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.