Understanding healthcare costs: The employer-sponsored insurance system

Who is paying for your healthcare?

To understand how healthcare is financed in the United States, you must start with the flow of money into and out of the employer-sponsored insurance system, which covers almost 60 percent of the US population under age 65.

Of the remaining 40 percent, nearly half are uninsured, and the rest are covered by Medicaid, individual insurance policies or other public plans.

Our focus in this video is on the 60 percent of people covered in the employer-sponsored market, though some of these dynamics may also apply to the other 40 percent.

Here's how the employer-sponsored system works: For each employee, employers contribute towards the group health insurance plan. The employer contribution has been growing each year.

Employers usually make payroll deductions from employee pay checks to cover the employee's share of the cost of the group health insurance plan. The plan has certain co-pays, deductibles, co-insurance and out-of-pocket limits that determine how much plan members pay to receive care.

The combined share of payroll deductions and out-of-pocket costs that represent the employee cost of healthcare has been growing in recent years.

Together employer and employee contributions form the pool of funds that pays for the care provided to members of the group health plan. Funds may be used for trips to the doctor, in-patient and out-patient care, and for pharmaceuticals and other medical services.

The cost and volume of usage for each service vary geographically. The difference in cost from one city to another reflects differences in how care is delivered and differences in the amount that providers and payers negotiate as payment for healthcare services.

While there is a great deal of variety in how these cost dynamics behave, the common driver of increasing cost is the underlying cost of care—the cost of seeing the doctor, going to the hospital, buying prescription drugs—and the volume of each are what most determine healthcare costs.

And in 2012 that underlying cost for the typical family of four will exceed $20,000.

Without significant changes to the healthcare system, such as improved efficiency or better coordination of care, this cost will continue to rise.

For more on the dynamics of healthcare spending, read the Milliman Medical Index, available at http://milliman.com/mmi, or follow us at healthcaretownhall.com.