How Much Medical Costs Can We Bear? There is a Number for it

How Much Medical Costs Can We Bear? There is a Number for it

In the last two decades, national health expenditures have more than doubled from $1.5 trillion in 2001 to $4.1 trillion in 2020, accounting for 14.0% and 19.7% of the US Gross Domestic Product (GDP), respectively. 

One may wonder, How far can we go? How much more medical costs can American families bear?

One way to determine affordability is to define a minimum amount of medical care a family should be able to afford, but we know healthcare is different from food and housing, and such an approach is problematic.

Since the 1950s, the federal government has defined food affordability using a minimum food bundle and its associated costs. The federal poverty level is then derived assuming that food costs should not exceed one-third of family income and that Americans need the rest to cover other necessities. Using the same approach, the federal government determines housing affordability, i.e., no more than 30% of income is spent on housing. 

However, unlike food and housing, healthcare affordability is largely an elusive concept because it is often difficult to quantify the medical care required upfront due to uncertainty. Also, there is a large variation across American families, and medical care needs change over time. Whatever thresholds proposed are likely to be arbitrary and problematic. 

Nevertheless, we may be able to determine health insurance affordability. Some researchers tried to figure out this, although they found that “many people who cannot afford health insurance actually purchase coverage and many people who can afford coverage remain uninsured.” But there is a difference between healthcare and health insurance, which should be discussed in a separate article as it will not directly address our question above.

Instead of defining the elusive healthcare affordability directly, we can examine the economic burden among families who are unable to pay medical bills and find a clue to health expenditures we can afford.

These are the families who have already received services but are unable to pay their medical bills. We identified these families in the 2014-2020 Medical Expenditure Panel Survey (MEPS) conducted by the Agency for Healthcare Research and Quality. In the survey, respondents answered “Yes” to the question, “Does anyone in your household currently have any medical bills that you are unable to pay at all?” We then calculated the medical-cost-to-family-income ratio and derived its median or 50th percentile. 

Among the families without any public health insurance, the median medical-cost-to-family-income ratio is 0.13, i.e., half of the families who were unable to pay medical bills spent 13% of their family income on medical care during 2014-2020. This number was fairly stable over time. When looking at families with at least one member having public health insurance coverage, this number increases to 0.38, indicating public health insurance greatly increased healthcare affordability.  

Affordability problems can also lead to forgone needed medical care in addition to unpaid medical bills. 

Using the MEPS data, we identified families that were “unable to obtain medical care, tests, treatments, or prescription medications they or a doctor believed necessary” because of financial reasons. For the years 2002-2020, the weighted average median medical-cost-to-family-income ratio is 0.25 and 0.07 in families with and without public health insurance coverage, respectively. 

These ratios are lower than those of families who are unable to pay medical bills. Presumably, when a medical condition is urgent, severe, or life-threatening, families may have no choice but to seek care and accumulate medical bills. In contrast, necessary care can be delayed or foregone if a condition is less urgent or severe. Intuitively, the families in the former scenario are more likely to incur large medical bills and thus have a larger medical-cost-to-family-income ratio. 

But, you may ask, why are these medical-cost-to-family-income ratios much lower than 43%, a typical threshold for loan approval? 

This may reflect the debt burden due to basic needs other than healthcare, such as food, clothing, housing, transportation, children’s education, etc. Families who have reached their financial limits may decide to forgo necessary medical care or not to pay medical bills for the services that they have already received. 

Ideally, we would like to see the type and amount of non-medical debts to understand this question better. Unfortunately, such information from MEPS is not publicly available. 

Due likely to other non-medical needs or debts and the variation in medical care needs, we observe a large variation in the medical-cost-to-family-income ratio. For example, during 2014-2020, the 25th and 75th percentile of the ratio in families not able to pay medical bills and without public insurance were 0.08 and 0.92, respectively. Nevertheless, MEPS is a nationally representative survey, and our estimates have incorporated the family-level survey weights and thus reflect the status of American families. 

American families have likely reached their financial limits on medical expenditure, but the system can expand partially due to income transfers in the form of public health insurance. 

If we consider 13% of income (although not a perfect measure) as the medical expenditure threshold that American families can bear, the current system has already over-spent given that healthcare expenditure accounted for 19.7% of the GDP in 2020. Even if we exclude expenditures on dental services, business investments, and government health-related expenditures (to avoid double counting as they are covered by taxes), we spent 16.8% in 2020 on healthcare. 

It seems the reason that the healthcare system can continue its expansion is partially due to income transfers from higher-income families to lower-income ones in the form of public health insurance. As a result, families covered by public health insurance and unable to pay medical bills spend a much higher proportion of their income on medical care. Given that families with public health insurance may be able to bear a medical cost burden equivalent to 38% of their income, the total health expenditure may reach over one-third of the GDP at some point if public health insurance continues to expand without leading to political upheaval. 


In the absence of public health insurance coverage, half of the families who are unable to pay medical bills spend about 13% of their income on medical care. But as a country, we have already spent more than that. The fact that our healthcare system can keep going is partially due to income transfers to low-income families in the form of public health insurance. 

But who are the families struggling in paying medical bills, especially among those who are ineligible for public insurance? What does this mean for value-based care in the commercial market? 

We will discuss this in the next article. 

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