Over the past century, the proportion of health-care services purchased through insurance—as opposed to directly by patients—has surged, thanks to the exemption of employer-sponsored benefits from income and payroll taxes. This has encouraged a great increase in spending on treatment by insulating consumers from the cost of services being sold.
What if patients spent more of their own money on health insurance? As Congress recently debated extending federal subsidies for health insurance, President Trump recommended that “the Hundreds of Billions of Dollars currently being sent to money-sucking Insurance Companies in order to save the bad Health care provided by ObamaCare, BE SENT DIRECTLY TO THE PEOPLE SO THAT THEY CAN PURCHASE THEIR OWN, MUCH BETTER, HEALTH CARE, and have money left over.”
Finally, a reason to check your email.
Sign up for our free newsletter today.
But making patients bear more of their costs out of pocket is a bad way to reduce wasteful health-care spending. It does more to inhibit access to care than to steer patients to cheaper sources of treatment. This is because health-care spending is highly concentrated among the seriously ill, for whom additional expenditures greatly exceed any realistic deductibles. Legislators should instead focus on letting Americans purchase more affordable insurance plans that are better focused on their health needs.
The proportion of health-care spending done out of pocket has declined steadily from 80 percent in 1929 to 11 percent in 2023. Most of the out-of-pocket expenditures that remain are deductibles and coinsurance payments required by insurance plans.
This has shifted control over the purchase of health care from patients to bureaucrats. Critics of this arrangement argue that it deprives individuals of access to their preferred doctors and drugs, while displacing a personalized patient–clinician relationship for “checkbox medicine” preoccupied with reimbursement and regulatory compliance. They suggest that insurers impose needless administrative costs and restrictions on access to care.
The American Hospital Association first established major medical health-insurance plans in the 1930s to make up for the collapse of patient revenues and charitable donations during the Great Depression. Over subsequent decades, policymakers enacted regulations and tax preferences to support the expansion of these plans, with the deliberate objective of increasing funding for medical providers. In 1965, Medicare and Medicaid established federal funding for the elderly and poor along similar lines.
These developments encouraged the rapid inflation of medical expenses. With public and private insurers funding 97 percent of hospital spending by 2023, patients have little incentive to shop around on price, while hospitals compete by boosting expenditure on equipment, amenities, and staffing. The price of a colonoscopy paid by private insurers, for example, varies fivefold across the United States.
Most insurers reimburse medical providers according to the costs they incur treating patients. That inflates the number of expensive services that yield minimal clinical benefits. Insurers lack the resources to scrutinize effectively the appropriateness of reimbursement claims given the availability of effective alternatives, and they face resentment from patients, medical practitioners, and lawmakers when they tentatively attempt to do so.
Advocates of “direct payment” for medical care propose cutting out the middleman. They argue that relying on cash payment for services would empower patients to seek out the best-priced medical care and forgo wasteful expenditures. Rather than inflating expenses, medical providers would work tirelessly to drive down costs and advertise potential savings. Innovative entrepreneurs could be directly rewarded for developing effective treatments at a fraction of the cost of the existing labor-intensive medical system.
Congress has taken some steps in this direction. The Medicare Modernization Act of 2003 sought to encourage direct payment for medical care by allowing employers to deposit pre-tax funds into Health Savings Accounts for workers enrolled in high-deductible health-care plans. From 2006 to 2023, average deductibles in employer-sponsored health insurance increased from $296 to $1,564.
This shifted some expenses from insurers to individuals, but established little incentive to shop for medical procedures. In 2023, less than 3 percent of U.S. health-care spending was done by people who spent under $1,564 on health care. Economists have found that higher deductibles did not lead consumers to switch to lower-priced medical providers but served instead to reduce the utilization of medical services—cost-effective as well as wasteful ones.
If the federal government attempts to finance health care by distributing cash uniformly to Americans, funds are likely to accumulate in the hands of those who need assistance least. In 2021, 5 percent of the population accounted for 51 percent of health-care spending. Though the heaviest health-care costs are not always incurred by the same households, “high utilizers” of medical care typically use more than average year after year. A diabetic is also more likely to be admitted to hospital for a heart attack or a stroke, and per capita health-care expenditures rise steadily over people’s lives.
As technological progress allows more to be done for the very ill, it becomes harder to pay for treatment out of pocket. In 2023, the median annual cost of newly launched cancer drugs was nearly $300,000.
Expenditure is also becoming increasingly concentrated. From 1996 to 2023, the share of U.S. health-care spending going to households that spend more than the median personal income on health care rose from 8 percent to 41 percent.
Some forms of insurance may facilitate the direct purchase of medical care by patients. Specifically, fixed indemnity health insurance provides predetermined cash payments to policyholders according to triggering medical events. These plans were popular in the early years of health insurance, before large tax and regulatory advantages were established for major medical insurance.
Fixed indemnity payments may amount to less, or more, than the cost of procedures at various medical facilities. For instance, UnitedHealthcare advertises that its fixed indemnity plan would give patients $12,320 for an emergency appendectomy, noting the average cost was about $16,000, but that 25 percent of procedures were performed for around $9,000. Cigna sells Lump Sum Cancer Insurance policies paying benefits ranging from $5,000 to $100,000, which enrollees can use to buy medical care directly from providers worldwide, pay for experimental therapies, or fund household expenses not covered by traditional health-insurance plans.
Yet the appeal of fixed indemnity insurance is likely to be limited. Plans may leave patients unable to pay for treatment, particularly if their cases involve costly complications. Enrollees who do not fully understand policies would find themselves on the hook for huge bills. Because of this, such plans are subject to income and payroll taxation, ineligible for federal subsidies, and often curtailed by state regulation.
Americans, meantime, typically want health insurers to cover more, not less. Eighty-three percent of adults aged 50 to 80 want insurance to pay for weight loss drugs, 77 percent of voters want insurers to pay for medical services without prior authorization, 89 percent of voters supported federal legislation to limit surprise medical bills uncovered by insurance, while 78 percent of Americans want to increase federal subsidies for health insurance sold on the individual market.
In other words, we’re stuck with health insurance. But we can greatly improve it.
Insurers are so unresponsive to patients’ concerns because it is employers, rather than enrollees, who usually control the purchase of policies. This arrangement forces plans to include costly benefits and features that are of little value to individual patients, such as coverage of expensive medical providers in other neighborhoods where they will never seek care.
Allowing employers to provide pretax funds for their employees to purchase their own insurance can allow individuals to opt for more cost-effective plans that better suit their own personal health needs and circumstances. This would actually reduce the largest hospital and drug expenses, rather than just shifting the burden of paying for them onto the seriously ill— which only cuts costs by leaving people without payment for care when they need it.
Photo: Jay Janner/Austin American-Statesman via Getty Images