Brief Analysis
No. 120

Far from deserving our sympathy, many Americans without health insurance are "freeloaders," says Hillary Rodham Clinton. When they get health care, they often don't pay for it - sticking the rest of us with their bills, which we pay for through higher taxes and higher insurance premiums. It's in our self-interest, she says, to force them and their employers to buy health insurance whether they want to or not. Is that argument correct? Let's take a closer look.

How Much Free Care Do the Uninsured Get?

The uninsured are not necessarily poor or homeless. Most are connected to the workforce. A third of uninsured households earn more than $30,000 a year and 10 percent earn more than $50,000. Nonetheless, the Congressional Budget Office (CBO) estimates that the uninsured pay only about 30 percent of the cost of the health care they get each year. As a result:

• The CBO estimates that the uninsured received about $15.2 billion in "uncompensated" hospital care in 1991, and another $10.2 billion in "uncompensated" physician services.

• After making some adjustments, the CBO estimates that the uninsured caused $20.3 billion in costs to be shifted to paying patients.

• By 1995, that figure is expected to grow to $27.6 billion - an amount equal to about $1,645 per uninsured household.

"Cost shifting" occurs when one group of patients pays less than the true cost of their medical care. In order to stay solvent, providers must cover these losses by overcharging everyone else. No one knows precisely how much cost shifting there is; and there is ample room for debate about its magnitude. For example, the CBO estimate for hospitals is 50 percent higher than the estimate of the American Hospital Association. But even if we accept the CBO estimate, uncompensated care for the uninsured is only 2.9 percent of the nation's annual health care bill. Considering that bad debts for the economy as a whole are 2.4 percent of sales, the numbers for the health care sector certainly do not suggest we are facing a crisis.

The Tax Penalty for Being Uninsured.

While the uninsured are getting some free health care, they are paying a penalty for being uninsured in terms of higher taxes. That's because they do not enjoy the tax subsidies received by those who have employer-provided health insurance.

By taking part of their income in the form of a fringe benefit such as health insurance instead of wages, middle-income families and their employers escape, say, a 28 percent income tax, a 15.3 percent FICA (Social Security tax) and a 4, 5 or 6 percent state and local income tax on that money. The value of this tax subsidy equals as much as half of the cost of health insurance. Altogether, the federal government currently "spends" about $86 billion a year in tax subsidies for health insurance, and state and local governments spend another $10 billion. These subsidies are not enjoyed by people who receive all of their income in the form of wages and have no fringe benefits, however.

The flip side of a tax subsidy is a tax penalty. When government offers tax subsidies to people conditional on their purchase of health insurance, those who choose not to purchase insurance pay higher taxes. The higher taxes may be thought of as a penalty for being uninsured.

Estimating the Amount of Extra Taxes Paid By the Uninsured.

The tax penalty for being uninsured varies by income. For example, a family in the bottom fifth of the income distribution pays about $450 more in taxes than insured families at the same income level. For families in the top fifth of the income distribution, the tax penalty is $1,780.

• On the average, uninsured families pay about $1,018 more in federal taxes each year because they do not have employer-provided insurance.
• Collectively, the uninsured pay about $17.1 billion in extra taxes each year because they do not receive the same tax break as insured people with similar incomes.
• If state and local taxes are included, the extra taxes paid by the uninsured exceed $19 billion per year.

Far from getting a free lunch, the uninsured pay a penalty for being uninsured, equal to more than two-thirds of the value of uncompensated care they receive each year. [See Figure I.] In fact, given the uncertainty about the amount of uncompensated care, uninsured people are arguably paying their own way.

The Real Problem and a Practical Solution.

The problem with the current system is that most of the extra taxes the uninsured pay go to Washington, DC, while the uncompensated care they receive is provided by local hospitals and physicians. The National Center for Policy Analysis has proposed a solution to this problem: Establish a formal link by which the extra taxes the voluntarily uninsured pay are returned to the local hospitals and clinics that deliver unreimbursed care.

The Wrong Solution: Insuring the Uninsured by Cutting Medicare and Medicaid.

The Clinton administration has proposed to fund health care reform by cutting funds for Medicare and Medicaid. For example:

• The original Clinton health care plan proposed to cut Medicare and Medicaid spending by $104 billion over the next five years.

• According to the American Hospital Association, the House Ways and Means Committee version of the Clinton plan would cut $110 billion out of Medicare over five years and $467 billion over nine years.

These proposals attempt to solve a minor problem (eliminating uncompensated care for the uninsured) by making a major problem (uncompensated care generated by government programs) even worse.

• According to the CBO, Medicare and Medicaid payments to hospitals are 70.3 percent and 62.5 percent of private patient payments respectively.

• Medicare and Medicaid payments to physicians are 70 percent and 45 percent of private payments respectively.

• The biggest source of uncompensated care in our health care system is Medicare (33.0%) and Medicaid (42.6%), not unreimbursed care for the uninsured (24.3%). [See Figure II.]

Return to Return to MSA's

Return to The Uninsured

Note: Nothing written here should be construed as necessarily reflecting the views of the National Center for Policy Analysis or as an attempt to aid or hinder the passage of any legislation.