The Healthcare Financing Policies in the U.S.


The United States has always faced a myriad of challenges in financing its healthcare system. Most Americans access healthcare through health insurance covers which are normally provided at the workplace (Kronenfeld, 2002, p. 32). A small percentage of the citizens usually purchase health insurance on their own. The government support vulnerable groups through health programs such as Medicaid and Medicare. Additionally, the government has implemented policies such as tax incentives to enhance demand for health insurance. These policies have substantially improved access to healthcare in the country. However, they have also created problems such as inequality and high costs in the health sector. Consequently, several policy recommendations have been proposed to reform the healthcare system. These include subsidizing health insurance premiums, expanding Medicaid and reforming health-related tax incentives.


The objective of the United States of America’s health policy is to promote access to high quality healthcare in a cost-effective and fair manner. This objective can only be achieved through a policy mix that ensures adequate and reliable funding of the health sector (Kronenfeld, 2002, p. 65). In the US, healthcare is mainly provided by private operators. Concisely, employers normally provide health insurance to their employees to facilitate access to health services. Furthermore, most healthcare facilities, as well as, insurance companies belong to private economic agents. Thus, the government’s primary role is to implement policies that promote access to health insurance. Additionally, the government provides healthcare through programs such as Medicare and Medicaid. In the last two decades, the quality of health services in the US has been declining. Besides, the cost of providing healthcare has significantly increased. Consequently, this paper analyzes the pros and cons of the various healthcare financing policies in the US.

Private Financing

Private Health Insurance

Majority of Americans access health services through privately arranged health insurance. All employers are required by law to provide health insurance to their employees. In most cases, the health insurance covers the employees and their family members. Health insurance products are provided by private insurance companies, whereas the premiums are paid by the employers. However, in some organizations, the employees are expected to contribute towards the payment of the premiums. The government also provides health insurance to citizens who are employed in the public sector. The benefits associated with the employer-sponsored health insurance vary across organizations and states. Generally, the insurance policies guarantee employees access to services such as curative and preventive care (Diggs, 2011, pp. 76-90). Citizens who are not employed by either the government or private firms have to arrange for their own health insurance policies. In this case, the insured bears the full cost of the cover. Additionally, the benefits received depend on the insured’s ability to pay. Due to rising poverty levels, some citizens who are not formally employed can not afford to purchase health insurance. Consequently, they can only access health services through cash (out-of-pocket) payments.

Social Consideration

The rationale of financing healthcare through private insurance is based on the principle of sharing costs and risks (Birnbaum, 2012, pp. 248-252). In this context, private employers and their employees finance the health system by paying for premiums. The government, on the other hand, funds the system through subsidies, direct provision of health services and payment of premiums. By pooling resources through health insurance schemes, the burden of paying for healthcare is proportionately shared by the public. This makes it easier and cheaper for the insured to access healthcare.

Advantages of Private Financing

Cost Reduction

Accessing healthcare through health insurance is relatively cheap. The insured usually pay a fixed premium over a given period of time such as one year. However, he or she will have unlimited access to health services during this period. This leads to better health among the insured. Furthermore, employer-sponsored health insurance reduces the government’s burden of providing health services to the low income groups. The resulting cost saving reduces budgetary constraints and enables the government to operate a health system that is responsive to the needs of the populace (Birnbaum, 2012, pp. 248-252).

Equity at the Workplace

Group health insurance promotes equity at the workplace. In most organizations, the top management and the junior employees enjoy similar health services. Furthermore, the employees’ family members are also covered. Hence, the positive health impacts of the employer-sponsored health insurance can be felt beyond the organization.

Access to a Variety of Services

Individuals who opt to purchase their own health insurance have a wider choice of benefits. In this case, the health insurance product to be purchased is directly selected by the individual (insured). Consequently, significant savings can be made if the insured reduces expenditure on benefits that are not fundamental to his or her health needs.

Behavior Change Programs

Private health insurance has led to the implementation of behavior change measures at the organization level (Gerard, Scheppingen, & Dijkman, 2010, pp. 143-159). Most firms are implementing programs that reduce cases of illnesses among their employees. Such programs include health education, counseling, gymnasium services and emotional support. A significant reduction in cases of illnesses often leads to a reduction in the premiums paid by the employers to the insurance companies.

Disadvantages of Private Financing

High Costs

The rising cost of health insurance has forced many organizations to obtain part of the premiums from their employees’ salaries. In some organizations, employees contribute as high as 16% of their salaries to pay for the premiums (Birnbaum, 2012, pp. 248-252). The resulting reduction in disposable income makes it difficult to access adequate food and shelter which are also important elements of a healthy lifestyle. In this context, private health insurance fails to achieve its objective of reducing the cost of healthcare and improving the health of the population. Financing healthcare through private insurance also involves a large number of stakeholders. Thus, coordinating the activities of all stakeholders leads to high administrative costs. Hence, the private insurance system is more expensive than a nationalized single-payer system

Limited Access to Medical Services

Individuals with employer-sponsored health insurance can only access limited medical services. Most group health insurance products do not cover services such as dental, mental and vision care. Additionally, the insured can only access health services from the health facilities identified by their employers. This causes inconvenience to the employees, especially, during emergencies. Besides, the employees usually bear a larger percentage of the treatment cost if they visit facilities which are not sanctioned by their employers.


Private insurance fails to address the problem of inequality in healthcare provision. Concisely, only the employed and the rich who are able to purchase health insurance can access health services in a private health insurance system. Thus, the uninsured often forego basic health services due to their inability to pay. Moreover, the sharp increase in premiums has made it difficult for low income earners to purchase health insurance.

Reduction in Productivity

The rise in health costs is one of the major causes of high labor costs in the US. Health benefit costs account for up to ten percent of the total labor costs in most organizations (Kronenfeld, 2002, p. 78). These costs adversely affect employers’ ability to expand their businesses and to offer better wages.

Poor Quality

Finally, employer-sponsored health insurance hardly addresses the health needs of the employees. Negotiations on the services to be covered are often done by the employers, healthcare providers and the insurers. Hence, these negotiations fail to take into account the employees’ concerns. Besides, the negotiations are sometimes informed by outdated data on price and health needs.

Public Financing

Government Sponsored Programs

The government funds healthcare through programs that provide health services to specific members of the population. Some of the programs include the following. To begin with, the federal government established the Medicare program to provide health insurance to citizens with disability, renal disease patients and the elderly (above 65 years). In 1965, the Medicaid program was established to provide health insurance to the low income groups (Nero, Lipp, & Callahan, 2011, pp. 40-49). It mainly covers children, women, the disabled and the poor. The State Children’s Health Insurance Program (SCHIP) was created to cover children who are not eligible for Medicaid and their families can not afford private health insurance. This program is jointly run by the federal and the state governments. The Department of Defense and Military Health System (MHS) covers military personnel. The rationale of providing healthcare through these programs is to enhance equitable access to health services. This is because they target vulnerable groups who are not able to afford private health insurance.

Health Tax Policies

Apart from the aforementioned programs, the government also funds the healthcare system through subsidies. This policy has been implemented through various tax codes which ease the burden of paying health insurance premiums. In a nutshell, the tax codes do not recognize the premiums as part of an individual’s taxable income. Consequently, the portion of an employee’s salary that is used to pay for premiums is not taxed (Seshamani, Lambrew, & Antos, 2009, pp. 7-35). Americans are also entitled to tax exemptions on medical expenses and health-related charitable donations. Finally, the government offers tax breaks to holders of Health Savings Accounts (HAS). The main objective of these tax incentives is to encourage citizens to purchase private health insurance.

The Merits of Public Financing

Improved Access to Health Services

One of the main achievements of the state-run health insurance programs is improvement in access to healthcare among the needy. Most elderly people in the US are retirees and lack savings to finance their health needs. Besides, the current economic decline has led to a reduction in the financial support that elderly citizens receive from their families. However, through Medicare thousands of old Americans have been able to receive high quality health services (Frakt & Pizer, 2010, pp. 14-16). Similarly, Medicaid has enabled thousands of citizens from needy families to access healthcare.

Effective Management

Providing healthcare through programs that target specific groups also facilitates effective management of the country’s health sector resources. For instance, it is easy to track and evaluate the performance of each program against predetermined benchmarks (Rivers & Saundra, 2000, pp. 134-139). This is attributed to the fact that each program has distinct objectives and a management framework. The resulting improvement in efficiency enhances resource allocation. Moreover, the management can easily engage the beneficiaries in dialogue in order to improve service delivery. For example, the Medicare advantage and Medicare Part D which are essentially modifications of the original Medicare program were established as a response to the emerging needs of beneficiaries. Finally, the use of funds in HSAs is restricted to the most important expenses such as doctor’s fee and drug costs. Consequently, the funds in these accounts can not be used for luxurious services such as cosmetic surgery.

The Demerits of Public Financing

Reduction of Tax Revenue

The tax incentives have led to an increase in demand for health insurance. However, they have also led to a significant loss of tax revenue. This loss is partly responsible for the budgetary constraints in the health sector. In the last decade, the government has been struggling to sustain spending on Medicare and Medicaid due to the lost tax revenue. Consequently, the quality of healthcare has been declining (Diggs, 2011, pp. 76-90). The tax incentives are also unfair since they benefit only the employed citizens. Individuals who purchase health insurance on their own have to pay for premiums out of their after tax income. Hence, such individuals bear a greater burden of paying for healthcare than their employed counterparts.


HSAs are mostly owned by the rich who are able to save more for their future health expenditures. The rich are normally the healthiest in the society since they can afford to maintain healthy lifestyles. In this regard, tax exemptions on HSAs tend to create little value in the health sector. Finally, government programs such as Medicare and Medicaid have restrictive enrollment criteria. Hence, thousands of citizens who are in need of the services provided by these programs are often left out. This worsens the problem of inequality in accessing health services.

Policy Recommendations

Use the Existing Sources of Revenue

The government should continue to use the current sources of revenue to finance healthcare. However, the healthcare system should be streamlined in order to improve efficiency and reduce wasteful expenditure (Cutler & Feder, 2009, pp. 2-17). The benefit of this policy is that it will not be necessary to increase taxes in order to finance healthcare. However, providing employer-sponsored health insurance is likely to be unsustainable if increase in health costs exceeds wage growth in the long-term. Hence, more people will enroll in state funded programs, which will also become unsustainable due to financial constraints.

Reform the Tax Incentive Programs

Some economists argue that health tax incentives should be reformed. In this case, tax breaks/ exemptions should either be reduced or eliminated. Consequently, it will be possible to generate more tax revenue, especially, from the high income earners (Seshamani, Lambrew, & Antos, 2009, pp. 7-35). However, the employers are likely to reduce benefits if the tax incentives are reduced.

Play-or-Pay Policy

A play-or-pay model has been proposed. Under this policy, employers have the option of either providing insurance or paying a tax equivalent to finance the provision of insurance to employees through alternative means. This policy will improve equity and availability of funds by ensuring that all firms contribute a minimum amount to finance healthcare.

Reform the Healthcare System

In 2010 the Patient Protection and Affordable Care Act (PPAC), was adopted to reform the healthcare system. The policies under this legislation include expansion of Medicaid, subsidizing insurance premiums and banning denial of coverage. Additionally, more incentives will be offered to employers to encourage them to provide health insurance to their employees. These recommendations are currently being implemented and are expected to address equity, quality and efficiency issues in the health sector.


The government of the United States has adopted several policies to finance healthcare. Some of the policies include employer-sponsored health insurance, individual health insurance and tax incentives that facilitate access to health insurance (Kronenfeld, 2002, p. 22). Additionally, the government channels its funding through programs such as Medicaid and Medicare. In general, these policies have had both positive and negative effects in the health sector. For instance, private insurance has improved access to healthcare among the employed citizens. However, it has also worsened the problem of inequality in the health sector. Similarly, the tax incentives have increased demand for health insurance. However, they have also led to a reduction in tax revenue. Due to these weaknesses, various remedial policies have been proposed. Some of the recommendations include reforming the tax incentives and introducing a play-or-pay policy. Effective implementation of these proposals is expected to improve healthcare in the country.


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