What is the healthcare system? How is the government involved today?

First, I am not a doctor or scientist. This is a focus on the services side of healthcare, not the products. I am not in the position to deeply explore the pharmaceutical world, the intricacies of a surgery, or the medical devices that are used to make miracles happen. What I will try to explain is how the hospitals, doctors, nurses, pharmacists, health insurers, and patients fit together in this system and what role the government plays today. This will help frame many of the future topics we will explore and put context around any posts that analyze current events. Below is a simple diagram of healthcare services system.


The majority of people have some type of insurance coverage. This can be private insurance through their employer, family insurance through their parents, Medicare through the Federal government, Medicaid through their state government, or even military health benefits. At interaction #1, Americans or their employers are paying these insurance companies premiums up-front each month for future uses of services. At interaction #2, a patient renders services from some type of healthcare provider. At interaction #3, the healthcare provider requests reimbursement from the health insurer. We won’t worry about all the details of the bullets now, but we’ll come back to them eventually.

The government is involved in the insurance side through two major programs: Medicare and Medicaid. Medicare is a program started in 1965 to offer coverage for the elderly. It is by far the largest health insurance entity in America by dollars spent. Medicaid is a Federal-state government partnership started in 1965 to offer coverage for the poor and uninsured. The program is run by each individual state, but the Federal government subsidizes the states by giving states money for each $1 spent on the Medicaid program. For example, in a 40-60 split, the Federal government gives certain states $2 for every $3 that the state spends.

Healthcare happens to be the perfect example of the 80/20 rule. Roughly 80% of the spending is done by 20% of the people. More than half of all healthcare spending is done by those with less than 2 years left to live. Of the entire $1.9 trillion annual spending in the healthcare industry, 22% comes from the Medicare program. It also stands to take an even greater role as our parents, the baby boomers, begin to age into the Medicare program. Understanding Medicare is fundamental to understanding why our Federal government is going bankrupt and how the program shapes the entire healthcare system itself. If Walmart is the 800-lb. gorilla that shapes the retail industry and its practices, then Medicare is the 4 ton gorilla that shapes the healthcare industry.

Whether we like it or not, Medicare affects our generation directly and indirectly. The most direct effect is the 2.9% tax on income paid 50/50 by employees (1.45%) and employers (1.45%). This money is going directly into paying for existing Medicare beneficiaries. No matter what the government claims, it is not being socked away untouched for 40 years in a trust fund. Seniors are getting ~$11,000 health plan and paying ~$2,300 out of pocket. Rolling back to the birth of the program, the 1st generation of seniors received the entitlement benefits but never paid for it through Medicare taxes like our generation is doing today. Ultimately this means that deterioration of the financial health of the program will lead to either a) benefit cuts or b) higher taxes. Fundamentally that means either our government can’t keep its promises or it must tax us. Considering the size of our generation – I’d make a big bet that a lot of these taxes will fall squarely on our shoulders.

Sources: www.medpac.gov

Next Post: What is Medicare? How did it start? Why do people think it's great?