Wednesday, July 22, 2009

Where does the number $15,000 come from, when talking about the Average Cost per household of Heathcare in USa...

I wrote that “health care will cost the typical household roughly $15,000 this year.” As the word “roughly” suggests, that is an estimate. It’s an estimate of the median cost of health care for households in this country, including all insurance premiums, employer contributions, co-payments, Medicare and Medicaid taxes and everything else.

I started by calculating the average cost of health care for each household. The United States economy produced more than $14 trillion worth of goods and services last year. About one-sixth of this output went to health care. One-sixth of $14 trillion or so is about $2.4 trillion.

This country had 117 million households last year. $2.4 trillion divided by 117 million is about $20,000. That is the average cost of health care for each household. It’s surprisingly high, isn’t it?

Now, averages are tricky. They can be disproportionately affected by outliers. (The average net worth of me and Bill Gates: in the billions!)

There isn’t good data — at least that I could find — on the distribution of health costs across the population. This is different from the distribution of health spending, which is driven by illnesses — and is highly, highly variable. I’m talking here about the distribution of insurance premiums and the like. But we know that people with higher incomes bear more health costs. They have more generous insurance plans. They pay more out of pocket for various services. And they pay more taxes.

So I used the ratio of median income to average income and applied it to average cost of health care. This ratio is about .75, which is how an average cost of $20,000 became a cost of $15,000 for the typical family.

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