It's cheaper to cover the uninsured

July 8, 2005

The Institute of Medicine says the benefits outweigh the costs. Do they—and will a hard-line business case help get coverage for the uninsured?

In May, thousands of people in communities across the country came together to focus attention on the plight of the nation's 45 million uninsured. As in the past, the week-long series of events included speeches proclaiming the "moral and ethical dimensions" of the problem and the "moral imperative" that we do something about it.

But morality wasn't the only thing cited during the week of demonstrations. Advocacy groups also spelled out, as they always do, the financial consequences of "uninsurance"-reduced productivity for employers, higher taxes for communities, uncompensated care for providers, and lower wages and poorer health for the uninsured themselves. If we made health insurance available to the millions of Americans currently without it, these groups argue, we could cut these losses, enabling whatever universal coverage scheme we enacted to pay for itself or even to come out a net cost saver.

The economic or "business case" for universal coverage has a long pedigree. In 2003, the Institute of Medicine weighed in with its own report, "Hidden Costs, Value Lost: Uninsurance in America." The report, part of a larger series on the uninsured, not only attempted to gauge the economic impact of the problem on society but argued why, in solving it, the benefits are likely to outweigh the costs.

The dollars come out right, the IOM says In examining the economic impact of the problem, the IOM identifies two major cost areas.

The first is the cost of the health services the uninsured receive, whether in the form of uncompensated care currently delivered or in the more-expensive dollars spent due to delayed treatment. Using estimates from economists Jack Hadley and John Holahan of the Urban Institute, a Washington, DC, think tank, the IOM says this cost amounted to roughly $100 billion in 2001, about $35 billion of which was in uncompensated care. (In a 2004 follow-up report, the economists updated this amount to $40.7 billion.) The remainder is either paid for out of pocket by the uninsured themselves or-in the case of those who were insured for at least part of the year-by private insurance, Medicaid, or other public programs.

But it's the second area of cost that the IOM says is the more significant. Appropriating the concept of "health capital"-an often-used government measure of the present value of a person's lifetime health-the IOM attempted to compute the fiscal impact of the loss of income and quality of life that the uninsured experience because of their generally poorer health and shorter lifespans.

To do this, the IOM commissioned Duke University economist Elizabeth Richardson Vigdor, an expert in the area. Using a series of standard government measures to calculate the value of a single year of life in perfect health ($160,000 in 2001 dollars), and then projecting this value into the future, Vigdor came up with her estimate, after adjusting for inflation: "The economic value of the healthier and longer life that . . . [a] child or adult foregoes because he or she lacks health insurance ranges between $1,645 and $3,280 for each additional year spent without coverage." (The range reflects gender and age differences in health status and life expectancy.)

Multiplied by the number of the uninsured (around 41 million in 2001), the aggregate annual amount of lost health capital is $65 billion to $130 billion.

The IOM next asked, "What would it cost to cover all uninsured Americans for one year, assuming no change in the current healthcare system?" To answer that question, it once again turned to the Urban Institute's Hadley and Holahan. The true cost of covering the uninsured, the economists knew, depended on the fact that "people with insurance spend more on medical care than people without insurance." By measuring this extra utilization of health services, the team was able to estimate what the additional cost to the system would be if the millions of Americans currently without insurance suddenly got it.