Medical costs are eating into middle-class incomes.

The prospect of high medical costs and unexpected medical expenses is a source of great anxiety for adults and their families. According to KFF, an independent source of health policy research, polling, and news, reducing out-of-pocket costs is a top national health care priority.

A year ago, I wrote about how our expensive health care system is negatively impacting American society. “In addition to increasing budget deficits and adding hundreds of billions of dollars to the national debt each year, high health care costs crowd out other state budget priorities and undermine public finances.” Competitiveness of American Business and the damage to American families. ”

This problem is not new, but it is growing every day.

Few Americans understand how much they are paying.

A few years ago, while at Landland, I worked with Dr. David Auerbach, a health economist with experience at the Congressional Budget Office, to study the impact of a decade of increased health care costs on the incomes of middle-class households. The impact was analyzed. We found that between 1999 and 2009, the total income of a typical middle-class family of four with employer-sponsored health insurance increased from $76,000 to $99,000. (adjusted to 2009 dollars). However, medical costs almost completely wiped out this increase.

“Self-pay” is just the tip of the iceberg

The medical costs that individuals and families most readily recognize are the amounts they pay at the doctor, dentist, or optometrist's reception desk, or at the local drug store or medical supply company.

Once this “co-payment” is paid (often only after the annual deductible has been met), private health insurance will cover the rest. Health insurance may waive co-pays for inexpensive generic drugs and expensive preventive services, but will require high co-pays for expensive brand-name drugs and specialist treatments. If a patient is hospitalized or requires expensive tests and treatments, out-of-pocket costs can run into the hundreds of dollars. In some cases, patients must pay 20% of the bill before insurance will cover it.

Dr. Auerbach and I estimated that in 1999, a typical middle-class family of four was paying an average of $135 a month in out-of-pocket medical expenses. Over the next 10 years, their out-of-pocket costs nearly doubled to $235 a month. Although this is a significant increase, it is only a fraction of a family's total medical expenses. That's because instead of families paying out of one pocket, they pay out of four pockets.

Second Pocket – The cost of employee health insurance premiums increases significantly.

The second source of health care spending is money paid by employees for employer-provided health insurance. Premium costs tend to rise faster than inflation, so they generally outpace worker wage growth. Dr. Auerbach and I calculated that monthly premiums for families rose from $85 in 1999 to $135 per month in 2009, an increase of $600 per year.

The last two pockets of spending are hidden from view

Economists have long argued that rising insurance premiums suppress wage growth. That's because employers typically cover the cost of health insurance from the same funds they pay their employees. Dr. Auerbach and I calculated that in 1999, our family's employer-paid health insurance premiums were costing us $240 per month in unreimbursed costs. By 2009, ESI had more than doubled to $550 per month, an increase of $3,720 per year.

The ultimate source of health spending is the portion of individual or family federal and state taxes that fund Medicare, Medicaid, Veterans Affairs, the military health care system, and the Indian Health Service. Some communities allocate a portion of their local tax revenue to health care, but this is not included in the analysis. We estimated that families' tax payments for medical expenses increased from $345 in 1999 to $440 in 2009. In reality, it would have been much larger, but the difference was added to the federal budget deficit and ultimately to the national debt.

If medical costs had increased at the same rate as the prices of other goods and services, the family could have earned an additional $5,400 in 2009. Instead, increased medical costs ate up almost all of it, leaving only $95.

Today's photo is even darker

Since our study was published, the problem has gotten even worse. In 2009, the United States spent $2.5 trillion on health care. By the end of 2024, spending will reach or exceed $5 trillion. This has caused health insurance premiums to skyrocket. According to the 2024 KFF Employee Benefits Survey, average premiums for ESI in 2024 increased by 6% for single coverage and 7% for family coverage. A similar rate increase was seen in 2023.

A recent analysis in JAMA Open found that between 1988 and 2019, increases in employer-sponsored health insurance premiums cost U.S. households a median income loss of $125,340. The overall impact was undoubtedly larger because the researchers did not take into account increases in co-pays, deductibles, and other out-of-pocket medical costs.

According to a 2023 study by the Commonwealth Fund, many working-age adults today struggle to pay for health care, with 43% having employer-based insurance and 57% receiving market or personal insurance. 45% are enrolled in Medicaid. Many respondents reported that in the past 12 months, they or a family member had to postpone or skip needed medical care or prescription drugs because they could not afford it.

What's next?

Inflation played a major role in determining the outcome of recent elections, according to exit polls. It's easy to see increases in food prices and gas prices. Rising health care costs are not. If Americans knew how much of their hard-earned income is being spent on health care, they would demand action.

This problem will not be solved by raising out-of-pocket costs, pushing chronically ill people into high-risk groups, or increasing government payments. Health care already accounts for a larger share of the federal budget than Social Security or national defense.

The only way we can meet this challenge is to reduce costs and improve care. We'll explore ideas for achieving both goals in the coming weeks.