    Maybe if the chart had tracked healthcare spending by annual income it would’ve shown something interesting. But a chart saying that the people who spend the most on healthcare spend more on healthcare than those who spend less on healthcare really isn’t terribly enlightening.

    • It may be intuitively obvious that sick people spend more than healthy people. That said, it is not “obvious” that the top 1% account for 20% of spending–as opposed to 10% or 50%. Likewise, it is not “obvious” that the top 1 percenters average $115K in spending. If their average were only $11,500, for example, then ability to pay for such care would be much less problematic than when the average is more than double the earnings of a typical American worker. What the numbers tell me is that the vast majority of families are not in a position to self-insure a risk of this magnitude. The opposite would be true were the average only $11,500.

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