WHITE PAPER: Financing Hoosier Healthcare
The foundation’s white papers are intended to make scholarly research on Indiana issues more widely available to policy analysts and researchers. White Papers represent research in progress and are published to invite comment and discussion as preparation for their submission to academic journals and other professional publications.
by Maryann O. Keating, Ph.D.
Shuffling through health insurance paperwork, do you sometimes wonder if your neighbor is equally confused? Does the saga of the One Big Beautiful Bill (OBBBA), signed into law on July 4th, concern you? Setting aside healthcare quality, we attempt to provide a snapshot of Hoosiers’ access to healthcare and the ever-changing means with which they finance it.
Indiana ranks 17th in State population, yet 8th in the estimated decline by 2027 in health care spending due to OBBBA. Is there something unique about health care financing in Indiana? The answer is a qualified “yes!” The qualification is that, to some degree, Indiana’s uniqueness is a response to Federal incentives.
Contrary to public opinion, the U.S. is not the Wild West in terms of access to healthcare. In fact, by 2023, the insured share of the population exceeded 92% in general and 93% in Indiana.
As seen in Table 1, the Federal and State governments offer full or partial health coverage for a significant percentage of the U.S. population. The total percentages exceed 100% because some enrollees are covered in more than one way. For example, Medicare enrollees often supplement coverage with private Medigap policies, and Medicaid clients in long-term care can continue with Medicare.
Table 1. Major Sources, Enrollment, and Health Expenditures in the United States in 2023.
| Sources of National Health Expenditures in 2023 | Enrollment | Expenditure per Enrollee | Percentage of U.S. Resident Population (334 million) |
| Private Health Insurance | 207.3 million | $7,065 | 62.2% |
| Medicare | 67.1 million | $15,808 | 19.5% |
| Medicaid | 91.7 million | $9,502 | 27.5% |
Based on: Martin, Anne B., Micah Hartman, Benjamin Washington, and Aaron Catlin. “National Health Expenditures In 2023: Faster Growth as Insurance Coverage and Utilization Increased,” Health Affairs, Vol. 44. No. 1. Centers for Medicare and Medicaid Services (CMS), Baltimore, MD. Published online 18 December 2024.
The Federal Role in Financing Hoosier Health Care: Medicare and Medicaid
The Federal government is a dominant player in insuring and financing health care, but the role of local and State governments preceded it by many decades.
In Indiana,the Board of State Charities, established in 1889, had the duty of ensuring that children, prisoners, and destitute persons residing in public institutions received proper care. The Board supervised the management of these institutions and the proper expenditure of State funds. All care was financed by the State and local government. Federal finances to support such activities were generally not available until 1936, when Indiana was able to access Federal grants for specific health services. Social Security, another Federal program, was also initiated in the 1930s; however, no nationalized system of health insurance existed until much later. In 1965, both Medicare and Medicaid were signed simultaneously into Federal law. Initially, Medicare focused on basic hospital insurance policy (Medicare, Part A) exclusively for those 65 and older to be totally financed with payroll taxes. If payroll taxes for Social Security and Medicare Hospital Insurance (Part A) exceeded benefits in any year, trust funds, consisting of Federal Treasuries, would make up the difference.
Unlike payroll taxes for Social Sercurity, there is no income cap on Medicare payroll taxes. In fact, high income workers can pay an additional surcharge. Unlike Medicare Hospital Insurance (Part A), premiums are charged for Medicare Parts B, C, and D. Nonetheless, annual premiums and payroll taxes combined are insufficient, and the trust funds, making up Social Secuirty and Medicare deficits, could be insolvent by the 2030s. The viability of Medicare is not a state policy issue, but it does concern the 15% of Hoosiers claiming Medicare benefits.
Unlike Medicare, Medicaid is jointing funded by the state, and is therefore an important policy issue for Indiana. Medicaid was designed to target low income indifiuals. Ironically, as a result of its simultaneous birth with Medicaid, Medicare Parts B, C, and D premiums flow together with federal Medicaid funds into a joint account, called Supplementary Medical Insurance (SMI). The Federal budget is on line to back up these joint commitments.
Over time, these commitments have expanded. Eligibility and benefits offered by Medicare and Medicaid have increased at a faster rate than revenue sources designed to finance them.
When a government reaches the limits of its ability to collect revenue, its legal commitments are in trouble. The size of the Supplementary Medical Insurance (SMI) account is a particularly serious issue because it affects, by default, both federal and state budgets. Medicare, Medicaid (including the Children’s Health Insurance Program, enacted in 1997), and the Affordable Care Act’s premium subsidies, enacted in 2010, have complementary missions in financing healthcare. It would make sense for Congress to consolidate federal healthcare trust funds and cap the Treasury subsidy. A reasonable recommendation, given the size of the National Debt, would be for SMI not to exceed its present 1.6 percent of GDP (Capretta).
How does Medicare assist in funding Hoosier healthcare? Those Hoosiers who are over 65 and Social Security recipients are eligible for Medicare Part A hospital benefits, that is if they or their spouse paid Medicare payroll taxes generally over a minimum of 10 years. Part A hospital benefits are limited; they come with a deductible and require part or full cost per day payments after a 60-day hospital stay and after a 20-day stay in a nursing facility.
They also become eligible for Medicare Parts B, C, and D for which they will be charged premiums. Penalties in the form of higher premiums are associated with neglecting to enroll in them when an individual is eligible without proof of alternative coverage.
Medicare Part B covers doctors’ appointments, outpatient services, and certain medically necessary products. In 2025, the standard Part B monthly premium is $185. However, those with Modified Adjusted Gross Income (MAGI) exceeding $106,000 for an individual pay a surcharge. This surcharge, referred to as the Income Related Monthly Adjustment Amount (IRMAA), ranges from $74 to $443.90 per person. The standard premium plus any surcharge due are typically deducted from each person’s monthly Social Security payment.
Medicare Advantage Plans (Medicare Part C) are a choice offered by private insurance companies and combine aspects of Parts A and B. Certain Advantage plans cover hearing, vision, and dental care. About 49% of Hoosiers enrolled in Medicare choose Part C Advantage plans, slightly less than the National average. Holders of Medicare Advantage are not exempt from IRMAA surcharges
Medicare Part D offers optional prescription drug coverage. Premiums vary by the private pharmaceutical plan chosen; however, Hoosier premiums and deductibles are higher than the National Average. Again, the government makes it simple. Part D private premiums, together with up to an additional $85.80 IRMAA Part D fee, can be deducted from each person’s monthly Social Security payment!
In addition, many Hoosier purchase private Medigap policies to assist them in paying for deductibles and any uncovered Medicare charges. Medigap premiums are per person and vary depending on one’s age and benefits covered.
Neither Medicare nor private Medigap policies cover long-term residential care. Individuals are expected to pay for these services out-of-pocket or purchase private long-term care insurance.
Medicare is a serious topic of conversation for Hoosiers approaching retirement because the ins and outs for themselves and dependents are complicated. However, Medicare is a relatively simple program compared with Medicaid. The federal/state Medicaid program is akin to a Rube Goldberg machine in complexity!
In 2023, as shown in Table 2, 35.8 % of Hoosiers were enrolled in either Medicare or Medicaid; those dually eligible are listed in either Medicare or Medicaid.
Table 2. Health Insurance Coverage in the U.S. and Indiana: 2023
| Employer | Non-Group | Medicaid | Medicare | Military | Uninsured | |
| U. S. | 48.6% | 6.2% | 21.2% | 14.7% | 1.3% | 7.9% |
| Indiana | 51.9% | 4.8% | 20.8% | 15.0% | 0.8% | 6.8% |
Based on: KFF analysis and estimates derived from the 2008-2023 Census Bureau’s American Community Survey. https://www.kff.org/other/state-indicator/total-population/.
The State of Indiana’s Role in Financing Hoosier Health Care
From Table 2, we learn that about 21% of Hoosiers are enrolled in Medicaid, significantly more than those receiving Medicare.
Recall that residential care for orphaned children, the mentally ill, and aged adults in need was provided in Indiana, locally or by the State, prior to any Federal assistance. By the late sixties, however, Medicaid had initiated Federal subsidies to States for free or low-cost healthcare for all low-income households.
Therefore, starting in 1965, Indiana co-financed original Medicaid for low-income residents. For those, requiring long-term institutional care, these funds were generally allocated on a per-person fee-for-service basis. As early as 1981, Indiana had established the Indiana Comprehensive Health Insurance Association (ICHIA), a high-risk pool to provide coverage for those unable to obtain health insurance due to their health status. Indiana also initiated a unique Healthy Initiatives Program (HIP) for low-income households, while managing separate programs for pregnant women and children enrolled in the federal CHIP program.
The Affordable Care Act (ACA) of 2010, sometimes referred to as Obamacare, greatly expanded eligibility for Medicaid healthcare coverage, and every State, including Indiana, responded uniquely to changed incentives.
What is now the first step for any Hoosier adult lacking employer, Medicare, or other health insurance? Those with household incomes of approximately 138% or less of the Federal Poverty Level (FPL) can apply for coverage directly to the State of Indiana. Otherwise, the front door to coverage is the Health Insurance Marketplace, introduced as part of the Affordable Care Act.
Indiana, unlike some other States, has not set up its own Health Insurance Marketplace. Hoosier residents access the Federally-Facilitated Marketplace through HealthCare.gov.
The Health Insurance Marketplace determines eligibility but does not automatically enroll an applicant in Medicaid. The goal of the Marketplace is to facilitate enrollment in private plans for those with estimated adjusted gross income too high for Medicaid eligibility but less than 400% of the Federal Poverty Level (FPL). Those who qualify can sign up for free or low-cost subsidized coverage. In some cases, those with even higher incomes may be directed to plans charging reduced monthly premiums with lower deductibles and co-payments.
Public concern about the anticipated decrease in the percentage insured in the U.S. seems to focus on enhanced subsidies recently introduced into Medicaid and Marketplace policies. Enhanced subsidies provided additional premium support and tax credits during COVID, as well as coverage at no cost to those with incomes up to 130% FPL. Enhanced subsidies were extended through 2025 in the Inflation Reduction Act. However, they were eliminated as part of the OBBBA.
Marketplace plans clients are responsible for premiums; however, the Marketplace generally forwards federal subsidies directly to insurance companies that cannot deny coverage to those with preexisting medical conditions. An enrollee’s tax liability adjusts if yearly income exceeds or falls below that estimated when determining the size of the subsidy.
Federally Facilitated Marketplace plans differ from Medicaid plans. Indiana manages several Medicaid plans with Maximus Health Services, Inc. serving as its enrollment broker. Maximus’s role is to provide unbiased counseling on the health plan that best serves anyone seeking assistance. Hoosiers choose between policies offered by State-partnered managed-care organizations (MCOs), such as Anthem, CareSource Indiana, Managed Health Services (MHS), United Health, and MDwise. MCOs arrange, administer, and pay for the delivery of healthcare services. The MCO is responsible for ensuring access and quality care for anyone enrolled in one or the other of Indiana’s health plans.
Indiana plans are regulated and variously subsidized by Federal Medicaid. Table 3 categorizes the over 2 million Hoosiers enrolled in Medicaid; the numbers given represent an average of monthly enrollment in 2024.
Table 3. Medicaid Enrollment in Indiana Health Care Plans
| Indiana Health Care Plans | Average Monthly Enrollment Fiscal Year 2024 |
| Healthy Indiana Plan (HIP) | 736,768 |
| Hoosier Care Connect | 96,268 |
| Hoosier Healthwise | 797,206 |
| Pathways for Aging | |
| Total Managed Care Enrollment | 1,630,242 |
| Institutionalized | 31,099 |
| In Waivers granted to Indiana | 75,364 |
| Home and Community-Based Services (HCBS) | 3,342 |
| Other (Emergency Services, Dual Eligibility, Savings Program, etc.) | 341,333 |
| Total Fee for Service Enrollment | 451,138 |
| Overall Total Enrollment | 2,081,380 |
Source: Indiana Family & Social Services Administration. “Medicaid Financial Reports,” June 2024
Indiana Health Care Plans
The Healthy Indiana Plan (HIP), a unique healthcare plan pioneered by the State of Indiana in 2008, includes vision and dental coverage for Hoosiers ages 19 to 64 with incomes up to 138% of the Federal Poverty Level (FPL). It requires premiums and copayments. HIP incentivizes members to take better care of their health and offers a savings plan to cover out-of-pocket health care expenses. The HIP program now includes the expanded Medicaid enrollment population, initiated by the Affordable Care Act.
Hoosier Care Connect is a health care program for individuals aged 59 years and younger who are blind or disabled. It also includes some children in foster care. Some, ineligible for Medicare, receive federal Supplemental Security Income.
Hoosier Healthwise is an Indiana Medicaid plan for children, former foster care children, pregnant women, blind, or disabled individuals. Members do not have any cost-sharing obligations for basic healthcare. Hoosier Healthwise generally does not include the expanded benefits of HIP. However, families with incomes below a certain level can access, at little or no cost, a policy provided by a managed care organization covering doctor visits, prescription medicine, mental health care, dental care, hospitalizations, and surgeries.
Children’s Health Insurance Program (CHIP) is a federal program enacted in 1997 to provide funding to states to reduce the number of uninsured children. CHIP enrolls children in low-income working families who don’t have access to job-based coverage but earn too much to qualify for Medicaid. Children served by CHIP are included in the Hoosier Healthwise population. CHIP members pay a low monthly premium for coverage and copays for certain services.
Pathways for the Aging is a new Indiana program for those 60 years of age and older; as such, no enrollment figures for fiscal year 2024 are listed in Table 3. The anticipated 2025 enrollment figure was 119,619. Of these, 19% would be residing in nursing homes, 24% would be receiving Home and Community Based Services (HCBS) services, and 57% would be receiving treatment for acute illnesses. Pathways is designed as a long-term services and support program in which the Indiana Family & Social Services Administration partners with managed health organizations to coordinate Medicaid and Medicare benefits.
Previously, Medicaid only paid for long-term care services in an institutional setting. The waiver program “waives” the necessity of admission into a nursing facility or group home for Medicaid to pay for needed home and community-based services.
Indiana has applied for and received other Medicaid waivers, each of which has a fixed number of individuals served annually. For example, there are waivers increasing financial or institutional coverage for youths with serious mental, developmental, and medical issues (Wheeler). Indiana also received waivers to allocate Medicaid funds directly to institutions aside from those earned on a per capita basis.
Table 4indicates that while over 50% of all Medicaid spending in Indiana went for those in managed care plans, less than 44% was spent on fee-for-service care. However, these percentages are misleading when enrollment, as shown in Table 3, is considered. Average Medicaid expenditure per person is around $6,000 for those in managed care and $19,000 for all those enrolled in any fee-for-service plans. Obviously, expenditures for healthy adults and children are significantly less than those for the elderly and severely ill. As such, a ballpark per capita estimate, based on Tables 3 and 4, for those in residential care is $84,447.
One might assume incorrectly that Indiana’s Medicaid payments from the Federal government reflect the higher costs associated with providing care for different Medicare classifications. Ironically, the Federal government compensates Indiana on a per capita basis for its healthier, less costly clients at a significantly higher rate!
The ACA expanded Medicaid coverage to nearly all individuals and households with incomes up to 138% of the Federal Poverty Level and provided states with an enhanced Federal matching annual rate (FMAP) of 90%. The bonus matching rate was in return for increasing their original Medicaid population to include the expanded ACA-eligible population. A 90% matching rate is significantly higher than the matching rate for original Medicaid. The lower Federal matching rate varies from 50% to over 80% depending on a state or territory’s level of income. Indiana’s Federal matching rate is 64.74%, and we can assume that this is a good estimate of the federal government’s share for original Medicaid.
ACA expansion was optional, and Indiana’s Healthy Indiana Plan (HIP) was already in effect. However, Indiana, like all but 10 states, succumbed to the 90% annual subsidy incentive and adopted expanded Medicaid. Expanded enrollment in Indiana is now about 31% of its total Medicaid enrollment, exceeding 24.3% for the U.S. in general.
Table 4. Medicaid Spending in Indiana for Health Care – 2024 State Fiscal Year
| Type of Expenditure | Dollars Spent | Percent of Total Expenditures |
| Managed Care | $10,353,867,761 | 52.1% |
| Healthy Indiana Plan | $5,878,806,202 | 29.6% |
| Hoosier Care Connect | $1,725,551,782 | 8.7% |
| Hoosier Healthwise | $2,749,509,777 | 13.8% |
| Pathways for Aging | ||
| Fee-for-service Total | $8,705,165,770 | 43.8% |
| Long Term Institutional Care | $2,626,219,098 | 13.2% |
| Long Term Community Care | $3,572,795,279 | 18.0% |
| NEMT Program | $26,008,458 | 0.1% |
| State Plan Services FFS | $2,480,142,935 | 12.5% |
| Manual Expenditures that tend to be one-time | $1,439,237,242 | 7.2% |
| Other Expenditures and Collections | ($635,278,470) | (3.2%) |
| Total Expenditures | $19,862,992,304 | 100.0% |
| Total Children’s Health Insurance Program (CHIP) Expenditures | $388,757,196 |
Source: Indiana Family & Social Services Administration. “Medicaid Financial Reports,” June 2024
The Federal government pays about 70% of total Hoosier Medicaid expenditures. Does this imply that the remaining 30% is part of Indiana’s biennial budget approved by the General Assembly? Not quite as indicated in Table 5. Indeed, just 21% of Hoosier Medicaid expenses is allocated through the General Fund; however, this is not an insignificant amount. For the 2026 fiscal year, 29% of the total State budget has been allocated to Health and Human Services, and approximately 24% exclusively to healthcare.
Additional sources for funding Indiana’s Medicaid share are excise taxes on cigarettes and Hospital Assessment Fees. A key to understanding the revenue sources, listed in Table 5, lies in the incentives associated with the Affordable Care Act (ACA).
Table 5. Major Sources of Medicaid Funding in Indiana- Fiscal Year 2024
| Major Sources of Medicaid Funding | Percentage of Total Funding |
| Federal Contribution to Indiana Medicaid Program | 69.6% |
| Intergovernmental Transfers | 2.1% |
| Provider Tax Receipts | .8% |
| Hospital Assessment Fee Funding | 5.3% |
| Healthy Indiana Plan Funding | 2.5% |
| Indiana’s Contribution from its General Fund | 21.2% |
| Major Sources of Children’s Health Insurance Program (CHIP) Funding | |
| Federal Government | 76.6% |
| Indiana’s General Fund | 22.2% |
| Hospital Assessment Fee Funding | <0.1% |
Provider Taxes and Assessment Fees
As Medicaid enrollment grew, Indiana increasingly turned to taxes and fees on hospitals, nursing homes, and other health care providers to generate funds to pay for its Medicaid programs. The General Assembly has considered extending taxes and fees to Managed Care Organizations; twenty other states have already done so. Note in Table 5 that Intergovernmental Transfers, Provider Tax Receipts, and Hospital Assessment Fee Funding accounted for 8.2% of all Medicaid Funding in Indiana in fiscal year 2024.
Provider taxes are state-imposed taxes on health care providers. Since 1980, states have been taxing healthcare providers; Alaska remains the only state that does not. A 1991 “holding harmless” provision prevented States from guaranteeing that the revenue collected from this tax would return to the same provider. Thus, provider taxes should be broad-based and uniformly applied to all providers in a specific category. Currently, however, the Federal government exempts states from the “hold harmless” provision on taxes up to 6% of net patient revenue. As of 2024, Indiana had a provider tax on nursing facilities (less than or equal to 3.5%), on hospitals (4.5%-5%), and on intermediate care facilities (5.5%) (Alice Burns, KFF).
Assessment fees, on the other hand, are additional charges, with fixed and variable rates, levied on health care providers. These fees are generally not as uniformly applied as provider taxes. In Indiana, assessment fees target the expansion population in the Healthy Initiatives Program and compensate institutions for taxes and fees paid versus costs incurred, given Medicaid’s base rates.
Provider taxes and fees support Indiana’s program in offering healthcare institutions serving low-income populations with supplemental Medicaid payments. As such, they are viewed by some as a means whereby the state, in cooperation with hospitals and other health facilities, back-channels revenue from Medicaid programs. They suggest that the intention is to increase the Medicaid population to draw more Federal money, about $2 more for every dollar contributed by the State for original Medicaid and $9 for able-bodied individuals in the expanded ACA population (WSJ Editorial). In response, the president of the Indiana Hospital Association argues that the remuneration received from two-thirds of all hospital clients does not cover costs. As a result, nearly one-third of Indiana’s rural hospitals operate at a loss because the percentage of Medicare and Medicaid patients they serve exceeds the State average (Tittle).
States seek waivers in order to provide institutions with supplemental payments, and Indiana ranked 4th of all States in the percentage of Supplemental Payments as a share of its total Medicaid expenditures (Congressional Research Services). Supplemental payments include Intergovernmental Transfers to County hospitals and Disproportionate Share Hospital (DSH) Payments meant to offset the costs of uncompensated care. Upper Payment Limits (UPL) are designed to bridge the gap between Medicare and Medicaid rates.
Because Indiana’s provider taxes are below 6%, it falls at the moment within the safe harbor in allocating Medicaid Supplemental Payments. However, OBBBA reduces the “hold harmless” safe harbor threshold for provider taxes from 6% to 3.4%, reducing the rate level by 0.5% annually starting in fiscal year 2028 and reaching 3.5% by 2032. Nursing facilities and intermediate care facilities, unlike hospitals, are exempt from this phase-down.
OBBBA specifically targets Indiana’s ACA’s expansion population with multiple mandates, including an enrollment cap. It requires recertification for Medicaid eligibility every 6 months and imposes work requirements on non-disabled adults not caring for young children. For those with incomes above the poverty level, it mandates cost-sharing up to $35 per visit for most health services. OBBBA also reduces the 90 percent federal matching rate (FMAP) for the costs of emergency medical care provided to immigrants who happen to be covered by Medicaid but are undocumented.
In 2018, Indiana sought and received Medicaid approval for work requirements for those enrolled in its “Healthy Indiana Plan.” However, it suspended enforcement due to legal challenges. The State and Federal intentions to control deficits and reduce dependency are understandable. However, work requirements are costly to administer and introduce distortionary incentives to household and firm decision-making. Furthermore, KFF reports that 72% of all Indiana Medicaid adults already work part-time or full-time.
Unlike work requirements, the administrative costs associated with eligibility checks on household income are directly related to the integrity of Medicaid. The Centers for Medicare and Medicaid reports that 1.2 million Americans in 2024 were enrolled in Medicaid or CHIPS in two or more states. Another 1.6 million were enrolled in both Medicaid and a Marketplace plan with taxpayer subsidies. Insurers benefit when enrollees, enrolled in another state, do not utilize coverage on policies issued in-state.
Could eliminating enhanced Medicaid and Marketplace subsidies reduce insurance coverage on these plans by 19.2% as some reports suggest (The Global Statistics)? Indeed, that would be unfortunate. It is more likely, however, that those with Marketplace plans will continue with their pre-COVID subsidized policies because their incomes are too high for Medicaid, and OBBBA doubles tax-free contributions to health-saving accounts. If, for some reason, they do become eligible for Medicaid, they will be directed to free or more heavily subsidized private insurance policies.
Private Insurance and Out-of-Pocket Health Care Financing
More than a majority of Hoosiers are linked in some way to private healthcare coverage
Private health insurance can be divided into non-group and group policies. The non-grouped include those in subsidized Federal Marketplace and Medicaid, and unsubsidized ones purchased by individuals. Group policies are generally employer-provided. Hoosiers have a greater likelihood than Americans in general to be enrolled in employer-provided policies.
The average annual healthcare premium paid by employers in 2024 was $8,951 for single coverage and $25,572 for family coverage. Consider that the average joint employer/employee premium is about 32% of the median household income. Yet, this premium is less than U.S. healthcare costs per person! Medicare and Medicaid combined annual expenditures tend to exceed those paid by private insurance. One explanation is that those enrolled in employer-sponsored health insurance are younger and employable, whereas those in government policies tend to be elderly and more infirm.
In employer-provided health insurance, covered workers contribute on average 16% of the premium for single coverage and 25% for family coverage. Plans vary significantly with respect to deductibles, co-payments, benefits covered, health savings accounts, and firm size. A few generalizations stand out. For example, the average premium contribution of covered workers in nonprofit is higher than that in for-profit firms (KFF Authors: Cox).
Continuation of Health Coverage, referred to as COBRA, initiated in 1986, gave employees and their families the right to continue with employer provided policies for a limited time on separating from a job. Presently, policies accessed through the Federal Marketplace may be less expensive.
Employer healthcare plans vary by type. PPOs (Preferred Provider Organizations) are most common; they offer flexibility and generally do not require referrals to see specialists. PPO members pay less when using in-network providers. In 2024, 48% of covered workers were enrolled in a PPO, another 27% in a high deductible plan with a savings option, and 13% in an HMO (Health Maintenance Organization). Certain employers do not offer insurance but compensate employees for health care expenses in what is called a POS (Point of Service) plan; others merely reimburse employees for a fixed percentage of health care costs (KFF, Employer Benefits 2024).
It should be mentioned that certain economists view employer health care costs as “tax expenditures”! They argue that, because employer/employee healthcare premiums are treated as a cost of doing business, they reduce the corporate and income taxes that the government would have otherwise received! Nevertheless, the residual competitive and market aspect of employer-sponsored health insurance adds value. Employees bargain for benefits, employers have an incentive to seek low premiums, and insurance companies negotiate services and prices with healthcare providers.
Out-of-pocket costs represent the amount of money spent by individuals on health care that is not paid for by a health insurance plan or public programs like Medicare or Medicaid. It includes health spending by uninsured people and any expenses not covered by health insurance plans. Out-of-pocket spending does not include health insurance premiums. Cross-country comparisons indicate that universal single-payer nation health insurance may require significant out-of-pocket co-payments. Various estimates place overall U.S. out-of-pocket health care expenditures at 10% of total health care spending.
Why Is Financing Healthcare So Expensive?
Three partial explanations for expensive medicalcare financing include: 1. A disconnect between costs and prices, 2. A lack of political consensus on income-based government policies and the level of care provided, and 3. Americans’ preference for options.
Administered prices do not reflect market costs. Medicare rates are set by a federal formula; State budgets affect Medicaid eligibility; premiums are shaped by designated Managed Care Organizations. This fragmented approach has led to growing rate differentials. Consider the following hypothetical example.
Suppose Hoosier Hospital bills Clients A, B, C, and D for medical and lab services worth $300.
Client A: Medicare covers $75 for Client A, her Medigap plan negotiates a fee and pays $85, and Client A is charged and pays $25 out-of-pocket.
Client B: Medicaid covers $60 for Client B, his subsidized plan pays $75, and Client B pays $25 out-of-pocket and receives a tax credit for that amount.
Client C: Uninsured Client C receives similar services for acute care in the Emergency Room for which Hoosier Hospital receives $0 in revenue.
Client D: Hoosier Hospital needs to charge Client D, paying full price, $955 to cover its stated costs of $1200 for all four clients. Otherwise, it might seek supplemental payments from the State to cover losses.
Pharmaceutical charges provide another example of cost/price distortions. In some instances, plans charge members differential prices for identical drugs depending on a patient’s diagnosis. Pharmaceutical companies pay fees and offer discounts to intermediaries and the government, but not all discounts are passed through into lower insurance premiums (WSJ).
It is no secret that firms redistribute revenue internally between goods and services. However, the degrees of separation between costs, charges, and premiums plus out-of-pocket costs are significantly greater in three- and four-party medical financing. Also, unlike corporations, nonprofit healthcare providers seldom go out of service. Nevertheless, healthcare can be life-or-death, and G. K. Chesterton warned against tearing down a wall without knowing why it was built in the first place.
Is there a way of linking costs with prices in healthcare without destroying what presently works? Introducing healthcare competition without reducing quality could reduce costs. Competition between providers, along with client choice, would concentrate scattered cost/pricing information into the most effective ways of delivering services. Unnecessary government controls, on the other hand, reduce incentives to innovate in the development of generics and breakthroughs in new treatments. A realistic suggestion would be to reduce or, at a minimum, not expand any non-critical goods and services that can be provided elsewhere in competitive markets.
Is “Healthcare Financing” the Same as “Medical Insurance?”
It is a misnomer to call present healthcare policies “medical insurance.” In the past, health insurance was a way to avoid large unanticipated expenses due to illness or injury. We now tend to view our healthcare policies like maintenance contracts to be renewed annually with virtually no ceiling on reimbursements.
To some extent, for-profit plans and health providers have access to and use actuarial data for large populations to keep their premiums and charges in line. Individuals, with knowledge about their own household’s health status, shop around for a policy that, over time, will pay out benefits equal to or exceeding premiums. Meanwhile, they have an incentive to avail themselves of all included services. Guaranteed government subsidies encourage both providers and clients to advocate for more services to be included in “insurance” policies. Expanding coverage for everyone Increases government’s commitments, hence, more public revenue must be raised through taxes or debt.
Long-term care for those unable to care for themselves is a completely separate issue from having access to a healthcare policy with an affordable premium. In such cases, one may be affluent enough to arrange for care or have purchased a long-term care policy. For others, Medicaid is the payer of last resort.
Hoosiers are not legally required to contribute financially for their parent’s care; Pennsylvania does have such a law, but generally it is not operative due to administrative costs. Medicaid, however, can and does seek reimbursement from adult children to whom funds were transferred from parental assets used to determine Medicaid eligibility. Indiana was one of the first 4 states to initiate, in 1993, a choice between a traditional long-term care policy or one with a Medicaid Partnership Provision. Presently, Medicaid long-term care applicants covered by a policy including such a provision are permitted to retain assets beyond the normal limits and still qualify.
If health care is a right, then someone is responsible for providing it. In Indiana, the political will to stabilize anyone presenting with acute illnesses continues. Hoosiers are willing as well to provide healthcare for impoverished elders and those with protracted incurable illnesses. No one knows precisely the available resources required to service these commitments. Federal Medicare and Medicaid funding, however, is insufficient.
Rhetoric aside, the goal in offering Indiana’s relatively new Home and Community Based Services (HCBS) is to lower the cost and number of those eligible for long-term residential care. For some Hoosiers, however, community-based services will not function as a low-cost substitute. Other difficult questions remain, such as who determines the level of State care provided and what is the role of families, churches, and other non-profits in monitoring and providing care. Data from the American Time Use Survey indicates that 14% of U.S. adults report providing unpaid eldercare, and over one fourth of these are engaged in eldercare on any given day (Bureau of Labor Statistics).
The average amount spent on healthcare per person in other high-income countries ($7,393) is about half of that spent per person in the U.S. in 2023 ($13,432) (Peterson-KFF. Health System). To some extent, the expenditure difference is due to two factors. First, Americans prefer a variety of options in selecting the type of financing and level of care. Recall that a recent proposal to tax those who choose not to purchase health insurance was quickly rejected. Secondly, these expenditures may indicate a higher preference of Americans for healthcare services versus other types of consumption. Fortunately, neither government nor private plans preclude access to expensive but available treatments.
International comparisons inevitably raise the question of healthcare quality. Do more options and increased spending result in better health outcomes? We suggest that the system of U.S. healthcare financing has resulted in health outcomes equal to or exceeding international standards for most U.S. residents. Why then do Indiana residents have worse health outcomes compared with the U.S. as a whole?
The South Bend Tribune Editorial Board argues for increased Public Health funding to address these issues. They refer to Indiana’s “abysmal” ranking on infant mortality (8.7 per 1,000 births compared with 5.6 nationally), the percentage of adults who smoke (14.5 compared with 12.1% nationally), and obesity (36.3% of adults compared with 32% nationally) (June 29, 2025). Furthermore, drug deaths and adults with multiple chronic conditions in Indiana exceed national averages. The problem is not due to a lack of access to healthcare. Indiana exceeds or hovers around national averages in terms of the percentage insured, in having a dedicated healthcare provider, and the availability of preventative care (United Health Foundation).
The disconnect between indicators of the Hoosier health status and access to health care is puzzling. It does suggest the need for health financing programs in line with the unique issues facing Indiana. One recommendation is to build on the framework of the State’s Healthy Indiana Plan (HIP) that emphasizes incentives and remuneration for those who assume responsibility for their health.
A perfect health care financing system does not exist. Modest incremental but needed changes to existing programs are likely to be dismissed, barring a crisis. For Indiana, a crisis would mean unsustainable personal and State expenditures and reduced access to care. On a more positive note, Hoosiers may be ready to forfeit some options and the paperwork associated with them! High-quality, low-cost, standardized healthcare packages are possible and would be welcomed. This would require transparency about costs and charges, entry and exit of providers, and a finite list of services offered. Let’s aspire to a more realistic and effective system to maintain present or better health outcomes for all Hoosiers.
Sources
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Bureau of Labor Statistics. “Unpaid Eldercare in the United States: 2021-2022,” Technical Information, Released September 21, 2023. Unpaid Eldercare in the United States–2021-2022 Summary – 2022 A01 Results
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