Background
The average American household spends 8% of their budget, $4900 a year, on health care. This cost has been rising over time (see the How Americans Spend post). However, the average cost hides a world of (financial) pain households are facing. If you get insurance through your employer (50% of households) you pay less than buying on your own (7%). However, but any household that’s not on Medicare (14%) or Medicaid (21%) may be faced with some very difficult spending or saving choices given the high cost of getting care. This post explores the reality for working households and digs deeper than the averages to understand different types of consumers.
This analysis won’t begin to look at the why of rising expenses – that’s an entirely different topic. And because trying to find good data on health spending, and getting clear insurance plan comparisons, is slightly more difficult than inventing perpetual motion, treat the numbers below as a good indication of reality but not the final answer!
Findings
The short story is that many families can’t really afford health care – and financial services firms do them no favors by skirting the issue in their planning tools.
I’ll focus on costs for the stereotypical family of four – two parents and two children. The analysis below excludes their paycheck contributions to Medicare, Medicaid and other governmental programs taxed through employment. The short story is that the middle class can’t afford medical care!
- A family getting insurance through an employer probably is spending north of $10,000 per year, because:
- The average portion of the premium they share is $6,000.
- Their deductible, the amount they must spend before insurance kicks in, averages $3,500.
- On top of this, plans have an out-of-pocket maximum capping the insureds’ annual spending. If you’re a typical family with kids breaking arms and getting sick, you’re likely to exceed your deductible and then your out of pocket expenses can be thousands more.
- If the family is buying insurance on their own, they’re looking at $25,000 or more a year. This assumes they are above the level of subsidy through the governmental exchanges, which is $103,000 a year – about 30% of US households. No average is available, but we know that the average employer plan premium is almost $21,000. Premiums in the California insurance exchange are $15,000/year for a basic bronze Kaiser HMO plan and $25,000 for a Blue Shield Silver PPO plan. That means that this family is likely paying in the area of $20,000+ for insurance, plus the deductible and copays. Hence, $25K/year may even be a low estimate.
If your income is below $103,000 subsidies kick in on a sliding scale but you still spend on care. If your income is at the US household median of $62K/year, the premium alone on the Blue Shield PPO will still run about $8,000/year. Add onto this deductibles and copays and it gets expensive fast.
- Costs are rising dramatically in inflation adjusted dollars: Anyone who’s paid for health care in the past 20 years knows this! Per the chart – employee contributions for premiums have risen 149% while the overall premium cost was up 114%. Deductibles are harder to quantify but in 2004 only half of employer plan participants had them; now it’s 85%.
Implications
Financial services companies like to tell middle class consumers they need to save a lot more money for retirement. Unfortunately, they almost never talk to them about their health care situation and the tradeoffs that they face. If you make $100,000 a year pre-tax, that may equate to $75-80,000 after income tax, and you have to pay for housing, food, clothing and transportation. Spending $10,000 up to $25,000 or more on insurance and health care means either you forgo saving for retirement, or you go without insurance. To adequately advise consumers on how to manage their finances, you have to understand their situation with respect to health care and tailor your recommendations, instead of jumping straight in and saying “just max out your 401(k)”.
Most online financial planning tools offer little or no consideration of the health care cost. The reality is that in many cases, the middle class can’t afford medical care. As an industry, financial services should be addressing health care costs head on, not skirting the issue like a dodgeball player.
The small print
Most of the excellent data for this post came from the Kaiser Family Foundation report, 2019 Employer health benefits survey which has a host of information on employer-offered health insurance plans. The inflation adjustment can be found here. California’s insurance exchange costs came from the Covered California website for 2019 coverage. As mentioned above, the multitude of data sources, vast variations in insurance coverages, and general complexity of the system makes it very difficult to make perfect comparisons or cost of care calculations.