The Regressiveness of Health Premiums

Health insurance premiums are unlike the cost of other forms of insurance that each of us carries. The price of most insurance we buy is progressive, that is, related to our income. We usually buy life insurance as a multiple of our income, so if we earn more, we buy more, and pay more. If we earn less, we buy less, and pay less. Our home owner's insurance is related to the value of the property we are insuring. If we have a large home, we buy more coverage. If we have a modest home, our coverage needs and costs are lower. Our automobile insurance needs are related to the value of the car we are insuring, and our own driving record, items that are related to our income, in the first case, and under our control, in the second. If we buy disability insurance, its cost is related to the income we are protecting, and our age.

Health insurance costs, however, are regressive. They are inversely related to income. It costs as much to do open heart surgery on a man who earns the minimum wage, as it costs to operate on a Goldman Sachs executive. The operation consumes several years' worth of the income of the minimum wage earner, but only a tiny fraction of the year-end bonus of the Wall Street executive. As a result the health premiums that protect against these costs are regressive too.


Because we don't know our medical futures, we need to be protected against the worst case: We are stricken with an illness that costs hundreds of thousands of dollars to treat initially, and tens of thousands of dollars to maintain our health afterward. As a result, serious health insurance policies carry lifetime maximum coverage of two or more millions of dollars. Yes, it is possible to buy limited benefit coverage, but this provides no real protection if one needs serious medical care.

To avoid being underinsured, it is often recommended that health insurance provide enough protection to keep out-of-pocket medical expenses from exceeding 10 percent of income, (or five percent of income for those with incomes below 200 percent of the Federal Poverty Level (which is $44,100 for a family of four), or have an annual deductible representing less than five percent of income. Policies with higher deductibles cost less than policies with lower deductibles. For someone earning $20,000 per year and supporting a family of four, these guidelines mean that the deductible in that policy should not exceed $1,000. An individual earning $70,000 per year could reasonably afford a deductible that did not exceed $3,500. For individuals of the same age and health status, the policy with the lower deductible costs much more than the higher deductible policy.

Using my own family as an example, I obtained a quote for coverage by a health policy with a $1,000 deductible, a 20 percent coinsurance to a maximum out-of-pocket of $3,000 (far exceeding the recommendation of a maximum out of pocket of not more than five percent ($1,000) for a family earning $20,000), and a $40 office visit co-pay. That policy was 22 percent more expensive ($179.20 per month more expensive) than a policy from the same insurer that carried a $3,500 deductible, a 20 percent coinsurance to a maximum out-of-pocket of $6,000 and the same $40 office visit co-pay. The monthly premium for the health insurance specified would consume 59.6 percent of the gross monthly income of an individual earning $20,000 annually (clearly an unaffordable amount), but only 13.9 percent of the gross monthly income of an individual earning $70,000 annually. The family with the greatest need for protection, is charged the most, and is least able to afford coverage.

The President's health reform proposal provides serious medicine for these problems. The family of four earning $20,000 would be eligible for coverage under Medicaid. The family earning $70,000 would see their insurance premium payments capped at 9.5 percent of income ($6,650 per year). That represents a savings of $3,107 per year in this example. We'll see an end to abusive insurance practices that exclude coverage for those with pre-existing conditions. We'll have real and affordable health insurance choices when we face major life transitions, such as graduating from high school or college, going through a divorce, losing a job, or getting so sick we can't work.

When we need health services, we count on them being available.  President Obama's proposal will ensure that real financial access to healthcare will be available to 30 million more Americans. It would mean that about 30,000 fewer Americans will die each year because those uninsured today will have health insurance. Small businesses will be able to hire new employees because they will get real help providing health insurance benefits. Thousands of American families won't lose their homes to foreclosure because of unpaid medical bills. Fewer spaghetti dinners and car washes will be held to help a neighbor raise funds for life-saving treatment. Our children will grow up healthier and the rest of us will age better because preventive care will keep us healthy, or find illness when it is most effectively and efficiently treated. Health care providers will get paid for nearly all the care they deliver, so they can avoid raising prices to cover uncompensated care, and will be financially strong enough to be there for us when we need them most. The President's health reform proposal means a fairer and healthier America for all of us.