In 1960, the private sector funded more than three-quarters of the nation's health care expenditures. Individuals paid nearly one-half through out-of-pocket expenditures. Beginning in 1967, the way health care is purchased in the U.S. began to completely reverse itself.

The private sector has been slowly funding less and less; as of 2007 less than 54 percent of total national health care expenditures are paid for by the private sector. Reciprocally, the public sector has been slowly funding more and more; as of 2007, public expenditures at the federal and state levels now fund nearly half the total expenditures.

Total out-of-pocket expenditures have been plummeting as a share of total health expenditures at an even faster rate; today only a bit more than $1 out of every $10 spent on health care is being funded by individuals through out-of-pocket expenditures.

This has resulted in a large and growing government health care wedge – an economic separation of effort from reward, of consumers (patients) from producers (health care providers), caused by government policies. Rising government expenditures on health care are the main factor driving the growth in the wedge. The wedge is a primary driver in rising health care costs, i.e., inflation in medical costs.

President Obama's priorities to drastically alter U.S. health care policy — a public health insurance exchange, mandated minimum coverage, mandated coverage of pre-existing conditions, required purchase of health insurance — do not address the growing wedge and its role as the fundamental driver of health care costs. In fact, they will further increase the wedge and can thus be expected to increase medical price inflation.

Specifically, the estimated $1 trillion increase in federal government health subsidies over 10 years based on President Obama's priorities will have the following consequences:

♦Overall, total federal expenditures 5.6 percent higher than otherwise by 2019, adding $285.6 billion to the federal deficit in 2019.

♦An increase in national health care expenditures by an additional 8.9 percent by 2019.

♦An increase in medical price inflation by 5.2 percent above what it would have been otherwise by 2019.

♦Reduced U.S. economic growth in 2019 compared to the baseline scenario by 4.9 percent for the nation as a whole and 4.4 percent in Indiana.

♦Higher medical inflation and overall expenditures that will ultimately lead to government expenditures that exceed the $1 trillion in expenditures on health subsidies. The net present value of all additional federal government expenditures through 2019 that will occur as a result of a federal health care reform is $1.2 trillion, or a $3,900 bill for every man, woman and child in the U.S.

♦In addition to federally funded expenditures, the net present value of all Indiana state government expenditures through 2019 that will occur as a result of a federal health care reform is $2.2 billion, or a $346 bill for every man, woman and child in Indiana.

♦The current net present value of funding health care reform based on President Obama's priorities will be $4,247 for every person in Indiana. This comes to a total net present value of $27.1 billion in total costs that Hoosiers will have to bear.

♦Despite the additional $1 trillion in expected health care subsidies by the government, 30 million people would remain uninsured. The cost to reduce the number of uninsured by 16 million people is $62,500 in subsidy expenditures per person insured.

♦The cost on Indiana could be higher, and the national cost lower, if the federal government pushes the financial responsibility for covering the expansion of lower-income individuals' health insurance coverage off to the states. While the federal costs will decline, Indiana's costs will increase by a total of $7 billion (the net present value being $5.4 billion).

Health care reforms based on President Obama's priorities would affect each state differently. Indiana, specifically, would experience lower overall economic activity as well as increased fiscal pressures on the state budget. In assessing the impact of Sen. Kennedy's proposed health care reform, the Congressional Budget Office declares:

“… although the proposal would not change federal laws regarding Medicaid and CHIP, it would affect outlays for those programs. CBO assumes that states that had expanded eligibility for Medicaid and CHIP to people with income above 150 percent of the federal poverty level would be inclined to reverse those policies, because those individuals could instead obtain subsidies through the insurance exchanges that would be financed entirely by the federal government.”

Other proposals address in different ways the situations of families in need. The House Tri-Committee Reform Proposal would force states to expand Medicaid eligibility to 150 percent of the poverty level and lock in current benefit levels. Although the federal government would cover new Medicaid enrollees under the plan, the lack of flexibility could damage Indiana's ability to manage its growing Medicaid costs. According to the CBO, the additional Medicaid coverage would cost the federal government in this instance an additional $438 billion over 10 years, with the 10-year total cost of the health reform program still in the $1 trillion range.

The Senate HELP plan would currently force states to expand Medicaid eligibility to 150 percent of the poverty level as well – without compensating them for the increased expenditures. Should that proposal pass, the CBO estimate of total national Medicaid costs suggests that Indiana could be forced to spend an additional $7 billion based on current spending patterns and assuming the federal government does not reduce its current share of Medicaid spending.

We include the potential state Medicaid cost in the federal budget estimate rather than in the Indiana budget estimate because it is unknown how the health care reform package will ultimately address this issue. Our calculations are based on the assumption that the costs of the expanded Medicaid population are covered by the federal subsidies. Consequently, the additional costs are reflected in the $3,900-per-person federal cost estimate.

The present value of the non-federally funded additional health care expenditures that the Indiana state government will have to pay if a health care reform based on President Obama's priorities were passed is $2.2 billion, or $346 for every resident in Indiana.

All told, combining the per-person federal costs with the per-person Indiana costs, the present value of new government expenditures will cost every resident in Indiana $4,247.

While this figure will hold true regardless of whether the federal or state government picks up the costs for expanding Medicaid, the source of funding for Medicaid expansion will have a major impact on the Indiana state budget.

Regardless of the funding mechanism, Indiana taxpayers and the Indiana economy would suffer from the heavy costs imposed under these health care proposals. Indiana's economy would shrink by 4.4 percent. This is slightly less than the impact on the national economy, due to Indiana's more competitive economic landscape.

Additionally, because Indiana does not have the option to run trillion-dollar deficits, Indiana's tax collections would have to be 1.9 percent larger in order to cover the additional $0.51 billion in health care expenditures in 2019. Again, this number does not include the additional cost to Indiana of expanding Medicaid if the federal government fails to pick up the tab.