HLTH 4530 Week 10 Financing Comparison Paper Example

Four Channels That Pay for American Health Care: Medicare, Medicaid, Employer Coverage and Out-of-Pocket Spending Compared on Where the Money Comes From, Who Collects It, Who Delivers Care and How the Burden Falls by Income

Student Name

Walden University

HLTH 4530: Healthcare Economics From a Population Health Perspective

Instructor Name

Month Day, Year

Four Channels That Pay for American Health Care: Medicare, Medicaid, Employer Coverage and Out-of-Pocket Spending Compared on Where the Money Comes From, Who Collects It, Who Delivers Care and How the Burden Falls by Income

Purpose

How a health system raises money shapes who bears its cost as much as how much it spends. The United States does not have one financing arrangement but several, operating side by side. This paper compares the four largest channels, Medicare, Medicaid, employer-sponsored private insurance and out-of-pocket payment, on four questions: where the money comes from, who collects it, who delivers the care it pays for and how the burden falls across income groups. In 2024, these four channels together accounted for about 81% of national health spending: private health insurance 31%, Medicare 21%, Medicaid 18% and out-of-pocket spending 11% (Centers for Medicare & Medicaid Services [CMS], 2025).

The Matrix

Table 1

Four U.S. Financing Channels Compared

Spending shares from the CMS national health expenditure fact sheet; premium figures from KFF (2025). The matrix describes the main features of each channel, not every exception.

Row 1: Where the Money Comes From

The four channels draw on very different sources. Medicare's hospital insurance is financed largely by a dedicated payroll tax paid by workers and employers on all wages, while its physician and drug coverage relies more on general federal revenue and enrollee premiums. Medicaid is paid for from general tax revenue, shared between the federal government and the states. Employer-sponsored insurance is financed by premiums: in 2025 the average annual premium for family coverage was $26,993, of which workers paid $6,850 directly and employers the rest (KFF, 2025). Out-of-pocket spending, $556.6 billion in 2024, comes directly from patients through deductibles, copayments, coinsurance and services that insurance does not cover, according to the same CMS fact sheet.

Row 2: Who Collects It

Two of the channels are collected by government and two privately. Medicare and Medicaid funds pass through federal and state treasuries. Employer premiums are collected by employers through payroll deductions and passed to insurers or, for self-insured employers, held to pay claims directly. Out-of-pocket payments are collected by providers themselves at the point of care. The collector matters because it controls how prices are set: public programs largely set the prices they pay, while private insurers negotiate them.

Row 3: Who Delivers Care

In all four channels, most care is delivered by private hospitals, physician practices and pharmacies. This is a key difference from systems in which the government owns hospitals and employs clinicians. The United States finances a large share of care publicly but delivers it mostly privately, and the same hospital may treat a Medicare patient, a Medicaid patient and a privately insured patient in neighboring beds, each paid at a different price.

Row 4: How the Burden Falls by Income

This row receives the most attention because it determines whether a channel asks more of people who earn more.

A financing mechanism is progressive if higher-income households pay a larger share of their income, proportional if they pay the same share and regressive if they pay a smaller share. Wagstaff et al. (1999), comparing the progressivity of health financing across several high-income countries, report that the financing mix matters: systems leaning on direct taxes were generally more progressive, while those leaning on private insurance and out-of-pocket payments were generally less so.

Medicare's payroll tax is close to proportional: the same rate applies to all wages, with no ceiling, and an additional tax applies to wages above a high threshold. The general revenue that funds the rest of Medicare and Medicaid comes partly from the federal income tax, which is progressive.

Employer premiums are regressive in their direct effect. A $26,993 family premium is a much larger share of a $50,000 wage than of a $200,000 wage. Economists also generally conclude that the employer's share of the premium comes, over time, out of workers' wages, so it too weighs more heavily on lower earners. The exclusion of employer premiums from income tax adds to this, because the tax saving is worth more to people in higher tax brackets.

Out-of-pocket payments fall on people according to their illness rather than their income, which makes them the most regressive channel in practice: a $3,000 deductible is a manageable cost for a high-income household and a serious burden for a low-income one.

What the Comparison Shows

The U.S. mix combines one roughly proportional channel, Medicare's payroll tax; channels funded by progressive general revenue, the rest of Medicare and Medicaid; and two channels that weigh more heavily on lower-income people, employer premiums and out-of-pocket payment. Because private insurance and out-of-pocket spending together make up about 42% of national spending in the CMS figures, a large share of the system's cost is raised through the less progressive channels. The households' share of total health spending, 28% in 2024 when premiums, out-of-pocket costs and payroll taxes are counted together, shows how much of the burden lands directly on families.

Why the Mix Matters for Population Health

The burden pattern has consequences beyond fairness. When a larger share of costs is collected through premiums and point-of-care payments, lower-income households face higher costs relative to their income, and some respond by delaying or forgoing care. That pattern links financing design to the population health questions earlier in this course: the asthma controller skipped under a high deductible and the emergency visits that a copayment discouraged both arise from the out-of-pocket channel. A financing comparison is therefore not only an accounting exercise. The channel through which money is raised helps decide who reaches care and when, and a system that leans on its least progressive channels will, other things equal, see more cost-related barriers among the people with the least income.

Limits

The matrix simplifies each channel. Medicaid eligibility rules and the Affordable Care Act's premium tax credits, which cap premiums as a share of income for some marketplace buyers, add progressive elements not shown in the table. The burden row describes direct effects; the full incidence of taxes and premiums depends on assumptions about who ultimately pays them.

References

Centers for Medicare & Medicaid Services. (2025). NHE fact sheet. https://www.cms.gov/data-research/statistics-trends-and-reports/national-health-expenditure-data/nhe-fact-sheet

KFF. (2025). 2025 employer health benefits survey. https://www.kff.org/health-costs/2025-employer-health-benefits-survey/

Wagstaff, A., van Doorslaer, E., van der Burg, H., Calonge, S., Christiansen, T., Citoni, G., Gerdtham, U.-G., Gerfin, M., Gross, L., Häkinnen, U., Johnson, P., John, J., Klavus, J., Lachaud, C., Lauritsen, J., Leu, R., Nolan, B., Perán, E., Pereira, J., . . . Winkelhake, O. (1999). Equity in the finance of health care: Some further international comparisons. Journal of Health Economics, 18(3), 263-290. https://doi.org/10.1016/S0167-6296(98)00044-7