Where is your healthcare dollar going?

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Mari Tiwari from Southport, Maine, asks:

For every dollar spent on healthcare, how much supports the insurance industry, and how much actually goes for medical care?

Our healthcare system is opaque, which means it can be hard to tell where your dollars are going.

About 15% to 20% of your healthcare money ends up going to insurance, experts told Marketplace.

"It includes the administrative costs of running insurance along with profit," said David Cutler, a health economist at Harvard. "That's why there's not a lot of entry into insurance; the margins are not that high. You have to be huge, like United, to earn much."

Those 15 to 20 cents of your healthcare dollar are used by the insurer for expenses like their staff, their buildings, capital costs, worker and technology, said Michael Richards, a professor of public policy at Cornell University and director of the Sloan Program in Health Administration at the university.

The remaining amount goes toward direct medical care or initiatives aimed at improving healthcare quality, Richards said.

There are regulations that dictate this ratio if you have a health insurance plan through the Affordable Care Act or a Medicare Advantage plan, but not every health insurance is bound by these regulations, Richards said. These numbers were based on industry norms that existed prior to the Affordable Care Act, he said.

People might not get what their premium dollars are worth in terms of received care, said Christopher Whaley, an associate professor of health services, policy and practice at Brown University. "The whole purpose of insurance is that some people are getting less than their premium amount in terms of received care, and others are getting far more," Whaley said.

While not much actually goes toward the insurers themselves, many Americans are left with rising health insurance costs and massive medical bills, raising questions about where their money is going.

The U.S. has the most expensive healthcare system in the world, and has continued to become more expensive. Health insurance costs rose 6% last year and are expected to rise 11% this year.

"It's not necessarily easy or always intuitive to know what part of the dollar is going where," Richards said.

It's tricky to answer whether the ratio is the right amount, experts say. "For example, we could have less administrative expenses in the insurance system, but one key area where administrative expenses are used is for oversight. And so, if we had fewer administrative expenses, then maybe we'd have much more fraud and abuse," Whaley said.

Patients' experiences with health insurance are real, but the issues they face are often due to deeper issues within our healthcare system, Richards said.

"The incentive systems that we've set up for healthcare providers and for health insurers across the system actually lend themselves to these frustrations and inefficiencies that we are all tired of," Richards said.

For example, one issue that Richards points to is our fee-for-service system, which has long been critiqued by health experts.

Physicians get a fee if you go to the doctor’s office, another fee for giving you a shot and another fee for running your labs, said Christy Ford Chapin, author of the book “Ensuring America’s Health," in a 2024 Marketplace interview.

“They are acting rationally for the incentives they’re given. They’re acting in a way anybody would act in their position,” Chapin said.

But she said that this model encourages overspending. (At the same time, many rural hospitals are actually losing money since they're located in areas with smaller populations, which means fewer patients.)

Some health experts and organizations say there are alternatives that the healthcare system can invest in instead, like bundled payments or incentive payments based on the quality of care.

Our healthcare system could also institute "site-neutral" payments, Whaley said. Sometimes if you get an MRI at a hospital, it might cost more than one you'd get an imaging center, so one way people could save money is if payments were standardized, regardless of setting, Whaley said.

The Centers for Medicare & Medicaid Services is planning to implement site-neutral reforms next year.